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.