Weekly Market Update April 28, 2023
Dow Jones Industrial 34,098.16 +0.86%, S&P 500 4,169.48 +0.87%,
Nasdaq Composite 12,226.58 +0.69%, US Ten Year 3.441%, Crude Oil $76.70
The biggest piece of news last week was the GDP data for the first quarter. Coming in at 1.1%, it was significantly below the 2% that had been expected and much lower than the 2022 fourth quarter’s 2.6%. As was mentioned in my March 24th update, the withdrawal of three years of pandemic-fueled fiscal stimulus continues to slow the economy. This will likely persist through summer’s end, despite the Administration’s efforts to increase the 2024 budget by 15% over the previous year. Meanwhile the Federal Reserve is hiking interest rates to offset the inflation that such spending will cause. Higher government spending is initially inflationary, as it increases the demand for goods beyond currently available supply. This occurred during the supply chain crisis in 2021 when inflation reached the 8% level. It has since declined as supply adjusted upward to meet demand but is still at an elevated 5.1%.
Recessionary fears continue, despite still robust consumer spending and low unemployment. There is concern that much consumer spending is being done on credit, while cracks are appearing in the employment picture. Hardly a day goes by without some large firm announcing layoffs, from technology giants like Amazon and Meta, manufacturing firms like 3M, and consumer staples companies like Tyson Foods. This weakness in labor was reflected in the less-than-expected job growth in March and the higher-than-expected initial unemployment claims for the week of April 15. Below we see GDP growth since the beginning of the pandemic in the first quarter of 2020. The sharp reduction from the covid recovery years is apparent.
What does all this mean for stocks? The slowing economy gives hope that the Fed will cease raising and then begin lowering interest rates, increasing the present value of company earnings. We also know that history has shown that stock prices have only a weak correlation to the overall economy. Earlier fears that the slowing economy would result in a poor earnings season have been proven unfounded. Companies that have reported earnings and revenue above expectations include behemoths like Microsoft, Alphabet, Meta, and Amazon, defense giants Lockheed Martin and Northrop Grumman (no surprise given the need to replenish our military stocks depleted through aid to Ukraine in its war against Russia), consumer staples like Hershey and Mondelez, and energy companies like Chevron. Given these results we can be almost certain that equities have “baked in” a 25-basis point bump in the Fed Funds rate coming out of the May 2/3 FOMC meeting. Over the weekend investors will eagerly wait to hear Apple’s first quarter earnings set to be released May 4. How such large companies do often set the stage for the rest of the market, as did Microsoft and Amazon did for this past week. With short-term interest rates still elevated, keep a good portion of your assets in money-market funds and short-term liquid fixed securities, which can be easily accessed when the bulls return to the stock market.
Wishing You a Profitable Week,
Paul