Don't hold a surprise birthday party for Jerome Powell. He would hate it. And if you plan on visiting the Fed Chair, call first. He doesn't like surprises.
Powell delivered on his March promise at the most recent Fed meeting by increasing short-term rates by 0.25%, just as the financial markets expected. No surprise.
"Economic activity expanded at a modest pace in the first quarter," he said at the press conference following the May meeting." Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient."
There are several reasons this may be happening, some of them emotional. However, I'm not a market timer, so you can rest assured I won't be moving money in and out of the markets based on a headline, fears about the banking system, or a Fed meeting.
At the same time, we're monitoring markets for any opportunities that may arise. Or, in the blunt words of Warren Buffett, at Berkshire Hathaway's 2023 May annual shareholder's meeting, "What gives you opportunities is other people doing dumb things.
“Better” Is the Best Word on Wall Street
From my perspective, we can't hear the word "better" enough in the weeks ahead.
"Better than expected."
These are winning phrases that can be used by market pundits when they compare a company's quarterly financials against Wall Street's forecasts. Additionally, terms like these can help investors feel hopeful about potential market behavior.
One way to measure "better" is the number of Standard & Poor's 500 companies that revise their earnings estimates prior to reporting earnings. As you can see in the accompanying chart, fewer companies have revised their estimates for Q12023. So in this instance, fewer revisions lower is better than the prior two quarters.
Thankfully, It’s Not All Unsettling News in the Headlines.
A microbe discovered living on the slopes of an Italian volcano can eat and store CO2 in its body faster than any other species yet known. Scientists hope to harness the creature’s powers to create carbon-capture ponds to aid in pulling CO2 out of the atmosphere. Or how about the wonderful news that the world’s most romantic river (the Seine) has been cleaned up ahead of the 2024 Olympics in Paris. The previously unappealing green-brown river has undergone a $2.3 billion overhaul, and recent water quality surveys found it “overwhelmingly good” and ready to host swimmers and triathletes.
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After an awful year in the stock market, you can expect one of two things to happen:
a) Very good returns (since bear markets don’t last forever), or downturns that make for fantastic buying opportunities.
The good news about the current environment is that it seems like the stock market is trending toward an end to the inflationary crisis days of 2022. Last year, the Nasdaq Composite was down more than 32%. This year the Nasdaq is up nearly 22%. Last year the S&P 500 was down 18%. This year the S&P 500 is up more than 9%.1
In U.S. Sector performance, 8 of 11 sectors finished the month of April higher, with Communication Services stocks leading the pack after better-than-expected earnings from some of the sector’s larger constituents (namely, Facebook, Alphabet, and Netflix). On the opposite end of the return spectrum, this year we saw three of the biggest bank collapses in U.S. history, so it should be no surprise that Financials are the largest laggard for the year thus far, down -2.56% through the first four months.
The Federal Reserve’s (Fed) preferred inflation metric -- Core Personal Consumption Expenditures (PCE) -- rose 0.3% month-over-month and 4.6% year-over-year in March.1 Like other measures, this data shows that prices remain stubbornly elevated when the volatile food and energy categories are excluded. As a result, the Federal funds’ futures show that investors see a more than 80% chance that the Fed will raise rates by 0.25% in May, according to CME Group data. Traders expect the policy rate to peak around 5% before falling below 4.5% by year-end.2 Despite continued increases in interest rates, bond yields held steady over April, slightly falling to 3.45% from 3.50% at the start of the month. This has been favorable for bond market performance.
1. Data obtained from Bloomberg as of 4/30/2023 2. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
With many economists still calling for a recession this year, looking at the S&P 500 earnings picture is essential. Overall, 53% of the companies in the S&P 500 have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS (Earnings Per Share) above estimates and above the 5-year average of 77% and the 10-year average of 73%. In aggregate, companies are reporting earnings of 6.9% - - which is above estimates and, while below the 5-year average of 8.4%, it’s above the 10-year average of 6.4%. As a result, the blended (combines actual results for companies that have reported with estimated results for companies that have yet to report) earnings decline for the first quarter is -3.7% today. This would mark the second straight quarterly decline in earnings growth. While this may look troubling, there is good news: although earnings growth is coming in negative, it likely does not signal a recession. Why? Because, on average, S&P 500 earnings typically decline -16.4% in a recession, and we are far off from that.1
Bald Eagle Becomes Foster Dad
This month’s feel-good story is about Murphy, a beautiful male bald eagle who resides permanently at a Missouri sanctuary because of a wing injury. Though he lives with 4 other eagles, there is no Mrs. Murphy. And, while nesting hormones are normal and quite common, his keepers were surprised to find Murphy feathering a “very simple nest” and doting on a single “egg” contained within.
Unfortunately, it was not an egg at all but a rock. The staff felt bad that Murphy’s fatherly instincts would never pay off, but then came a serendipitous surprise. On April 1st, the sanctuary received its first bald eagle nestling in more than eight years. What happened next?
Click here to read more about this adorable foster story.
THOUGHT FOR THE MONTH
Dow Jones Industrial Average: The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
Dow Jones U.S. Real Estate Total Return Index: The index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.
NASDAQ Composite: The NASDAQ Composite is a market-cap weighted index of all issues listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector.
S&P 500 Bond Index: The S&P 500® Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities. Market value-weighted, the index seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500.
S&P 500 Consumer Discretionary: The S&P 500® Consumer Discretionary comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.
S&P 500 Consumer Staples: The S&P 500® Consumer Staples comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.
S&P 500 Energy: The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.
S&P 500 Financials: The S&P 500® Financials comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
S&P 500 Index: The S&P 500® index is a market-cap weighted index of the largest 500 companies headquartered in the United States. The index covers approximately 80% of available market capitalization.
S&P 500 Utilities: The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.
S&P U.S. Aggregate Bond Index: The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.
S&P U.S. Treasury Bond Index: The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.
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May Newsletter - The Fed Raises Rates. Again.
May 09, 2023