US stock market indices have belied widely held expectations and gone up substantially in the first half of 2023. The macroeconomic data, however, is telling a different story.
Will the rally continue? It’s possible in the near term as bullish momentum continues. But it’s difficult to see it go on for much longer given the headwinds.
Investors have turned extremely bullish after latest inflation data showed headline CPI dropping to 3%. Our analysis suggests markets are pricing a near perfect environment, which increases their vulnerability to negative developments in the months ahead.
A few interesting things happened in the U.S. stock markets last week.
The S&P 500 closed more than 20% off its October lows on June 8th. At 248 trading days, the recent run back to a bull market was the longest bear run for the S&P since 1948. In doing so, it reached the 4,300 level that many analysts had seen as a potential target for this up move.
On June 3rd, President Joe Biden signed the Fiscal Responsibility Act of 2023 to raise the country’s debt ceiling. As expected, after much political brinksmanship and at the last minute (in this case, with 2 days to go for the ‘x date’) Also as expected, with minimal cuts in spending. In a nutshell, it suspended the debt limit until 2025 after the next presidential election and gives lawmakers budget targets for the next two years. It rejected Biden’s call to roll back Trump era tax breaks on corporations and the wealthy and only curbs non defense discretionary spending, or just about one seventh of this year’s $6.4 trillion federal budget.
Stocks rallied on rising optimism that D.C. lawmakers will reach a deal to raise the U.S. debt ceiling, led by the tech-heavy Nasdaq, which closed at its highest level since August. For the full week, the Dow Jones index lost 1%, but the S&P 500 edged up 0.3% and the Nasdaq jumped 2.5% for a fifth straight week of gains. May 26th, 2023 The big mover this week was Nvidia, whose shares did ‘one of the greatest moonshots in the annals of capital market history’ by closing up almost 25% – equivalent to a market value of ~ $ 184 Billion – after it announced results for the quarter ended April 30th 2023. The Company said it expects gigantic expansion ahead as data centres switch to its products incorporating AI.
The stock market rally strengthened this past week. The Nasdaq composite and S&P 500 hit 2023 highs, with the Nasdaq 100 setting its best levels in more than a year. Market breadth continued to be very narrow, with gains led by AI-infused tech leaders such as Nvidia (NVDA), Advanced Micro Devices (AMD), Service Now (NOW), Google parent Alphabet (GOOGL), Snowflake (SNOW) and Palantir Technologies (PLTR).
Markets remained relatively range-bound last week, with a continuation of the battle between strong big tech and weak cyclical risk-on sectors. On economic data, the number of Americans filing for unemployment benefits rose by 22 thousand to 264 thousand on the week ending May 6th, the most since October 2021, and well above market expectations of 245 thousand. This is at odds with the strong jobs data that we saw last week and presumably suggests a turning point in the employment situation.
Another week, another bank in trouble We have repeatedly alluded in our newsletters to the lag effect of the rapid interest rate hikes set in motion by the U S Federal Reserve in early 2022 and warned that it would take several months before the full effects become clear Since March 2023 almost exactly a year since the hikes began, the following banks have collapsed in the U S alone Silvergate Bank, the 147th largest bank Silicon Valley Bank, the 16th largest Signature Bank, the 29th largest
Last week’s release of the March CPI report revealed that inflation remains on its downward path. Headline inflation has dropped materially, falling from 9% last summer to 5% in March, driven in large part by a drop in oil and food prices. Core inflation, which excludes volatile energy and food costs and serves as the more structural measure of inflation upon which the Fed bases monetary policy, rose by an expected 0.4% from the previous month, putting inflation at 5.6% annual rate. This is down from the peak of 6.6% seen in September 2022, but still a long way from the Fed’s 2% long-term target.
The stock market rally took a breather last week. The Dow Jones Industrial Average rose 0.6%, the S&P 500 index dipped 0.1%, the Nasdaq fell 1.1% and the Russell 2000 slumped 2.5%. U.S. labor data came in mixed on April 7th. Nonfarm payrolls rose by 236,000, just below estimates for 240,000 and down from February’s revised 326,000. Private payrolls rose just 189,000, well below views for 223,000. However, unemployment dipped to 3.5%, back to long-term lows. The labor force participation rate climbed to a post-Covid high of 62.6%. Hourly earnings rose 0.3% vs. February, in line.
