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May 5th 2023 Securities Market Commentary

by admin | Jun 9, 2023 | Market Commentary | 0 comments

Summary

The Federal Reserve raised interest rates for the 10th time in a row, making them the highest in over 15 years. This caused the stock market to drop for four consecutive days. The market is worried about the impact on banks and the overall economy. Inflation is still high, and prices for homes and goods continue to rise. However, some companies are making more money by cutting jobs and raising prices. The housing market is strong, but stocks and small businesses are struggling. The Federal Reserve is unlikely to lower rates unless there is a major problem like a big crisis or recession. Overall, the market is uncertain and cautious. It’s important to resolve the debt ceiling issue before June 1.

Talking Points

The Fed hiked rates for the 10th straight time this week.

• Short term rates now sit at just over 5%. We haven’t seen rates this high in over 15 years.

• Though the market has itself convinced of a stunning reversal and at least 3 rate cuts by year-end, stocks reacted to the news by selling off all week (save for today).

• The week’s four straight negative days for stocks reflects the manic market’s confrontation with current economic realities:

1. As the Fed expected and hoped, their rate hikes broke something—regional banks. So far the bank failures and the overall sector’s ongoing underperformance show the market’s comprehension of the potential for ramifications for the broader economy. Powell failed to instill confidence at his press conference and the Fed’s banking oversight is admittedly shoddy. Resulting credit tightening could put a big dent in growth.

2. We are in a high interest rate, elevated inflation environment. It remains unclear when/if we get back to 2% inflation, and there are signs that core prices are staying sticky.

• A key measure of the Fed’s favorite inflation barometer, the Trimmed Mean PCE Index, rose in March.

• Net profit margins are increasing thanks not only to layoffs, but also to price-hikes that consumers haven’t yet balked at.

• The housing market shows no signs of slowing down, with asking prices higher year-on-year and final sale prices down only -2.8% from last year’s spectacular heights.

• Likewise the labor market remains extremely tight—253k jobs added, unemployment rate at 3.4% (lowest since 1969), and, ominously for the Fed, wage growth up 4.4% (an increase month-to-month).

3. For the Fed to cut rates the economic situation would need to be dire: a geopolitical cataclysm, rapid contagion of bank failures, US defaulting on its debt, a deep recession. None of these scenarios would be bullish for stocks even though they may prompt the Fed to cut rates.

• Stocks trading in defined ranges, fading breadth, and small & mid caps negative for the year indicate a wariness in investors and a fragile market.

Key Takeaways

⇒ Rate hike pause possible, cuts unlikely barring cataclysm.
⇒ Bank weakness across the board (regionals and too-big-to-fails). Resulting tighter credit could
crimp growth.
⇒ Inflation falling but signs of persistence in core measures thanks to housing, labor markets.
⇒ Debt ceiling negotiations urgent given estimates of June 1 X-Date (when government can’t pay
bills)

EXHIBIT 1 – SEASONAL WEAKNESS

The summer stretch from May through September historically sees weaker returns than the rest of the year.

EXHIBIT 2 – A HOLLOW MARKET

Last week we highlighted the market’s weak breadth. We note that with the Nasdaq trading near 6-month highs, only 3% of its constituent stocks are at 6-month highs. And this chart shows the continuing streaks of seeing more NYSE & NASDAQ lows than highs. There’s more going on under the surface.

EXHIBIT 3 – LARGE CAP TECH OUTPERFORMING AND EXPENSIVE

Relative to the S&P 500, the tech sector has exceeded heights of outperformance last seen in the Dot Com bubble. Large cap valuations remain well over average even though the S&P is still -14% away from its high.

EXHIBIT 4 – INFLATIONARY PRESSURES: HOUSING MARKET

From Redfin we see the median asking price is actually higher than 2022’s record levels. And, below right, we see inventory of active listings falling, which will only contribute to firming home prices.

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