Wentz Weekly Insights
Finally A Deal

On Sunday Evening President Biden and Republican Leaders revealed they had reached a compromise to raise the debt limit for the next two years through the “Fiscal Responsibility Act.” There were several main components to the deal but most importantly for the time being, the government will not default and will not have to worry about doing so until January 2025 at the earliest.
The biggest “savings” in the deal is on discretionary spending which makes up nearly 25% of total federal spending and about 13% when excluding defense spending. The deal will cap spending in this category but this is only for the next two years, after which is more uncertain due to non-binding commitments. Spending cuts were on the top of the Republicans list of wants, but the details on the savings and caps, particularly years three through ten, are still uncertain at this time.
Work requirements for Federal benefits was another item high on Republicans list. The bill would bring on new work requirements for SNAP and TANF programs (like welfare and food stamps) meant to improve labor force participation and tighten requirements for those without dependents. Energy reform was another item on the bill that includes streamlining environment reviews for projects that will speed up the approval process and approving the Mountain Valley Pipeline.
The last several items include cutting $20 billion in IRS funding that was increased from the Inflation Reduction Act last year, prohibiting the White House from extending the student loan repayment suspension again, and rescinding unspent pandemic funding.
The agreement removes an uncertainty for the markets. Stocks were trending lower for most of the week until a blockbuster earnings report from chipmaker Nvidia changed the direction.
The company, which has been known for its gaming chips, blew away expectations when it reported its first quarter results after Thursday’s close and also provided guidance that was well beyond the highest estimate (it expects revenues of $11 billion in the current quarter compared to the consensus estimate of $7.11 billion). The reason is the surge in demand in artificial intelligence (AI) chips as internet companies look to increase investment in the space after the success of ChatGPT and not wanting to fall behind. Nvidia said it is significantly increasing its supply for products related to data center after the surge in interest in AI.
The leadership that is driving the indexes higher continued because of Nvidia’s 28% jump in its stock Thursday and Friday. After the increase Nvidia is now the fifth most valuable US public company, behind only Apple, Microsoft, Amazon, and Alphabet (at the open this morning Nvidia’s market cap surpassed $1 trillion).
Behind these headlines was many public appearances from several Fed policymakers. The overall message from officials continues to tilt more hawkish than what was said during the most recent Fed meeting on May 3 where it introduced the idea of pausing rate increases. Recent comments suggest there is no “pause” in rate hikes with a rate hike still on the table for the June 14 meeting and fixed income markets have been reacting with the 2-year Treasury yield rising 30 basis points last week to 4.56%. This is the highest since the banking issues surfaced in March and nearing the cycle high of 5.07% on March 8.
If stocks want to sustain a rally that the major indexes have seen so far this year, we want to see more participation with the average stock rather than just the top ten. The fact we have not tells us there is still worries of an economic slowdown and this will mostly likely keep volatility higher.
Week in Review:
Stocks opened the week relatively unchanged on Monday, with news on China’s ban on Micron chips, more merger and acquisition headlines, and negotiations between Republican leaders and the White House continuing over the weekend. It was another busy day of Fed speak with more officials giving a hawkish tone, with James Bullard from St Louis saying he still expects another two rate hikes this year. Debt ceiling talks resumed with Biden and McCarthy meeting in the evening where they agreed on how to handle unspent pandemic funding but still many other disagreements. Small caps were the outperformers for the first time in a while with the Russell 2000 gaining 1.22% while the S&P 500 was relatively unchanged and the 2-year Treasury continues to move higher, gaining another 7 bps on Monday.
Debt ceiling drama continued into Tuesday and is mostly what drove stocks lower for the day. Earnings were mixed, with Lowe’s and AutoZone missing estimates and lowering financial forecasts, while Dick’s Sporting Goods and Zoom Video had better than expected results. Something to note, Bloomberg reported Chinese experts are projecting another Covid wave by the end of June, sending certain sectors like casino stocks lower. New homes sales were higher in April, but supply is still an issue, as the housing markets moves off a bottom. The Dow meaningfully outperformed the NASDAQ for the first time in what feels like a while, falling just 0.69% while the NASDAQ fell 1.26%, with Treasuries little changed.
Leaders in Washington continued to give an optimistic tone to the media regarding debt ceiling discussions but despite this the market was lower for the whole session, though finished off the lows of the day. The minutes to the May FOMC meeting were released with a slightly hawkish tilt and officials noting the change in the statement was not made to reflect a bias for the direction of rates either way while Fed Governor Waller said he does not expect data to show the Fed has reached its terminal rate and more hikes will be needed. Treasury yields saw another move higher while the major indices all fell with the S&P 500 down 0.73%.
The highlight going into Thursday’s session was the blowout quarter from Nvidia all thanks to a massive boost in orders of its AI chips, and this drove gains across the whole semiconductor sector which rose 6.8%. The remainder of the market was slightly lower which comes after rating agency Fitch put the US government’s AAA credit rating on a “negative” watch, saying it would move to downgrade the top notch rating if a deal is not made by June 1. The move drove Treasury yields higher again with the 2-year yield up 16 bps to 4.54%. Data in the morning included another small drop in unemployment claims, an upward revision to first quarter GDP, and an upward revision to PCE inflation. The average stock was negative on high downside volume, but semiconductors, particularly Nvidia, lifted the S&P 500 by 0.88%, while the NASDAQ gained 1.71% and Russell 2000 fell 0.70%.
Progress on debt ceiling talks, with latest news showing a two-year extension, drove markets higher on Friday with much more participation than what was seen Thursday. Economic data in the morning including consumer spending for April that was double expectations with a 0.8% increase, income that grew as expected, capital goods orders that unexpectedly rose in April, and the PCE index (the Fed’s preferred measure of inflation) rising slightly more than expected. Outside data and debt ceiling updates it was a quiet day. Stocks rose on progress with negotiations and a continued rally in semiconductors after Nvidia’s report with all indices at least 1% higher for the day.
Oil finished up 1.4% last week, helped by comments from Saudi Oil Minister warning those betting on oil to fall to “watch out.” The dollar index was relatively more stable, rising 1%, with gold finishing the week down 1.9%. US stocks were mixed with growth stocks, particularly semiconductors, driving a majority of the gains while the average stock was down. The major US indices finished as follows: NASDAQ +2.51%, S&P 500 +0.32%, Russell 2000 -0.04%, Dow -1.00%. Treasury bonds sold off across the curve but more so at the short end as the curve flattened. The 2-year yield saw a large increase, rising 30 basis points over the week to 4.56% while the 10-year yield finished at 3.82%.

Recent Economic Data

  • Sales of newly constructed homes rose to the highest levels since the beginning of 2022, rising 4.1% in April to a seasonally adjusted annualized sales pace of 683,000 homes, which is 11.8% above the April 2022 rate. The South, as with other housing reports, continues to be the strongest region and generated most of the strong sales growth in new home sales with it making up 65% of all new home sales in the country, a jump of 18% from last months rate. Northeast saw a 59% decline to 24k sales, while the other regions were less changed. Inventory remains an issue with just 433,000 new homes available, unchanged from March making the monthly supply of new homes at just 7.6 months. The median price tends to be volatile and fell 7.7% from March and is down 8.2% from a year ago at $420,800.
  • Money supply in the US economy declined by $167 billion, or 0.8% in April. Money supply is down $1.004 trillion, or 4.6%, from April a year earlier for the largest annual decline ever, and is down 4.7% from the peak high on July 2022. A 4.7% decline may sound small but a $1 trillion decline in money supply is a massive drop in a short period of time. Of course, money supply is still up 35% from pre-pandemic levels, one of the main reasons inflation remains an issue.
  • The second revision of first quarter GDP, based on more complete source data, shows upward revisions to consumer spending, inventory investment, government spending, nonresidential investment, and exports, and a downward revision to residential investment, resulted in an overall 0.2% upward revision to the annual GDP rate. The final revision shows GDP expanded at an annual 1.3% in the first quarter, up from 1.1% in the first estimate last month.
  • The number of unemployment claims filed the week ended May 20 was 229,000, up slightly from the prior week with the four-week average at 231,750. The number of continuing claims fell slightly to 1.794 million, with the four-week average down to 1.800 million. After several weeks of increasing due to fraud in Massachusetts, claims have come back down.
  • Orders for durable goods, a major input to factory orders, increased $3.1 billion or 1.1% in April driven by an increase in defense aircraft, and follows a 3.3% increase in March. However, orders excluding transportation, which smooths out frequent volatility from large orders like aircraft, were down 0.2%. Shipments of core capital goods (non-defense excluding aircraft), which is a proxy of business investments and is an input to GDP, rose 0.5% which is a positive readthrough for GDP.
  • The Bureau of Economic Analysis data on personal income and outlays shows income growth slowed further while consumer spending remains very strong and inflation still a problem in April:
  • Personal income grew 0.4% in April as was expected and follows a 0.4% increase in March. The wages and salaries category, which makes up over half the index, increased 0.5%. Compared to a year earlier, incomes are up 5.4%, but wages and salaries are up just 3.4%. Driving most the income gains over the past year is a 12% increase in social security income due mostly to the cost of living adjustment.
  • Consumer spending rose a much stronger than expected 0.8% in April and continues to be the bright spot in the U.S. economy. Spending on goods picked up with a 1.1% increase while services spending remains strong rising another 0.7% in the month. Compared to a year ago spending is up 7.8% driven mostly by a 9.2% increase in services spending.
  • The personal savings rate fell to 4.1%, a historically low level, but off the post-pandemic low of 3.0% last October and still well below the historical average of 7.5%.
  • The PCE index, an inflation measure that the Fed prefers to use, increased 0.4% while the core index, that excludes food and energy prices, rose 0.4% which was above the 0.3% increase expected. Compared to a year earlier, the PCE index is up 4.4%, re-accelerating from March’s 4.2%, while core prices have increased 4.7%, up from expectations and March’s increase of 4.6%.

Company News

  • Chevron said it has agreed to acquire PDC Energy, an oil exploration and producer, in an all-stock deal valuing the company at $72/share, or $6.3 billion. The acquisition price was a 11% premium to where shares were trading prior to the announcement. PDC Energy shareholders will receive 0.4638 shares of Chevron for each PDC share owned while Chevron will issue 41 million shares. Chevron said the deal will generate strong free cash flow and development opportunities in the Denver-Julesburg Basin and Permian Basin.
  • Netflix said it has begun mailing out notifications to members urging them to not share accounts with anyone outside their household, and if they do they need to add a profile for outside households for an additional $7.99/month. They previously said this sharing crackdown was successful where it rolled it out outside the US.
  • Ford announced a blockbuster deal with Tesla that allows its customers to gain access to the over 12,000 Tesla Superchargers across the U.S. and Canada. Tesla developed an adaptor that would allow Ford’s vehicles to use the Superchargers while Ford will equip future EVs with the charge port that the Superchargers use. The deal will double the number of chargers available to Ford vehicles starting in Spring 2024.
  • Thanks to its deal with the FDIC and Treasury to purchase the assets of failed First Republic Bank, JPMorgan said it has increased its full year guidance for net interest income to $84 billion, up $3 billion from its estimate just one month ago.
  • Apple and Broadcom have reached a multi-billion, multi-year deal where Broadcom will develop 5G radio frequency components and wireless connectivity components for Apple.

Other News

  • Saudi oil minister Prince Abdulaziz bin Salman warned investors and traders that were shorting oil to “watch out” this comes a week before OPEC+ is set to convene to review policy on oil production for the second half of the year. It was only one month ago the cartel surprised the oil market with a production cut, which later was revealed this was intended to scare speculators like traders betting oil will continue to fall. Salman added “I keep advising them that they will be ouching — they did ouch in April” after the surprise production cut.
  • Central bank headlines:
  • St Louis Fed President Bullard, who has historically been more hawkish but does not hold a vote on the FOMC this year, said he believes the Fed should raise rates two more times to ensure inflation comes back down to target. He does not know when these rate hikes should happen but prefers them sooner than later. He agrees with peers that recession probabilities are overstated.
  • San Francisco Fed president Mary Daly refrained from guessing what the Fed will do at the next meeting, saying at this point in the cycle it is “prudent to resist the temptation” of guessing what the Fed will do the remainder of the year. She said there is a lot of data between now and the June 14 meeting so no decision has been made.
  • Minneapolis Fed President Kashkari said he is open to the idea of the Fed moving more slowly from here, not against a pause in rate hikes at the next meeting, but also said taking a pause does not mean the rate hike cycle is over.
  • Fed Governor Christopher Waller said he believes the Fed should maintain flexibility with the June meeting and could support either a rate hike or skipping the meeting to see more data before making the decision. He noted how inflation is not coming down fast enough and this does not support the pause (in rate hikes) narrative. Also important, Waller said he does not expect the upcoming data to support the claim the Fed has reached a ‘terminal rate.’
  • Richmond Fed President Barkin said he is hearing businesses are still saying they need to raise prices while having to deal with a tight labor market. He also said the higher rates are helping to reduce demand.

Did You Know…?

Record Air Travel

The number of passengers traveling by air over the Memorial Day weekend surpassed the pre-Covid levels to make a new record high. Data from TSA shows almost 9.8 million passengers passed through security over the four-day period which goes from Friday to Monday, which is 300k more than the 2019 period and 966k more than 2022 levels. In addition, Friday saw 2.74 million passengers alone, the highest daily volume since November 2019.

WFG News

Office Hours

Please be aware that starting after Memorial Day and running until Labor Day, Wentz Financial Group will begin its summer hours. Our hours will be 8:30 to 4:00 Monday through Friday. As always, if you need to speak or meet outside of those hours, please reach out and we will be happy to set up an appointment.

SMFCC Elite Business Awards

Wentz Financial Group had the opportunity to sponsor the Stow-Monroe Falls Chamber of Commerce 2023 Elite Business Awards last week. Tim Porter spoke on behalf of Wentz Financial Group and had the opportunity to present several of the awards. Congratulations to all the finalists and the winners of the Business Awards!!!

The Week Ahead

It will be a holiday shortened week for the markets but for this week that will not make it less busy. The economic calendar is full of data releases, most importantly focused on the labor market. On Wednesday we will see results from the job openings and labor turnover survey (another drop in job openings expected), Thursday we will see the payroll report from ADP and weekly jobless claims, and on Friday we will see the Department of Labor’s employment report. The labor report has consistently surprised to the upside and this week the consensus sees 180,000 job gains in May. Outside of that we will see the S&P Case Shiller home price index, where we may see the second monthly increase in home prices after seven months of declines, and the Conference Board’s consumer confidence survey index on Tuesday. Wednesday will see the Beige Book released and Thursday includes manufacturing survey results with the ISM and PMI manufacturing indexes, April construction spending, and the revisions to first quarter productivity and labor costs. Finally, on Friday automakers will provide vehicle sales for May. More earnings reports will come this week with notable results scheduled for HP on Tuesday, Salesforce, Advanced Auto Parts, and Chewy on Wednesday, and Broadcom, Dell, Dollar General, Lululemon, and Macy’s on Thursday. A lot of Fed speak will take place again, mostly on Wednesday, before policymakers move into a quiet period next week. Oil will receive increased attention as we head into the weekend with OPEC+ holding its production meeting on the 4th. On the political front, Congress is expected to vote on a debt ceiling bill this week with final passage expected over the weekend.