Wentz Weekly Insights
Lack of Conviction Led to Little Moves in Markets Last Week, Now A Pivotal Two Weeks Ahead

Stocks closed what was a relatively uneventful week little changed, with the S&P 500 finishing up 0.09% in a week that saw very little volatility. The volatility index, referred to as the VIX, traded below 16 for most of the week. Typically a level below 20 indicates low volatility. This was the lowest level since November 2021, compares to the peak of over 30 after the October market lows and much lower than where it traded most of 2022.
There has been a major lack of conviction among investors lately due to the uncertainty and differing opinions on where the economy and markets head next. There are reasonable arguments on both sides, with the major concerns remaining on inflation, Fed policy and interest rates, earnings, how fast the economy is slowing, and whether these factors will lead to a hard landing or soft landing.
As Barron’s noted from its Big Money poll, a survey of institutional investors, “Only 36% of the professional investors we surveyed in the past month describe themselves as bullish on the outlook for stocks over the next 12 months. The same percentage say they are neutral, while the remaining respondents, 28%, put themselves in the bearish camp.” It also notes that at the end of last year, after stocks and bonds saw a nearly 20% decline, 40% of managers were bullish.
This week should tell us a lot more on the direction of the markets with it being a very busy week of earnings and data on the economy. We will see many of the largest companies report results on the first quarter. Microsoft and Google parent company Alphabet report on Tuesday after the bell, Facebook parent company Meta on Wednesday after the close, and Amazon after the close on Thursday. In addition, there are another nearly 200 of the 500 S&P 500 companies releasing their results this week. While we will see how the first quarter shaped out, it will be more important to see what management teams think about the remainder of the year. So far, we have seen more cautious comments as executives are facing the same uncertainty as investors.
On the economic calendar one of the more notable data releases will be how economic growth turned out for the U.S. in the first quarter with the GDP release Thursday morning. Economists estimate the economy grew at a 2.0% annualized rate in the quarter. The unusually strong January (most likely weather related and higher social security payments from the inflation adjustment for 2023) likely led to most of the growth in the quarter, with consumer spending expected to be up at a robust rate of 4.3%, while housing, trade, and inventory growth should be drags on GDP. While GDP is expected to be solid for Q1, we expect it to weaken as we work through the remainder of 2023.
Then on Friday we will see more detailed consumer spending numbers for March. The estimates show there is no change expected, while income is expected to have grown 0.2%, the slowest in months. But the more important figure for markets currently will be the PCE price index – the Federal Reserve’s preferred measure of inflation. This is expected to have increased just 0.1% in the month, but the issue is inflation in the non-goods sector, which is expected to be up another 0.3%.
The debt ceiling debate is ongoing which adds to the uncertainty. Markets are waiting for an announcement on the day when the Treasury says it will be unable to pay its bills, expected to be somewhere between June and August, but this will depend on tax payments over the past couple weeks.
The odds of higher rates is beginning to trickle back into view. The odds of a rate hike at next week’s Fed meeting is nearly 100%, while the odds for a rate increase at the following meeting in June just moved off 0% for the first time this year. In addition, market expectations for year-end rates is now at 4.60% (versus the Fed’s 5.10% projections), up from the low of 3.90% after the bank failures last month.
With all the uncertainty, our view on the markets remain unchanged. We continue to favor value and income producing securities, including specific parts of the fixed income market, while preferring to utilize money markets due to the higher interest rates.
Week in Review:
The week started in the red on Monday for stocks, but that reversed and ended on a positive note with nothing significant driving the reversal. Talks on the debt ceiling made headlines after House Speaker Kevin McCarthy visited and made a speech at the NYSE calling for Congress to reduce spending in exchange for raising the debt ceiling for a year. AI was in the headlines as well, after a 60 minutes interview of Google CEO Sundar Pichai suggested that society needs to be prepared for the rapid advancement of AI and how it will impact every product and every company. Small caps outperformed with the Russell 2000 up 1.22% while the S&P 500 gained 0.33%.
Solid economic data from China on its Q1 GDP, retail sales, and industrial production gave global stocks a boost on Tuesday. However, U.S. stocks traded mixed for most of the session with no real catalyst for stocks either way. Outside of several earnings reports it was a relatively quiet day, housing starts and permits were lower than expected while St. Louis Bullard gave more hawkish remarks that 50 more basis points of rate increases may be needed, differing from peers who call for 25 bps more of increases. Treasury yields fell slightly while stocks finished mixed – three of the four major U.S. indices lower with the S&P 500 the sole gainer, rising 0.09%.
Stocks got off to a slow start on Wednesday after UK inflation came in higher than expected again, with the 12-month rate at 10.1% and in double digits for the seventh consecutive month, adding to inflation concerns and following Bullard’s Tuesday comments on higher rates. More earnings reports came in with focus on Netflix after an in line with expectations report, but its guidance was a little light as it delays the rollout of the paid sharing service. Stocks were relatively unchanged for the day
Debt ceiling debate was in discussions on Thursday again after the House introduced a proposal to increase the debt limit in exchange for cuts to spending. Data in the morning including another negative read on manufacturing while jobless claims ticked higher again, the highest since November 2021, in the latest week of data. Several earnings reports, including from Tesla and several regional banks, pushed stocks lower in the morning and the selling accelerated into the close with the S&P 500 finishing down 0.60%.
Yet again for the week it was another uneventful day that saw little movement in markets to close out the week on Friday. The major indices finished a very narrow range, between +0.07% and +0.11%.
For the week, there was very little movement in stocks and bonds. Treasury yields moved up slightly with the 10-year yield finishing at 3.58%, the highest in a month. Oil snapped a four-week winning streak, falling 5.6% for the week, over global recession/slowdown concerns and resilient flows from Russia. Stocks finished as follows: Russell 2000 +0.58%, S&P 500 -0.10%, Dow -0.23%, and NASDAQ -0.42%.

Recent Economic Data

  • The number of housing starts in March declined 2% to a seasonally adjusted annualized pace of 1.420 million homes whereas the number of permits filed to start building a new home fell 7.3% to an annual rate of 1.413 million. Starts have leveled out around these levels since the end of last summer after dropping 17% from a year ago while permits saw a small increase from the lows late 2022 but fell again in March and are down 25% from a year earlier. The decline in starts was entirely due to a decline in starts on multi-family units, whereas single-family starts increased, but are still down 28% over the past year.
  • The Empire State Manufacturing survey index suggested business activity in the New York region increased for the first time in five months, with the index at 10.8, a large increase from -24.6 in March. According to the survey new orders and shipments surged with delivery times holding steady and inventories increasing. At the same time, employment and hours worked declined and selling prices increased at the same pace as last month. Expectations are no better as businesses continue to expect little improvement in activity in the next six months.
  • The Philly Fed manufacturing survey index shows manufacturing conditions deteriorated further in April according to survey respondents. The index level was at -31.3, down from -23.2 in March for the eighth consecutive negative reading and the worst since May 2020 when we were in the depths of the pandemic recession. A majority of firms (59%) reporting no change in activity, 35% reported a decline, and only 3% reported an increase in activity. Despite the terrible index level which reflects general activity, new orders and shipments rose, with employment was steady and price increases continued to decline. Future indicators show firms’ expectations for growth remain subdued.
  • The number of unemployment claims for the week ended April 15 was 245,000, an increase of 5k from the week prior with the four-week average at 239,750. Continuing claims were 1.865 million, up 61k for the highest since November 2021. The four-week average of continuing claims was 1.827 million, up 12k from the prior week.
  • The Beige Book, which is released by the Fed about every 6 weeks and summarizes economic activity in each Fed district, reporting a downshift in economic activity, saying overall economic activity was little changed with nine districts reporting no change and three reporting modest growth, after describing economy as “resilient” in the last book. It said consumer spending was flat to down, travel activity was up again, price growth was moderate with the rate of price increases slowing, manufacturing activity was flat to down, and the labor market was less tight. Lending lines/volumes were down and loan demand has declined. In addition, banks tightening lending standards amid uncertainty and liquidity concerns.

Company News

  • The New York Times is reporting that Samsung is considering replacing Google with Microsoft’s Bing as its default search engine on all its devices.
  • Citing internal communications, CNBC reported Google is planning to announce a new foldable phone, something that has been rumored for a while, at its annual I/O Developer conference May 10.
  • Netflix said it would end its service of mailing movie rentals via discs after 25 years of doing so, saying “on September 29th, 2023, we will send out the last red envelope.”
  • Tesla will cut prices on some of its vehicles for the sixth round of price cuts this year. For this round of cuts, the high-volume models will see the markdowns including the Model Y, seeing a markdown of 6% now starting at $46,990 while the Model 3 will see a markdown of 4.7% now starting at $39,990 making it the first time a Tesla has seen a price below $40k. The cuts come after several quarters of Tesla reporting deliveries below expectations. Separately, Tesla stock fell after its earnings report after it said its gross margins fell to 16% in the quarter, down from 21% in the previous quarter. CEO Elon Musk said after several price cuts, the company prefers higher volumes with a larger fleet, sacrificing higher margins, in effort to generate higher profits through autonomy.
  • Dominion Voting Systems has settled its defamation case against Fox News shortly after the trial started. Fox will pay $787.5 million as part of the settlement, about half of the $1.6 billion in damages Dominion was suing for.

Other News

  • Speaker of the House, Kevin McCarthy, introduced a bill to cut government spending and to raise the debt ceiling by $1.5 trillion, something he hopes the House can vote on this week. However there is skepticism by some as it is unclear if all Republicans will be on board and able to pass the bill. Either way it would be dead on arrival in the Senate.
  • St. Louis Fed President Bullard said the latest inflation data showed inflation is still too hot, adding that 50 more basis points of rate increases would be needed (bringing the target rate to 5.50%-5.75%), and acknowledging inflation is coming down “but not as fast as Wall Street expects.” He said broader economy seems poised to continue to grow and said the idea of a recession in the second half of this year seems unlikely, especially with the labor market as strong as it is which feeds into strong consumption.

The Week Ahead

It will be a very busy week, full of economic data and earnings reports. At least 35% of S&P 500 companies will give updates on how the first quarter turned out, and some will provide updates on how they see the remainder of the year shaping out. Most of the focus will be on the mega cap companies with Microsoft and Alphabet reporting Tuesday, Meta on Wednesday, and Amazon reporting on Thursday. Other notable results will come from Coca-Cola, Whirlpool on Monday, Visa, 3M, GM, PepsiCo, McDonald’s, Verizon, GE, Chipotle, UPS on Tuesday, Boeing, eBay on Wednesday, Intel, Merck, Caterpillar, AbbVie, Altria on Thursday, and Exxon Mobil and Chevron on Friday. The data being released this week will be on the housing market, the consumer, and economic growth. On Tuesday we will see the latest on home price growth with the Case Shiller home price index along with new home sales for March. Tuesday will also include the latest consumer confidence reading and the level of money supply, which has been experiencing its fastest decline, shortly after experiencing a record increase. Wednesday will have durable goods orders. Thursday will see the first estimate of first quarter GDP, which is expected to come in somewhat strong with a 2.0% annualized increase, and the latest on jobless claims which have ticked up lately. Friday will see the latest consumer sentiment survey, the employment cost index, and the latest read on consumer income and spending for March. There will be more Fed speak this week as well, the last week before policymakers go into their blackout period prior to next week’s FOMC meeting. In politics, the House may attempt to vote on a debt ceiling package which has a chance of passing in the House where Republicans hold the majority but will be dead on arrival in the Democratic controlled Senate.