- Investors continue to juggle the health of the banking sector, the Fed’s next move in its fight with inflation, and recession odds. But economic and earnings are sending mixed signals leaving markets in a narrow trading range thus far in April.
- Stronger-than-expected preliminary April PMIs on Friday masked mostly weaker economic data reported earlier in the week. Meanwhile, first-quarter earnings have held up better than expected, but it’s still early with only about 20% of S&P 500 companies having reported.
- For the week, the S&P 500 slipped -0.1%, the Nasdaq Composite lost -0.4%, but the small-cap Russell 2000 eked out a +0.6% gain. The 2-year US Treasury yield rose +8 basis points (bps), the 10-year yield was up +6 bps, and the Bloomberg US Aggregate Bond Index was down -0.2%.
Stocks and bonds notch modest losses, earnings holding up
Stocks and bonds finished little changed for the week, but with a downward bias as investors considered the start of the quarterly earnings season and mostly disappointing, but conflicting, economic data. The market has been relatively range-bound in April after falling in the bank-stressed month of March. The back-and-forth grind can be frustrating as investors assess whether an economic slowdown is coming, what the next Fed move will be, and how corporate profits will hold up. Consistent with sideways trading action, economic and earnings data appears to contradict itself. For example, last Thursday the Conference Board released its Leading Economic Indicators (LEIs) which fell for the 12th straight month, and to its lowest level since that have historically indicated recession. But just a day later the flash April Purchasing Managers Indices (PMIs) from S&P Global signaled solid growth and beat expectations for both the manufacturing and services sectors of the economy. Last week was also the first full week of earnings reports for the first quarter. As discussed in the Chart of the Week below, corporate earnings were expected to decline by about -5% in the first quarter. And while it’s still early in this earnings season, so far results are holding up. With about 20% of S&P 500 companies reported, more than 77% have beaten Wall Street estimates according to Bloomberg Intelligence. Next week will bring a flood of earnings, including from some of the market-leading mega caps including Microsoft, Amazon, and Alphabet (Google) who are responsible for a big part of the S&P 500 rally this year. Those company profit reports and big macroeconomic reports like the first estimate of first quarter Gross Domestic Product (GDP) released on Thursday may help signal if the market is ready to break out of its recent range.
For the week, the S&P 500 slipped -0.1%, the Nasdaq Composite lost -0.4%, but the small-cap Russell 2000 eked out a +0.6% gain. Non-US equities were also mixed with the developed market up (MSCI EAFE, +0.03%) while emerging markets fell (MSCI Emerging Markets, -2.0%). Emerging markets were the worst performing of the major asset classes, hurt by a rising US dollar (dollar spot index, +0.3%) and falling crude oil prices (down -5.6%).
The bond market has also settled into a relatively narrow range recently as 2-year US Treasury yields, some of the most sensitive to changes in interest rates, rose +8 basis points after being unusually volatile in the wake of March’s banking crisis. The benchmark 10-year US Treasury yield was up +6 bps. The Bloomberg US Aggregate Bond Index was down -0.2% and the Bloomberg Global Aggregate ex US Bond Index (non-US bonds) fell -0.8% for the week.
Chart of the Week
Earnings for S&P 500 companies are expected to decline -4.8% year-over-year in the first quarter, according to data from Refinitiv, which would mark the second consecutive drop in year-over-year earnings growth. Two consecutive quarters of annual declines are typically defined as an earnings recession, and Q1-2023 would translate into the first earnings recession since the pandemic. Even more concerning would be if executives start issuing downbeat forecasts or if companies disappoint with larger-than-expected quarterly losses. According to Tajinder Dhillon of Refinitiv, “The prior earnings recession started in Q2-2020, lasting three quarters from start to finish. Today’s earnings recession may also last three quarters if analyst expectations turn out to be correct.” Dhillon points out that “Q1 estimates have declined significantly heading into earnings season which may set a lower bar for corporations to beat analyst expectations and surprise to the upside. The quality of a beat will matter, as investors look to hear from company management on numerous themes, including the macro-outlook, health of the consumer, impact of higher input costs on margins, employee hiring (or layoffs), and future capital expenditure plans.”
S&P 500 Earnings Revision Heading into Earnings Season
Would be the first “earnings recession” since the pandemic
Source: Refinitiv I/B/E/S.
- The preliminary S&P Global US Purchasing Managers Indexes (PMIs) signaled solid growth in April with the headline Composite PMI rising to 53.5 from 52.3 in March, beating expectations for 51.2, and marking the quickest upturn in business activity since May 2022. The PMIs are based on polls of senior executives in charge of buying supplies for their companies and levels above 50 indicate economic expansion. The Manufacturing PMI rose to 50.4 from 49.2 in March, ahead of expectations for a dip to 49.0, marking the first time that the manufacturing PMI has been above 50 in six months. The improvement in manufacturing was supported by stronger growth in output and employment. New sales rose only slightly. The Services PMI jumped to 53.7 from 52.6 in March, well above expectations for a drop to 51.5, and marking the highest level for services in 12 months. Greater employment and stronger demand supported the gain in services, but the pace of cost inflation rose.
- The Conference Board’s Leading Economic Index (LEI) declined again in March, falling -1.2%, marking the steepest since April 2020. It was also the 12th straight monthly decline, which has only occurred during the recessions that started in 1973, 1980, and 2007 (the last consecutive negative 12-month mark was in March 2008). On a year-over-year basis, the index was down -7.8%, firmly in historical recession territory. Weakness was broad-based, with housing, manufacturing, expectations, financial market, and labor market components all declining. The data indicates that economic weakness could soon intensify and spread throughout the US economy. According to BMO Chief Economist Douglas Porter, “we have never had the [US LEI index] drop that heavily in a year without a recession.”
- The Federal Reserve released its Beige Book—an anecdotal read on national business activity used by policymakers to prepare for their next monetary policy decision. The latest read on the state of the economy comes in the aftermath of the mid-March failure of two large regional banks that shook the financial sector and prompted an emergency response from regulators to contain the fallout. Of the 12 Federal Reserve districts, eight noted either no change or a slight decline in economic activity for the reporting period through April 10. Consumer spending generally held steady, with several districts noting that elevated inflation and high-interest rates continued to reduce discretionary income and purchasing power. Housing markets remained largely subdued, although there was an unexpected uptick in activity in a few districts. With uncertainty heightened, contacts expressed that they did not expect economic conditions to improve much in the coming months.
- New York factories appear to be picking up as the April Empire State Manufacturing jumped +35 points to +10.8, ending four months of declines and marking the strongest month since last July. Readings above zero indicate expansion, and April was far above expectations for an improvement to -22.0 from March’s -24.6 level. New Orders jumped by a record +46.8 points in the month to +25.1, a one-year high. The Shipments gauge also surged more than +37 points. Prices Paid fell by about -9 points, indicating input cost inflation moderated, consistent with the CPI, PPI, and Import Prices releases from last week.
- Manufacturing in the Federal Reserve’s Third District, worsened in April with the Philly Fed Manufacturing Business Outlook Survey falling to -31.3 from -23.2 in March. The April reading is the eighth consecutive negative month and marks the lowest level since May 2020. The decline was driven by a large reduction in the Prices Paid index which fell from 23.5 in March to 8.2 in April. A year ago, this figure was 75.7. The Prices Received index slid from 7.9 to -3.3, meaning more respondents reported lowering their prices in April than those saying they raised prices. Employment and Current Business Condition indicators improved modestly. April also marked the widest gap between the Philly Fed and Empire State manufacturing indexes.
- The National Association of Realtors reported that March Existing Home Sales, which make up most of the housing market, fell -2.4% to a seasonally adjusted annual rate of 4.44 million, below expectations for 4.50 million and February’s downwardly revised 4.55 million (originally 4.58 million). Single-family sales were behind the decline as they fell from 4.1 million in February to 3.99 million. From a regional perspective, the West, South, and Midwest fell -3.5%, -1.0%, and -5.5%, respectively. Meanwhile, the Northeast remained flat. It’s a sluggish start to the crucial spring selling season as higher mortgage rates squashed momentum. March marked the 13th time in the last 14 months that sales have dropped, which is now weighing on prices. The Median Existing Home Price has fallen on an annual basis for two consecutive months for the first time in 11 years, with a -0.9% in March from a year earlier to $375,700, which was the biggest year-over-year price drop since January 2012.
- March Housing Starts fell -0.8% to a seasonally adjusted annual rate of 1.420 million units, following a downwardly revised +7.3% surge in February (originally +9.8%), but slightly beating market forecasts of 1.407 units. The decline was entirely due to a -5.9% drop in multi-unit starts, while single-family starts were up +2.7%, a three-month high. Building Permits, one of the leading indicators tracked by the Conference Board, tumbled -8.8% after February’s upwardly revised +15.8% jump (originally +13.8%), to an annual rate of 1.413 million units, below expectations for 1.450 million and the positively revised 1.550 in February (originally 1.524). Like starts, the decline in permits was driven by a -24.3% fall in 5 units or more, while single-family units were up +4.1%.
- Homebuilder confidence inched up in April with the National Association of Home Builders (NAHB) Housing Market Index (HMI) rising +1 point to 45 but was below expectations for 46. Though the index remains below the 50-point threshold indicating poor building conditions, it has improved for four straight months to a seven-month high, suggesting the residential real estate market is slowly recovering from high mortgage rates and poor affordability that has weighed on housing demand. All three subcomponents increased or held steady this month, while all regional scores improved on a three-month moving average.
- The weekly MBA Mortgage Application Index sank -8.8% for the week ended April 14, the biggest decline in two months, after rising +5.3% the previous week. The Purchase Index dropped -10.0% compared to a +7.8% rise the prior week and the Refinance Index fell -5.8% following a +0.1% rise the prior week. The increase came as the average 30-Year Mortgage Rate rose 13 basis points to 6.43%, ending five straight weekly declines, and put the 30-year fixed rate up 1.23 percentage points versus a year ago.
- Weekly Initial Jobless Claims rose by +5,000 to 245,000 for the week ended April 15, above the positively revised 240,000 from the prior week (originally 239,000) and above expectations for 242,000. Initial claims have trended consistently higher since February when they were holding steady at around 200,000. Continuing Claims jumped by 61,000 to 1.87 million in the week ended April 8. That’s the highest level of people collecting unemployment claims since November 2021, which suggests it’s taking longer for people who lose their jobs to find new ones.
The Week Ahead
The economic calendar is packed, earnings season gets busy, but Fed speakers are on hiatus with the blackout period in effect before their May 3 interest rate decision. Another slate of housing data is on deck, with home prices from FHFA and S&P CoreLogic, as well as new home sales, pending home sales, and weekly mortgage applications. We’ll also get a look at the state of the consumer with both consumer confidence and consumer sentiment reports. Of course, the release of Gross Domestic Product (GDP) will also be prominent. The earnings calendar is loaded this week, with about 35% of the companies in the S&P 500 Index reporting profits. Key reports include updates from blue chips like Coca-Cola, Microsoft, Alphabet (Google’s parent), and Amazon, but big banks like Credit Suisse and regionals like First Republic will also be watched closely following last month’s stress in the banking sector.
Did You Know?
SOCIAL INSECURITY – The Old Age, Survivors, and Disability Insurance (OASDI) program’s annual trustees report was released at the end of March. The projected “exhaust date” for the Social Security Trust fund was moved up by one year to 2034 from 2035. At that point, annual revenues would only be sufficient to cover 80% of total benefits (source: OASDI, MFS).
THE TAXMAN GO-ETH – The week after the Federal tax deadline has historically been a positive time for the stock market. Over the last 25 years, the S&P 500’s median performance in the week following the tax deadline has been a gain of 0.83% with positive returns 76% of the time. That compares to a median gain of 0.31% with positive returns 57% of the time for all one-week periods over the last 25 years (source: Bespoke Investment Group, MFS).
CREDIT CRUNCH – Following the failure of SVB Financial and Signature Bank in early March, consumers are reporting tighter credit conditions. In a March survey from the NY Fed, a record share of respondents (58.2%) reported that credit is now harder to get than a year ago, while 52.9% expect credit to be harder to get in the year ahead than it is now (source: NY Fed Survey of Consumer Expectations, MFS).
This Week in History
FREE OIL – Three years ago, on April 20, 2020, oil markets did something they had never done before… the price of crude oil fell below zero and closed at -37.63 per barrel. It was the lowest price for oil in the 138-year history of the New York Mercantile Exchange. Within 24 hours the insanity was over, and oil cost money again, as the price per barrel closed at $10.01 on April 21, 2020 (source: Bloomberg).
Asset Class Performance
The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.