Your Monthly Market Newsletter, May 2023

Spring has Sprung, and it’s hard to believe that summer is just around the corner. April’s stock market was a mixed bag, with stocks ending the month higher despite several lackluster sessions. The Nasdaq managed a small gain thanks to a solid finish to the month, and the Dow had its best month since January. 

Inflation Rate at Lowest in Nearly Two Years. In April, the Bureau of Labor Statistics (BLS) reported a meager increase of just 0.1% in the Consumer Price Index (CPI) from February to March. Year over year, March saw inflation at its lowest level in nearly two years. Why does this matter? As the inflation rate continues to decline, there will be less pressure on the economy and household budgets, which is excellent news for most consumers. However, the rate remains much higher than the Federal Reserve’s (Fed) target rate of 2%.  

Mortgage Rates Trending Lower. Last month we talked about the rate spike we saw in the first half of March, and the good news is that mortgage rates are on their way back down. The average fixed interest rate on a 30-year mortgage was 6.27% as of April 13, down from a 20-year high of 7.08% in November 2022. Time will tell if cooling inflation helps drive rates even lower; there are expectations that we’ll see surges in housing market demand throughout the remainder of the year. That could undoubtedly cool any downward trend.

Fox News Settles Blockbuster Lawsuit. Fox News and its parent company Fox Corp. struck a deal with tech company Dominion Voting Systems over spurious fraud claims in the 2020 presidential race. Reaching a settlement of $787.5 million, Fox News released a statement saying, “This settlement reflects FOX’s continued commitment to the highest journalist standards.”

Gun Violence and Violent Storms Both Prolific in April. Sadly, the headlines in April were filled with far too much death and destruction. From family members shot by a neighbor in Texas to two teens killed in a shooting at a house party in Mississippi to four teens killed at a birthday party in Alabama, by mid-April there had been more mass shootings than days in 2023. 

And the weather was even more violent. Just through the 26th of the month, April had seen 126 confirmed tornadoes, bringing the total for the year to 496. They occurred in almost every part of the country east of the mountain time zone, and the death toll from those storms was higher than average. April also brought blizzards, wildfires, and significant flooding. As a result, we’ll likely all be experiencing continued cost increases in our property insurance.

Thankfully, It’s Not All Bad News in the Headlines. A microbe discovered living on the slopes of an Italian volcano can eat and store CO2 in its body faster than any other species yet known. Scientists hope to harness the creature’s powers to create carbon-capture ponds to aid in pulling CO2 out of the atmosphere. Or how about the wonderful news that the world’s most romantic river (the Seine) has been cleaned up ahead of the 2024 Olympics in Paris. The previously unappealing green-brown river has undergone a $2.3 billion overhaul, and recent water quality surveys found it “overwhelmingly good” and ready to host swimmers and triathletes.

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Stocks

After an awful year in the stock market, you can expect one of two things to happen:

a) Very good returns (since bear markets don’t last forever), or downturns that make for fantastic buying opportunities.
--or--
b) A continuation of the bad performance if things turn into a full-blown crisis.

The good news about the current environment is that it seems like the stock market is trending toward an end to the inflationary crisis days of 2022. Last year, the Nasdaq Composite was down more than 32%. This year the Nasdaq is up nearly 22%. Last year the S&P 500 was down 18%. This year the S&P 500 is up more than 9%.¹

^{1. https://awealthofcommonsense.com/2023/04/what-happens-after-a-bad-year-in-the-stock-market/}

Sector Performance

In U.S. Sector performance, 8 of 11 sectors finished the month of April higher, with Communication Services stocks leading the pack after better-than-expected earnings from some of the sector’s larger constituents (namely, Facebook, Alphabet, and Netflix). On the opposite end of the return spectrum, this year we saw three of the biggest bank collapses in U.S. history, so it should be no surprise that Financials are the largest laggard for the year thus far, down -2.56% through the first four months.

Bonds

The Federal Reserve’s (Fed) preferred inflation metric -- Core Personal Consumption Expenditures (PCE) -- rose 0.3% month-over-month and 4.6% year-over-year in March.¹ Like other measures, this data shows that prices remain stubbornly elevated when the volatile food and energy categories are excluded. As a result, the Federal funds’ futures show that investors see a more than 80% chance that the Fed will raise rates by 0.25% in May, according to CME Group data. Traders expect the policy rate to peak around 5% before falling below 4.5% by year-end.² Despite continued increases in interest rates, bond yields held steady over April, slightly falling to 3.45% from 3.50% at the start of the month. This has been favorable for bond market performance. 

^{1. Data obtained from Bloomberg as of 4/30/2023 2. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html}

Economic Update

With many economists still calling for a recession this year, looking at the S&P 500 earnings picture is essential. Overall, 53% of the companies in the S&P 500 have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS (Earnings Per Share) above estimates and above the 5-year average of 77% and the 10-year average of 73%. In aggregate, companies are reporting earnings of 6.9% - - which is above estimates and, while below the 5-year average of 8.4%, it’s above the 10-year average of 6.4%. As a result, the blended (combines actual results for companies that have reported with estimated results for companies that have yet to report) earnings decline for the first quarter is -3.7% today. This would mark the second straight quarterly decline in earnings growth. While this may look troubling, there is good news: although earnings growth is coming in negative, it likely does not signal a recession. Why? Because, on average, S&P 500 earnings typically decline -16.4% in a recession, and we are far off from that.¹

^{1. https://insight.factset.com/sp-500-earnings-season-update-april-28-2023}

Bald Eagle Becomes Foster Dad
After Trying to Hatch Rock

This month’s feel-good story is about Murphy, a beautiful male bald eagle who resides permanently at a Missouri sanctuary because of a wing injury. Though he lives with 4 other eagles, there is no Mrs. Murphy. And, while nesting hormones are normal and quite common, his keepers were surprised to find Murphy feathering a “very simple nest” and doting on a single “egg” contained within. 

Unfortunately, it was not an egg at all but a rock. The staff felt bad that Murphy’s fatherly instincts would never pay off, but then came a serendipitous surprise. On April 1st, the sanctuary received its first bald eagle nestling in more than eight years. What happened next?

 Click here to read more about this adorable foster story.

THOUGHT FOR THE MONTH

^{Index Definitions}

^{Dow Jones Industrial Average: The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.}

^{Dow Jones U.S. Real Estate Total Return Index: The index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.}

^{NASDAQ Composite: The NASDAQ Composite is a market-cap weighted index of all issues listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector.} 

^{S&P 500 Bond Index: The S&P 500® Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities. Market value-weighted, the index seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500.}

^{S&P 500 Consumer Discretionary: The S&P 500® Consumer Discretionary comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.}

^{S&P 500 Consumer Staples: The S&P 500® Consumer Staples comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.}

^{S&P 500 Energy: The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.}

^{S&P 500 Financials: The S&P 500® Financials comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.}

^{S&P 500 Index: The S&P 500® index is a market-cap weighted index of the largest 500 companies headquartered in the United States. The index covers approximately 80% of available market capitalization.}

^{S&P 500 Utilities: The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.}

^{S&P U.S. Aggregate Bond Index: The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.}

^{S&P U.S. Treasury Bond Index: The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.}

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