Weekly Commentary (5/15/23) – Most Markets Down Last Week

May 15, 2023

Equity markets were mostly lower last week as investors processed elevated but lessening inflation levels, political squabbling about the debt ceiling, expectations of recession / slowing growth, and lingering concerns about banks’ safety and stability.

For the week, the DJIA retreated 1.04% and the S&P 500 was down 0.24%. The tech-heavy Nasdaq added 0.44%. The MSCI EAFE Index gave up 0.63% while emerging market equities (MSCI EM) dropped 0.85%. Small company stocks, represented by the Russell 2000, were also down 1.04%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.23% for the week as yields moved a tiny bit higher. As a result, the 10 YR US Treasury closed at a yield of 3.46% (up 2bps from the previous week’s closing yield of ~3.44%) as investors seemed unmoved by CPI, PPI and unemployment data that met forecasts and expectations. Gold prices closed at $2,020/oz. – up 0.13%. Oil prices reversed course and moved higher by 3.37% to $70.87.

Last week’s major economic news was the Consumer Price Index data for April which came in on target for the month. Both the CPI and the Core CPI were up 0.4%. The year-over-year CPI came in at 4.9% versus the 5.0% forecast. Core CPI y/y was on target at 5.5%. Ultimately, investors did not react to this news with much energy as markets were generally tame last week. The VIX, which is a real-time measure of equity volatility, fell back to 16.5. In general, when the VIX is below 20 it is a signal of stable and lower stress conditions and levels at 30 or above is a sign of high volatility, uncertainty, and fear. The VIX has not closed above 30 since October and its peak close in 2023 was 26.52 in mid-March when SVB was rescued.

Nearly all S&P 500 Q1 earnings are reported, though a few notables report this week including Walmart, Home Depot, Target, and TJX. These are some of the retail bellwethers and their outlooks on the rest of the calendar year/consumer spending may be interesting. There have really been no big surprises this earnings cycle, though most companies continue to guide future earnings forecast lower or flat.

Markets continue to find more reasons to be sanguine than not. It’s as if the financial markets are tired of the recession hypothesis and are just looking past it, like real investors instead of the impetuous trader they most often are. Perhaps this is what a soft landing looks like – since nobody has ever really described it, or given an example of one from history, how should we know if we are landing softly? To say this environment is often confusing and incongruous is a major understatement. The pundits are at opposite poles – from a major repricing of equities being imminent, to jump on the bull and ride because the bottom of this cycle was made in October.

Since we are still wary of some near-term pressure on equity price levels, we remind clients to be mindful of their coming cash distributions needs. Avoid mixing funds that are earmarked for withdrawal over the next 24 months into the more volatile asset classes. Please keep us informed of your plans to access cash so we can adjust allocations appropriately.

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria” – Sir John Templeton