Wentz Weekly Insights
Indexes Up Although Driven by Few Leaders as the Average Stock Still Down

Aside from the bank turmoil in March, volatility this year has been relatively low. In fact, stocks just experienced the sixth consecutive week of moving less than 1% in either direction for the week, this contrast with the past three years where volatility was higher and it felt like the norm to see the index move more than 1% in a week.
However, as we mentioned the past two weeks, much of the return in the stock index this year (the S&P 500 – a market cap weighted index of 500 companies in the US) has been driven by the top companies in the index. The S&P 500 has gained 7.4% year-to-date as of Friday, May 12. The top nine companies in the S&P 500, which include Apple, Microsoft, Amazon, Alphabet, Nvidia, Berkshire Hathaway, Meta, United Health, and Tesla, make up nearly 27% of the index but their combined performance have added 9.7% to the index.
While the S&P 500 is up 7.4%, the NASDAQ (more weighted toward tech and growth stocks) is up 17.4%, the Dow Jones Industrial Average (an index of 30 blue chip stocks, tends to be more value oriented) is up just 0.5%, while the Russell 2000 (an index of 2,000 of the smallest companies in the US) is down 1.2%. The outperformance in the NASDAQ is also driven by the top names in the index (the top seven are the same as the S&P 500’s top nine but exclude Berkshire Hathaway and United Health) with those companies making up 41.7% of the index. As Raymond James notes in a chart below, despite the NASDAQ marking the highest level in a year, breadth has been narrow.
Meanwhile, one of the biggest headlines in the news over the past two weeks has been the debt ceiling debate in Washington. It does not seem like there has been progress with disagreements on both sides – centering around spending caps on non-defense discretionary spending, how to use remaining Covid funding, work requirements for federal benefits, and permitting reform. Markets have been unfazed at this time but as we get closer to a deadline, which is estimated to be June-July timeframe, we expect to see volatility pick up, particularly in the Treasury market. We have already seen yields on the one-month T-bill spike from a recent low of 3.30% mid-April to a recent high of 5.50% as it is the treasury with the shortest maturity and is beginning to price the chance of a default.
At the same time, economic data continues to deteriorate with several consumer sentiment indicators weakening further. The consumer sentiment survey showed an index level of 57.7, the lowest since November and continuing to indicate recessionary conditions, while the expectations index was 59.2, also the lowest since November and back near the record lows that were seen in early fall.
This week will show more data on the consumer from the retail sector. The retail sales report for April is expected to show a bounce in sales after several months of declines, but the data is likely to tell us this was due to a bounce in vehicle sales (which are large purchases and skew the index) and gas sales from higher gasoline prices. In addition, many of the big box retailers will report earnings results over the next two weeks. Target, Walmart, and Home Depot will release results this week and will give insight on consumers’ spending trends and what they expect for the remainder of the year.
On the inflation front, data last week came in as expected with inflation cooling further in April. The year-over-year consumer inflation rate was 4.9% as the index rose 0.4% in the month. The overall trend has been welcoming as inflation has moved lower for the tenth consecutive month. But something to keep in mind, as the team at First Trust notes – “The next two months are going to provide an interesting test for the Federal Reserve, as outsized jumps in inflation that took place in May and June of 2022 begin to roll off of the year-ago comparisons, which could make it look like inflation is moderating rapidly. However – as is often the case – that surge in inflation last year was followed by a lull, with inflation barely budging in July and August 2022. That means we are very likely to see the twelve-month inflation readings re-accelerate toward the end of the summer. Hopefully Powell and Co. look beyond short-term volatility in the data and realize the fight is not finished.”
Week in Review:
It was a quiet start to the week on Monday with stocks trading in a narrow range. Stocks were mixed and all indexes traded around breakeven for the session. After Powell’s comments at his last press conference on the Senior Loan Officer Opinion Survey on Bank Lending Practices, the release of the report was in focus for market participants. It noted most of what we knew in that banks credit standards tightened over the quarter with bank respondents noting weaker loan demand and tighter credit standards due to lower risk tolerance and concerns on funding costs and liquidity positions. Treasuries were a little weaker as yields rose as they start to price in more chance of a government default while stocks gained 0.05%.
There were no big headlines again on Tuesday so markets were following Congressional leaders’ meeting at the White House for any progress on the debate around the debt ceiling. According to reports, there was no progress with House Leader McCarthy dismissing the possibility of a short term extension/solution. Fed speak will pick back up in the days ahead with Tuesday’s remarks coming from NY Fed’s Williams who said he does not see any reason to cut rates this year and is now “particularly focused” on banks and how tighter credit conditions will affect economic activity. Stocks traded lower through the day with the S&P 500 down 0.46%.
The Consumer Price Index print Wednesday morning was the notable event for the week and the report showed inflation cooled slightly more than expected, leading markets higher. However, inflation still remains over double the Fed’s target, particularly prices among services, and this will keep rates higher as opposed to the market’s expectation on rate cuts later this year. Many smaller/mid sized software companies released quarterly reports with very mixed results. Volume on the equity market was lower with about half the S&P 500 stocks advancing with growth leading the way. In fact, the growth/tech heavy NASDAQ index reached its highest level since August after a 1.04% increase, while the S&P 500 gained 0.45%.
Thursday morning saw the producer price index cool further, similar to the CPI report Wednesday, while jobless claims ticked up to the highest levels since late 2021. The data is further supporting a rate hike pause at the next Fed meeting, as is beginning to be the overwhelming expectation. However, that led to growth concerns as well and, along with additional banking concerns, drove stocks lower during the session. A select few large cap names helped the NASDAQ and S&P 500 outperform, with the S&P 500 declining 0.17%, while small caps underperformed.
A scheduled meeting on Friday at the White House to discuss a debt celiing deal was delayed until sometime this week as the stalemate continues. Data in the morning included the consumer sentiment survey that showed inflation expectations rose for the short and medium term while additional Fed speak, this time from Governor Bowman, tilted more hawkish in supporting more rate hikes if inflation remains high. Stocks ended lower, but off the lows of the day with the S&P 500 down 0.16%.
Crude oil fell for the fourth consecutive week as investors continued to be worried about slowing growth and falling prices. The dollar was slightly higher for the week and Treasuries were mostly unchanged with the 2-year Treasury yield closing back above 4.0%. Stocks traded in a tight range again, in fact in was the sixth consecutive week where stocks traded within 1% in either direction for the week. Stocks were mostly lower, but tech was an outperformer which contributed to the tech/growth heavy NASDAQ being positive for the week. The major US indices finished as follows: NASDAQ +0.40%, S&P 500 -0.29%, Russell 2000 -1.08% and Dow -1.11%.

Recent Economic Data

  • Consumer inflation in April was right in line with expectations across the board. The consumer price index rose 0.4% in the month, up from a 0.1% increase in March due to a 0.6% rebound in energy prices (+3.0% for gas) as well as a 4.4% increase in used cars. Excluding the food and energy categories, core prices rose 0.4%. The shelter category, which has been the main driver of inflation over the past year, saw a 0.4% increase which was the lowest monthly increase since January 2022 and gives markets hope inflation will move down quicker. Medical care services fell for the sixth of the past seven months as insurance costs continue to decline, down 3.8% (due to the ‘new’ calculations), while medical goods rose 0.5%. Transportation service costs fell as airfare dropped 2.6% for the first decline in months. Compared to a year ago prices are up 4.9%, decelerating from 5.0% last in March while core prices are up 5.5%, down from 5.6% in March.
  • Input prices for producers rose 0.2% in April, slightly less than the 0.3% increase expected and picking up from the 0.5% decline in March. The March decline was due purely to a drop in energy prices, while the increase in April was a little more broad, with the foods and transportation/warehousing categories the only major categories seeing declines. Core prices, which look at final demand prices for producers excluding food, energy and trade, rose 0.2% as well, meeting expectations. The producer price index was up 2.3% from a year ago at the headline level, down from 2.7% in March, and up 3.4% for core prices, down from 3.6% in March.
  • Prices of goods/services imported to the US increased 0.4% in April, the first monthly increase since December, however prices of imports are down 4.8% from 12 months earlier, a sharp difference from this time last year when import prices were climbing at a record pace. April’s increase was driven by increases in fuel, as the index excluding fuel was unchanged in the month. US export prices increased 0.2% in April, the third monthly increase in the past ten months, with the 12 month decline in export prices at 5.9%, again after record increases this time last year. The increase was a little more broad based but mostly driven by a 0.4% increase in agricultural goods.
  • The Fed bank of NY survey of consumer expectations showed consumer’s inflation expectation fell 0.3% over the next 12 months compared to the March survey to 4.4%, while three-year ahead inflation rose 0.1% to 2.9%. More consumers thought unemployment would rise while expectations for income and spending fell, with spending growth expectations falling to 5.2% from 5.7% for the lowest reading since September 2021.
  • The Atlanta Fed business inflation expectation survey showed inflation expectations for businesses ticked higher, to 2.9% over the next year, up from 2.8% in last month’s survey. On the current environment, businesses said sales levels “compared to normal” have decreased while unit costs increases were unchanged in the month at 3.5% on average.
  • For the week ended May 6, the number of jobless claims filed was 264,000, an increase of 22k from the prior week and now the highest since October 2021 when they were trending downward from the Covid spike. The four-week average was 245,250, up 6k from the prior week. The number of continuing claims was 1.813 million, up another 12k with the four-week average now at 1.829 million.
  • The preliminary read on May Consumer sentiment, an index compiled by the University of Michigan based on a survey of consumers, was 57.7 which was down from 63.0 in April’s final print. The index on current conditions has fallen to 64.5 for the weakest since December, below expectations and down from 68.6 in April. The index on expectations was a bigger disappointment, falling to 53.4 which was well below expectations and down from 60.5 in April. One-year ahead inflation expectations ticked lower to 4.5% from 4.6% (which was up from 3.6% the prior read), while 5-10 year ahead expectation on inflation moved higher again, increasing to 3.2%, the highest since 2008 and not a welcoming sign for the Fed.
  • Per the weekly Freddie Mac mortgage survey, the average prime 30 year mortgage rate was 6.35% last week, down slightly from the week prior but has remained in this 6.10% – 6.60% range since November.

Company News

  • PacWest, a regional bank on the west coast which has been speculated to be the next bank to fail, said it lost another 9.5% of its deposits in the week ending May 5. In addition, it said it pledged another $5.1 billion of loans to the Fed to allow an additional $3.9 billion in borrowing.
  • The European Commission approved Microsoft’s proposed acquisition of Activision Blizzard, conditional upon the full compliance with the commitments Microsoft had offered. The EC said the commitments fully address the competition concerns it had and represents improvement for cloud gaming. UK’s antitrust regulators had previously blocked the deal while the companies have hired attorneys to counter UK’s decision.
  • Facebook parent company Meta said it is testing an advertising expansion on Reels that would give creators the ability to earn money on the performance of their Reels, a move Facebook thinks will create further engagement.
  • In M&A news, there was a big deal in the lithium mining space – Chemical maker Livent will combine with lithium miner Allkem in an all-stock deal valuing the combined company at $10.6 billion. Allkem will own 56% of the new company and Livent shareholders will own 44%.
  • Twitter CEO Elon Musk said the company has hired a new CEO and will start in six weeks. Reports from the WSJ say the new CEO will be current NBCUniversal advertising Chief Linda Yaccarino, who oversees the company’s advertising and partnerships at NBC. She has been an advocate in the industry for finding better ways to measure ad effectiveness. Later in the week, Yaccarino announced she was resigning from her position at NBC.
  • Goodyear Tire saw gains last week after activist investor Elliott Management said it built a stake in the stock and plans to seek five board seats, push the company to begin an operational review to improve its margins, and push for ways for the company to monetize its Goodyear retail store network, including a sale of the network of retail locations.
  • Franchise Group, owner and operator of franchises such as Vitamin Shoppe, Pet Supplies Plus, and American Freight announced it has agreed to be taken private by consortium led by its management group and its CEO as well as B. Riley Financial and Irradian Partners in a deal for $30/share, representing a 31% premium to shares before the deal was announced.

Other News

  • Brokerage firm Robinhood said it would be the first retail brokerage to offer trading 24 hours per day Monday through Friday, but will only include a list of 40 popular stocks and ETFs.
  • The Senior Loan Officer Opinion Survey on Bank Lending Practices, which received attention after Powell mentioned it at the last Fed meeting, showed banking credit standards tightened since January. Respondents noted tighter standards and weaker demand for commercial loans and household loans for all loan categories, but was actually unchanged for credit cards. There were a couple special questions – about banks changes in lending policies for commercial real estate loans which they said it was due to banks’ higher costs of funds and lower loan-to-value ratios. Regarding tightening standards for all loan categories respondents cited less favorable economic outlook, reduced risk tolerance, deterioration of collateral values, and concerns about banks’ funding costs and liquidity positions. Regarding how respondents see the outlook, they said they expect further tightening across all loan categories, citing the same as the previous questions and including deposit outflows.
  • The debate on the debt ceiling continued over the week with a scheduled meeting at the White House postponed on Friday to Tuesday this week to reportedly give staffers more time for negotiations, according to the AP. Shortly before the postponement, House speaker McCarthy dismissed the possibility of a short term extension to the debt limit, still preferring a longer-term solution. This comes after reports, including the White House saying it was looking at the possibility of a short-term extension. Meanwhile, the Congressional Budget Office, a non-partisan agency, said the Treasury will face a cash crunch in June but if it can get through June it can make it through the end of July before it reaches the debt limit.
  • Reuters reported Energy Secretary Granholm said the process of buying crude oil to restock the US’s Strategic Petroleum Reserve could start in June. Last year, Biden announced a massive draw that occurred through the middle of the year that depleted a large chunk of what was stored in the reserve and there has been speculation it would begin to be refilled soon. Reuters says the administration has signaled previously it would look to refill the SPR when oil prices are consistently below $67-$72/barrel. Prices have been in a tight range of roughly $68-$80/barrel since November.
  • Central Bank Headlines:
  • NY Fed president Williams said he is now “particularly focused” on banks and how tighter credit conditions will impact economic activity and inflation, which he says is uncertain at this point. He added he does not see any reason to cut rates this year as the labor market still remains very tight.
  • Chicago Fed president Goolsbee said it is too premature to tell what the FOMC will do at the next meeting with interest rates. He said the credit squeeze is beginning and the Fed needs to see how much work that is doing to monetary policy
  • Fed Governor Michelle Bowman said it will “likely be appropriate” for the Fed to raise interest rates further as the latest inflation and labor market data have not provided the “consistent evidence” that is needed to assure her inflation is on a downward path. She said the next meeting will be data dependent on what moves the Fed makes.
  • The Bank of England raised its policy rate by 25 basis points (to 4.5%), as expected, while signaling further rate increases will continue to be necessary. Its base case no longer sees a recession, however the risks to inflation remain to the upside. There was little reaction in financial markets as this was widely expected.
  • The European Central Bank’s consumer expectations survey showed one-year ahead expectations on inflation rose to 5.0% from 4.6% in the previous month’s survey. Meanwhile, longer-term inflation increased to 2.9%, a jump from 2.4% in the previous survey.

Did You Know…?

More Consumer Debt

The Federal Reserve’s monthly report on consumer credit shows credit increased 0.6% , or at a 6.6% annual rate, in March with a 17.3% annualized increase in revolving credit like credit cards and a 3.0% increase in nonrevolving debt. Meanwhile, the New York Fed’s quarterly report on household debt shows total household debt in the US hit $17 trillion for the first time ever after a 0.9% increase, or $148 billion, in the first quarter. Mortgage, auto, and student loan balances all rose, while revolving credit like credit cards were flat. Separately, data by TransUnion shows credit card balances declined by 1.5% in the first quarter compared to the last three months of 2022. The first quarter is usually when consumers work on paying down credit that they built during the holiday shopping season, with an average 3% decline in credit card debt in the quarter, but this year’s first quarter decline was at a slower pace than what is typically. Balances remain near record highs and are up nearly 20% from a year earlier.

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Office Hours

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The Week Ahead

This week ahead will have a focus on the retail sector. On the economic calendar, retail sales for the month of April will be released on Tuesday. After a 1.0% decline in March, economists are expecting sales bounced back with a 0.7% increase in April, but may be mostly due to vehicles and gasoline sales. Several housing indicators come out as well including the housing market index on Tuesday, housing starts and permits on Wednesday, and existing home sales on Thursday. Elsewhere, the Empire State Manufacturing and Philly Fed manufacturing survey indexes come out Monday and Thursday respectively, where we know the sector has shown weak activity for almost a year now, industrial production on Tuesday, and jobless claims on Thursday. There will be more Fed speak this week with Chairman Powell’s speech on Friday capping off the week. Earnings include many big box retailers. Among the notable names include Home Depot on Tuesday; Target, Cisco, TJX on Wednesday, Walmart, Ross Stores, Alibaba on Thursday, and Deere and Foot Locker on Friday. Debt ceiling debate continues with Congressional leaders scheduled to meet at the White House on Tuesday to continue negotiations.