The S&P 500 bounced off its 200-day Simple Moving Average, ending the week up 1.9%, fueled by positive economic data indicating continued economic growth, although at a slower pace. Federal Reserve Bank of Atlanta President Raphael Bostic's recent comments to reporters also contributed to the market's upward trend. Bostic supports a cautious approach to monetary policy, stating that "slow and steady" would be the most appropriate course of action. Bostic's comments follow other Fed Presidents who suggested that a return to 0.50% rate increases could be appropriate if future inflation data is hotter than expected.
Below are some highlights from this week's economic data.
Monday:
US Durable Goods orders showed a 4.5% decline in orders for manufactured goods, but if we exclude transportation, durable goods orders grew by 0.69%. Passenger airplanes are big ticket items illustrating how much Boeing contributes to US manufacturing.
Tuesday:
Case-Shiller Composite 20-City Composite Home Price Index showed that year over year, home prices grew by 4.67% compared to 18.51% a year ago. The long-term average is 5.32%.
Wednesday:
Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index was 47.7 compared to 47.4 a month ago, showing an overall contraction in the manufacturing sector for the fourth consecutive month. A number above 50 indicates growth, and below 50 indicates contraction.
Thursday:
Initial Claims for Unemployment Insurance were 190K lower than the 192K from the week before. Though lay-off announcements are increasing, it would seem those losing their jobs are quickly finding new jobs. Next Friday, we'll get a new Jobs Report from the Bureau of Labor Statistics (BLS). Last month showed a surprising monthly gain of 517K jobs and an unemployment rate of 3.4%. This was lower than expected and considerably lower than the longer-term average unemployment rate of 5.9%. The Federal Reserve views the tight labor market as inflationary. Another big jobs number would suggest that there is little slack in the job market and the Fed has much more work to do.
Friday:
The Institute for Supply Management (ISM) Services Purchasing Managers Index dipped to 55.1 from 55.2 the month before, showing expansion in the economy's service sector. A number above 50 indicates growth, and below 50 indicates contraction.
Summary:
There is a disagreement between the stock and bond markets regarding what comes next for the markets and economy. Stock market participants see evidence of a strong economy and job market and see equity prices going higher. The S&P 500 trades at 18 times 2023 expected earnings; the historical average is 16. Fourth-quarter earnings were better than feared, but many companies lowered their 2023 guidance suggesting that earnings estimates may come down, making the S&P 500 more expensive at current levels.
Interest rate traders are pricing in at least three more Fed rate hikes, and the Fed Funds rate staying above 5.25% through January 2024. The impact of earlier rate hikes are only now being felt in the economy. I struggle to believe we will see significant economic expansion while the Federal Reserve is raising interest rates to slow the economy.
The Federal Reserve Bank of New York increased the odds of a recession in the next 12 months to 57.13% from 47.31% last month.
The spread between the yield on the ten and two-year Treasury bonds, a reliable recession indicator, is more inverted than it's been in forty years.
Portfolio models remain defensively positioned. I am not anticipating a deep or pronged recession but rather the Fed winning the battle against inflation by contracting the economy. The S&P 500 is 15% below its all-time high and 13% above last October's lows, and I expect the S&P 500 to remain in this range. If the data changes, we'll adjust.
