Wentz Weekly Insights
Calmer Market Sends Stocks Higher

A calmness in markets returned last week and for the second week in a row the markets took bad news as good news when it comes to economic data. Stocks rose 1.85% for the third straight week of gains and are now within 1% of all-time highs while the Dow rose 2.16% for its best week of the year. Big tech was mostly higher and helped drive the index gains, but utilities have also been on a solid run, now the second best performing sector year-to-date with a 12.25% gain, just behind communication services 12.43% gain.
Markets saw a much calmer week last week with the volatility index (VIX, also known as the fear index) dropping to the lowest level since January (and the volatility index for the Treasury market the lowest in 6 weeks). The Treasury market saw a large amount of activity with the Treasury completing several rounds of new Treasury auctions of roughly $125 billion, just about all of which were met with solid demand and calmed bond investors nerves after the move higher in Treasury yields in April. The 2-year Treasury yield rose four basis points for the week to 4.87% while the 10-year yield fell two basis points to 4.50%.
The market narrative was unchanged last week, with a focus last week on earnings season that is coming in overall better than expected, but as we would note, earnings growth is being driven by large/mega cap tech/growth names and offset by earnings declines in everything excluding these names. Markets also continued its rally from the week prior after seeing cooling labor market data which investors celebrated, despite ongoing comments from Fed officials that rates are likely to stay higher for longer due to stickier inflation than what has been expected.
The market has been taking “bad new is good news” when it comes to economic data. Another example is last week’s jobless claims data where it rose 22,000 in the latest week to 231,000 new unemployment claims (the highest since August). While this is typically viewed negatively (because more people are filing for unemployment benefits), markets moved higher after the data was released because if the labor market is cooling more that will be lower interest rates sooner.
That turns us to what to expect this week. The markets and media are laser focused on the consumer price index (CPI) report being released Wednesday morning. It is expected that any number coming in higher than estimates will result in a selloff in stocks and push bond yields higher again, while anything lower or meeting expectations is expected to be positive and send stocks higher.
The other notable release is retail sales data for April. While the data mostly gives us hints on consumer spending strength in the goods sector, it has still provided us insight on spending trends. So far this year consumer spending has been much better than expected and it is estimated retail sales grew another 0.4% in the month.
Outside of that we will see more earnings reports, but the focus will shift to retailers with companies like Home Depot, Walmart and Cisco reporting this week.

Recent Economic Data

  • Senior Loan Officer Survey: The Senior Loan Officer opinion survey on bank lending practices, which is a survey conducted by the Fed to lenders to gauge credit standards and lending conditions, stated over the past three months banks had tighter lending standards for all business sizes and for all loans types, as was to be expected, but did so more moderately than the prior quarter (Q4 2023). Banks noted the reasoning as more uncertain economic outlook, less tolerance for risk, and industry specific issues. In addition, it saw weaker demand for all loan types including commercial real estate, residential real estate, and auto and credit card loans.
  • Jobless Claims: The number of unemployment claims the week ended May 4 was 231,000, an increase of 22k from the prior week for the highest since August. The four-week average was up 5k to 215,000. The number of continuing claims was 1.785 million, an increase of 17k from the prior week, with the four-week average down slightly to 1.781 million.
  • Mortgage Rates: According to the Freddie Mac weekly mortgage survey, the prime 30-year mortgage rate fell 13 basis points last week to 7.09%. It is still higher than a year ago when it stood at 6.35%.
  • Consumer Sentiment: Consumer Sentiment, according to the University of Michigan’s survey, fell about 13% this month with the index at 67.4, significantly below the expectations of 76. The current conditions index fell over 10 points to 68.8 as consumers expressed more worries about inflation, unemployment, and interest rates. The expectations index fell 9.5 points to 66.5. All the readings were the lowest since November and suggest a sharp deterioration in consumers’ confidence in the current economic environment. Finally, inflation expectations jumped in May. The year-ahead inflation expectation rose to 3.5%, up from 3.2% in April while the long-run inflation expectation ticked higher to 3.1%. These are also the highest since November.

Company News

  • No More Exports to Huawei: Intel and Qualcomm shares moved lower last Wednesday after both confirmed they have lost their export licenses that allowed them to supply Chinese firm Huawei (one of its largest smartphone makers) with its processors. Intel lowered its Q2 forecast as a result.
  • Tesla’s Autopilot Lawsuit: Tesla shares were lower after Reuters reported U.S. prosecutors are investigating the company for committing wire fraud or securities fraud regarding its claims about self driving capabilities as well as the use of autopilot. More specifically, prosecutors are looking into statements made by Musk that may have misled consumers, as well as investors, into believing Tesla’s vehicles were fully autonomous. Tesla has separately been investigated over hundreds of crashes that have happen while the Autopilot feature was engaged.
  • TikTok’s Lawsuit: TikTok parent company ByteDance filed a formal lawsuit against the US government over the recently passed legislation that would force a sale of TikTok or else face a nationwide ban, saying the law is unconstitutional as it violates the Frist Amendment of free speech, and claiming that forcing a sales within the 270 day timeframe was not possible.
  • Apple’s New Products & AI Chips: Apple’s event last week revealed the first new iPad models since October 2022 with a new iPad Air, iPad Pro and other accessories like its Magic Keyboard and Apple Pencil. Separately, Bloomberg reported Apple is working on building its own artificial intelligence data center chips that will help it deliver some of its AI features to consumers while simpler AI related features will be processed directly on the iPhone, iPads and Macs.
  • No More Chevy Malibu: GM said it would discontinue the production of its Chevy Malibu, a vehicle that has been around for around 60 years. The company said it will do so to make room for more EV and hybrid production and will invest $390 million in its Kansas City plant to build the next gen Chevy Bolt EV.
  • Microsoft’s In-house AI: The Information reported Microsoft is working on a brand new, in-house built artificial intelligence model that will compete directly with OpenAI (who it has invested billions in) Google, Anthropic, and others. It added Microsoft could reveal the AI at a meeting later this month.

Other News:

  • Potential Ceasefire: Hamas had reportedly agreed to a ceasefire proposal proposed by Egypt and Qatar, but Israel rejected the proposal saying its forces would continue their operations as the ceasefire proposal was “far from” its demands, which comes a day after Israel PM said he would reject a ceasefire that would involve leaving Hamas intact. Oil had moved lower (for five consecutive days) as there was optimism of a ceasefire, but oil moved higher briefly after the report Israel rejected the proposal.
  • Central Bank Updates:
    • Becoming the second developed central bank to cut rates (after the Swiss national Bank), Sweden cut rates as was expected and signaled it plans to do so two more times in the second half of this year. Its inflation rate has been closer to 2% than most of Europe and of course the US.
    • The Bank of England held its policy rate at 5.25% as expected and said the progress it has seen on bringing inflation down is “encouraging” but not enough to a point where it is ready to cut rates. Comments later suggested the central bank is on track to begin cutting rates at its next meeting. Two of its nine members voted to cut rates at this meeting.
  • Fed talk:
    • Richmond Fed Barkin said the “whiplash” in the economic data recently is proving why the Fed needs to take a patient approach in easing policy. He repeated the Fed’s need to gain greater confidence that inflation is moving to 2%, and given the stronger and “remarkably resilient” labor market and recent disappointment in inflation, there is more time to gain that confidence.
    • Minneapolis Fed’s Kashkari didn’t rule out all options when it comes to policy, saying the Fed will “do what we need to do to get inflation back down” including holding rates where they currently are for an extended period to “tap the brakes on the economy” or even raise rates again, if needed. He also talked about the impact of higher rates saying the higher inflation and solid economic growth “has led me to question if monetary policy is having as much downward pressure on demand as I would have otherwise expected.” As a result he believes the neutral rate may be higher, raising his estimate by 50 bps to 2.50%.
    • Boston Fed’s Susan Collins said because of inflation still too high and the uncertain outlook, the Fed should continue to take a patient and deliberate approach to the possibility of cutting rates, adding the recent data has led her to believe it will take more time than she previously thought to bring inflation to target.

Did You Know…?

Kentucky Derby Wagering

The Kentucky Derby saw a strong week of wagering. Wagering from all sources for Derby week increased 8% from last year to a new record high of $447 million, while the handle (total wagering) for Derby Day (Saturday) increased 11% and also to a record high of $320.5 million. Churchill Downs said it had a positive impact of $26 million on EBITDA, which it said was also driven by ticket price increases, and the new Paddock and new luxury seating areas.

Apple’s Record Buyback

In its latest earnings call, Apple said it would add $110 billion to its share buyback program. Based on its latest annual filing for the 2023 tax year, Apple ended the year with $148 billion in cash and cash equivalents and its buyback is equal to roughly 4% of its market cap. In fact, the buyback is so massive, it is larger than 84% of the 500 stocks that are in the S&P 500. Companies with a market cap closest to the $110 billion buyback include Boeing, Deere, Lockheed Martin, and Airbnb.

WFG News

New Settlement Period Beginning May 28

T+1 settlement – Please be aware that beginning May 28, the SEC’s to rule to reduce the time between the trade data and settlement date of a security from two business days (T+2) to one business day (T+1) will go into effect. This means that clients will receive faster proceeds from the sale of a security, and also need to cover a purchase within one day of the trade. The last time the SEC reduced the settlement period was in 2017 when it shortened from T+3 to T+2, and the time before that was in 1993 when the SEC shortened the settlement period from T+5 to T+3.

The Week Ahead

The main event investors and media are most focused on for this week is the inflation report on Wednesday morning. The consumer price index is expected to have increased 0.3% in the month both at headline level and for core prices, and have increased 3.6% over the past 12 month on core pries. Anything higher will likely see a market sell off. The other big data release is the April retail sales report at the same time the CPI is released Wednesday morning. Sales are estimated to have increased another 0.4% in the month. Other data releases include the producer price index Tuesday, the Empire State Manufacturing index, and housing market index Wednesday, jobless claims, housing starts and permits, industrial production, the Philly Fed manufacturing index, and import and export prices on Thursday. There will be several Fed speakers with public appearances this week, but it will be a slower week. Earnings seasons rolls on this week with the focus continuing to be on small/mid sized companies as well as beginning to see several retailers. Several notable reports will come from Alibaba, Home Depot, Cisco, Walmart, JD.com, Applied Materials, Deere, and Under Armour. Artificial Intelligence is sure to see several headlines as well with OpenAI (the first chatbot to come to market) announcing updates Monday and Alphabet holding its annual developer conference.