· All major indices except for the Dow Jones Industrial Average and Dow Jones Utility Average slipped fractionally from their recent highs this past week, as investors await the start of earnings season this upcoming week as well as March inflation data in the form of the Consumer and Producer Price Indexes, scheduled to be released this Wednesday and Thursday. Given the 14.76% move off the October 12, 2022 close, it stands to reason that several questions need to be answered prior to the S&P 500 moving substantially higher. They include 1) is the Federal Reserve at or near the end of its tightening cycle; 2) how much of an impact will the year-long battle the Fed has waged against inflation have on the economy and corporate earnings and 3) is some or all of this impact already priced in should interest rates stabilize?
Investors will most likely have the answer to the first two of these questions within the next two quarters and, in regard to the third question we believe that investors have priced most of the impact into current stock prices. However, at this time we think a substantial move from these levels will take time.
· The labor market has begun to show some wear and tear. All three reports released this past week, the Job Openings and Labor Turnover Summary (JOLTS), Weekly Report of Initial Claims for Unemployment Insurance and the March Non-Farm Payroll Report all weakened as compared to its previous release.
· King Dollar is not dead! Despite the potential and perhaps even the reality of the BRIC Countries (Brazil, Russia, India and China) establishing an alternative to the U.S. Dollar, it is hard to believe that democratically elected countries that comprise two-thirds of global GDP would place their trust and confidence in the BRICs, especially China. That said, the dollar index which sits within approximately ten percent of a decade high set during September, 2022 has weakened recently and could come under continued, normal pressure as interest rates abroad have risen, attracting flows out of the dollar.
· Interest rates have dropped. The yield on the two-year U.S. Treasury Note has fallen from a pre-Silicon Valley Bank (SIVB) peak of 5.05% on March 8 to its current level of 3.97%, a decline of more than twenty percent on the belief that the collapse of SIVB will lead to tightening lending standards, thereby slowing economic growth. We are already seeing signs of this in bank lending data outlined below.
· MidCap stocks as represented by the Russell 2000 continue to struggle, declining 2.66% this past week, which in turn pushed the index into the red year to date by 0.39%.
· Mortgage Rates Continues to Trend Downward. According to the Federal Home Loan Mortgage Corporation (Freddie Mac), the average interest rate charged on 15- and 30-year mortgages are currently at 5.64% and 6.28%. However, Freddie Mac also noted that a number of challenges remain for the housing market, “not the least of which is the low inventory of homes for sale, especially for aspiring first-time homebuyers.” Might we add that tightening credit conditions as a result of the impact on banks and the economy from the pace of Fed rate hikes has also added a headwind to the housing market.
· U.S. Banks cut lending post collapse of Silicon Valley Bank (SIVB). According to data released Friday by the Federal Reserve, bank lending over the past two weeks dropped the most ever as did bank lending to corporations and for real estate. (Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist.)
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, February Wholesale Inventories; on Wednesday, retail inflation during March as measured by the Consumer Price Index (CPI), on Thursday, wholesale inflation data during March as measured by the Producer Price Index (PPI) and the Weekly Report of Initial Claims for Unemployment Insurance; finally, on Friday, March Retail Sales, February Business Inventories, a preliminary gauge of April Consumer Sentiment from the University of Michigan, March Capacity Utilization and Industrial Production reports.
· Second Quarter earnings season begins this week. Some noteworthy companies that will provide a look into the health of the economy include Greenbrier Companies (GBX), Albertsons (ABS), CarMax (KMX), Washington Federal (WAFD), Progressive (PGR), Fastenal (FAST), Delta Airlines (DAL), PNC Financial (PNC), JP Morgan Chase (JPM), Wells Fargo (WFC), Blackrock(BLK), Citigroup (C), United Health (UNH) and First Republic Bank (FRC).
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