Stocks slipped on Friday as investors took some profits from a positive week of trade, wondering what’s next for stocks. Consumer sentiment remains high despite the Fed’s best efforts to break up the party.
Adrift. Now we know. The Fed has wagered its gambit on interest rates, for now, at least. It has rested its hammer to step back and survey the results of its handiwork. Of course, The Central Bank is only resting, and it has not yet put down the hammer, nor has it placed the hammer back behind the glass that says, “break glass in the case of bad inflation.” Neither has it even uncovered the glass encased can of spinach (Popeye reference ⚓ ) that would be used to goose the economy in the case of a falter. That has left us in a state of… um… um… where are we?
What about the guys and gals on Capitol Hill? Well, they managed to avoid a major debt ceiling debacle with seconds to spare. It was tough to watch, but we all knew what the ending was likely to be. However, these days, one never knows, so the markets did not completely ignore the potential threat of a default. Burned-around-the-edges investors, already cautious, kept their cash in a high and dry place, and chose to wait for the storm to pass.
Earnings season has come and gone with the last few stragglers coming in the days ahead. The news there is that revenues are not growing as fast as 2022 and 2021, which was disappointing on the one hand, and not surprising on the other, given the breakneck growth achieved during the post-pandemic-reopening. A high-level survey of earnings yielded mixed results that were somewhat upbeat. There were headwinds for sure, but companies, as they typically do, have found ways to stay healthily profitable. They achieved profitability by cutting costs and – dare I say- raising prices to consumers. But these companies know better. Especially the ones that have weathered past business cycles. They go up and they go down. Now is a down, so an up will come eventually… if not soon. Just keep adjusting and keep the ship on course, and all will be good.
Now we know. We know where the Fed is, lawmakers are back to making laws (and noise), and corporations have laid out their hopes for the second half of the year (which officially begins in a few weeks). You are probably thinking “Mark, you left out something very important… the stock market!” Oh, yeah, the stock market has rallied while all of this adjusting has gone on. To be clear, INDEXES have rallied, and not all of them. The recent rallying in stocks has not been a broad one, meaning that the big gains you hear about on the radio, or the evening news have been attributed to a small handful of stocks. The S&P500 and Nasdaq 100 are cap-weighted indexes, both dominated by technology growth stocks which received a huge boost from the markets’ recent romance with Artificial Intelligence, or AI. If you owned any of those stocks, you would be very happy right now, but if you owned a more diverse portfolio and you are holding on to cash, your returns would not look like those of the S&P500. To get an idea of just how lopsided stock returns have been, you only need to compare the S&P500 to its half-sibling S&P500 Equal Weighted Index. While the S&P500 that we typically talk about plays favorites to larger capitalized companies (AKA tech) the Equal Weight Index does not discriminate based on size. All companies get the same weighting. Year to date the S&P500 rose by +14.85% and the Equal Weight Index rose by just +4.93%.
Now we know. SO, where does that leave us just a week and a half before the halfway mark of 2023? Unfortunately, right now, in the middle of nowhere. We have logged significant gains in a narrow group of stocks. Calls for a later-year recession have not died down. The Fed is merely taking a break from the brake. Consumers are still confident according to last Friday’s better than expected University of Michigan Sentiment number. That same number saw a downward expectation of near-term inflation, which is a good sign. Companies will start announcing Q2 earnings in a little over 3 weeks. There are no currents pressing on the hull of the boat. Further, there is no steady breeze, just gusts coming from one direction or another. In these conditions, rallies can certainly continue, but not without volatility and setbacks. As economic numbers roll in during the coming weeks and earnings season begins, we may be able to make out some steady forces which will hopefully provide some meaningful directional signals for the coming months. However, until we get enough of those, we are still adrift, despite all that we do know.
FRIDAY’S MARKETS
Stocks slipped falling into the close, as investors closed out a winning week on a triple witching Friday. The S&P500 slipped -0.37%, the Dow Jones Industrial Average fell by -0.32%, the Nasdaq Composite Index dropped by -0.68%, and the Russell 2000 Index lost -0.73%. Bonds fell and 10-year Treasury Note yields gained +4 basis points to 3.76%. Cryptos advanced by +2.98% and Bitcoin added +3.31%. The S&P500 ESG Index slipped by -0.67%.
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