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Market Perspective for May 22, 2023

Market Perspective for May 22, 2023

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Last week started with some important news as the Empire State Manufacturing Index was released on Monday morning. In April, the index came in at -31.8, which represents a major contraction in New York’s manufacturing sector. This is important as a slump there generally indicates a slowdown in other parts of the country. Although analysts anticipated a negative figure, they foresaw only a modest contraction of 3.7.

On Tuesday, both retail sales and core retail sales figures for the past month were released. In April, retail sales and core retail sales were up .4 percent on a month-over-month basis. This was lower than the forecasted .8 percent increase for retail sales and a .5 percent increase for core retail sales. However, the actual numbers were still higher than a month ago when retail sales figures dropped .7 percent and core retail sales figures dropped .5 percent.

Following a quiet news day on Wednesday, Thursday began with unemployment claim data from the previous week. Over the last seven days, there were a total of 242,000 new claims, which was down from 264,000 the week before and lower than the forecast of 253,000 claims.

When combined with strong retail sales figures, the drop in unemployment claims may indicate that the economy is still hot. This may indicate that the Fed might have to rethink its intent to potentially keep rates where they are at the June Federal Open Market Committee (FOMC) meeting. Several voting members have said that recent data has indicated a need to at least consider another rate hike in June or have expressed a desire to continue hiking rates in general.

On Friday, Fed Chair Jerome Powell gave prepared remarks as to the future of Fed policy. During those remarks, he stated that he was open to the idea of a pause as he felt that interest rates were sufficiently high enough to restrict growth. A temporary pause would give policymakers time to determine whether further hikes were necessary or if existing efforts to reign in the economy were having their intended effect.

Powell also said that issues with Silicon Valley Bank (SVB) and other smaller financial institutions may enable the Fed to keep interest rates where they are. This is because trouble in the banking sector may lead to tougher lending standards, which would create conditions that are less favorable for economic growth.

However, Powell stressed that it was unclear as to whether current trouble in the banking sector would lead to long-term issues. He did say that there were many key differences between the current situation and the one that caused the recession of 2008.

Markets responded strongly to Powell’s remarks as the S&P 500 went from its Friday high of 4212 just before 11 a.m. to its low of 4180 just 30 minutes later. The Dow also reached its Friday high just prior to Powell’s remarks when it hit 33,650. As with the S&P 500, the Dow plunged to its daily low of 33,353 while Powell was talking.

The NASDAQ began Friday at its high of the day of 12,714 before slowing falling to 12,634 by midday. Despite its losses on Friday, the NASDAQ would finish the week up 2.82 percent. The S&P 500 would finish the week about 1.5 percent higher, while the Dow would finish the week up .32 percent.

Other markets such as gold and oil were also impacted by Powell’s comments. Gold was hovering near daily and weekly lows on Friday before finishing the week at $1,983 per ounce. Oil was at a weekly high of $73.48 at 9 a.m. before plummeting throughout the day to finish the week at $71.02.

There will be a number of important news events this week as the FOMC meeting minutes are scheduled to be released on Wednesday. Flash manufacturing and services data is scheduled to be released on Tuesday morning while quarterly gross domestic product (GDP) figures will be announced on Thursday. Finally, Friday sees the release of monthly durable goods and PCE price index figures.

Market Perspective for May 15, 2023

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Investors and traders alike spent the week interpreting several economic data released over the past week. The first two days of the week featured mostly range bound markets as there were no major news releases. Instead, equities, currencies and commodities were stuck in neutral in anticipation of April’s Consumer Price Index (CPI) data.

The April year-over-year CPI figure came in at 4.9 percent, which is the lowest number since June 2021 when the CPI figure was 5 percent. This was slightly lower than what analysts expected, as it was believed that yearly inflation would be 5 percent. In addition, the Bureau of Labor Statistics (BLS) also released the monthly CPI figure for April, which was .4 percent and in line with analyst estimates. Core CPI was also at .4 percent, which was slightly higher than the .3 percent estimate prior to the release of that data.

On Thursday, the monthly Producer Price Index (PPI) and the Core PPI reports were released. Core PPI for April came in at .2 percent while analysts expected that the PPI figure would remain flat when compared to March. The traditional PPI figure was also at .2 percent, which beat expectations of a drop of .2 percent compared to the previous month. Unemployment claims data was also released on Thursday, which showed that there were 264,000 requests for unemployment assistance over the previous week. That figure was also higher than the projected 242,000 claims prior to the report’s release.

On Friday, the University of Michigan released its preliminary consumer sentiment and inflation expectation data. In April, consumer sentiment dropped to 57.7 from 63.5 while respondents believe that inflation will be at 4.5 percent in the next 12 months.

The Dow made its high of the week on Monday morning reaching 33,729 before grinding down to 33,300 by the end of the week. The S&P 500 was range bound for the entire week and would establish its weekly high and low on Wednesday. On that day, the S&P 500 would bottom out at 4,102 and peak at 4,142. It would finish the week at 4,124, which was roughly where it opened on Monday. Finally, the NASDAQ would begin the week at its lowest point at 12,190 before grinding to its high of 12,359 on Friday morning.

The major indexes were largely quiet this week in part because traders aren’t sure how recent data releases might impact the Fed’s interest rate decisions. The Federal Open Market Committee (FOMC) is scheduled to meet again in June, and there are expectations that interest rates will be allowed to remain where they are. Currently, the Fed funds rate is between 5.25 and 5.5 percent, and there is significant debate as to whether this is sufficient to bring down inflation.

Wall Street has spent most of the year hoping for an indication that the Fed is ready to pivot and start cutting interest rates. This is because higher interest rates make it harder for companies to borrow money, which can make it harder to access the capital businesses need to grow. Furthermore, higher interest rates tend to weigh on consumer spending, which can hinder earnings growth.

A fight over the debt ceiling may also have caused traders to be cautious with their money this week. Treasury Secretary Janet Yellen announced this week that a default could occur as soon as June 1 if there was no deal in place to increase the government’s capacity to borrow money. It’s believed that a default could trigger a significant recession that could result in millions of job losses. This may be true even if a default is seen as strategic and only lasts for a relatively short period of time.

Investors may get more clarity next week as manufacturing and retail sales reports are set to be released. Next Friday, Fed Chair Jerome Powell is expected to speak, which may provide more insight into what the Fed might do at next month’s meeting and beyond.

 

Fund Spotlight: Vanguard Consumer Staples (VDC)

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Consumer staples companies have enjoyed a strong month. Vanguard Consumer Staples (VDC) climbed 5.69 percent, beating the S&P 500 Index. In the wake of bank failures, investors have shifted capital in one of two main ways. The first was bidding up BigTech companies that dominate the S&P 500 Index. The other was buying stocks that are sometimes dubbed defensive stocks, such as utilities and consumer staples.

Many actively managed funds must remain fully invested. Their managers cannot reduce their equity exposure, but they can shift their sector and stock exposure. When they see a risk-off environment, they prefer holding stocks with lower downside: those with lower valuations, steadier earnings, higher dividends, stronger balance sheets and so on. Many buy-and-hold investors also hold these types of stocks for income, and keep on holding through recessions and bear markets. As a result, these stocks usually hold up better than the more speculative stocks that dominate selling waves in corrections and bear markets.

Behavior of consumer staples stocks versus the broader market, along with slowing economic growth, indicate investors may continue their defensive ways moving forward. Consumer staples bottomed relative to the broader stock market in the middle of 2007. They peaked, relative to the market, near the stock market low in March 2009. Consumer staples would make another relative-high in early 2016, just as the world’s central banks began a global coordinated easing effort. Consumer staples made a relative-low in late 2021 near the time the Nasdaq was peaking. Since then, the relative performance of staples has been similar to the relative performance in 2007 and early 2008. Only hindsight will prove beyond a doubt whether this is a sustainable move, but if it continues, it indicates a choppy sideways market such as we saw from 2014 to 2016.

VDC tracks the MSCI US Investable Market Consumer Staples 25/50 Index, which includes large-, mid- and small-cap consumer staples companies. It has $7.8 billion in assets spread across 101 holdings. There is an Admiral Class of the fund that trades under the symbol VCSAX.

VDC was launched in January 2004. It is no longer the cheapest consumer staples ETF, but it remains among the lowest cost with an expense ratio of 0.10 percent.

It yields 2.30 percent, well ahead of the 1.53 percent yield of SPDR S&P 500 (SPY).

VDC has a 4-star and Gold rating from Morningstar.

Portfolio

VDC has an average market capitalization of $78.48 billion. This beats the sector average of $63.69 billion, but comes in shy of the market capitalization weighted index average of $82.37 billion. VDC has seen its largest stocks grow faster than average over the past year as small-caps underperformed. Giant-caps now make up 45 percent of assets, with most of that increase coming from the large-cap exposure that has dipped to 29 percent. Mid-, small- and micro-caps have 17 percent, 6 percent and 3 percent of assets, respectively.

As of the February 28 snapshot, Procter & Gamble (PG) was the top holding with 12.22 percent of assets. Coca-Cola (KO) has 8.87 percent, Pepsi (PEP) 8.67 percent, Costco (COST) 7.69 percent, Walmart (WMT) 7.57 percent, Philip Morris International (PM) 4.41 percent, Mondelez (MDLZ) 3.74 percent, Altria (MO) 3.51 percent, Colgate-Palmolive (CL) 2.48 percent and Estée Lauder (EL) 2.37 percent.

VDC is different from some of the most popular consumer staples ETFs such as SPDR Consumer Staples (XLP) because it has more diversified exposure. Procter & Gamble makes up more than 14 percent of XLP’s assets. It also has more retail exposure. Soft drinks have 21.10 percent of VDC’s assets, followed by household products with 19.20 percent, packaged foods 17.40 percent, hypermarkets 16 percent and tobacco 8.30 percent.

VDC has a beta of 0.63, less than the category’s 0.67, but slightly higher than the index’s 0.65 beta. The standard deviation is 14.94, below that of the category’s 15.75 and the index’s 15.19 standard deviation. VDC is less volatile than the average fund in the category, but all consumer staples funds and indexes are less volatile than and less correlated with the market.

Performance

VDC has increased 2.23 percent in 2021. Over the past 1-, 3-, 5-, 10- and 15-year periods it gained an annualized negative 1.20 percent, 13.16 percent, 10.26 percent, 9.55 percent and 9.80 percent, respectively. Except for the past 3-year period, VDC has otherwise outperformed the category in all periods.

Performance has been helped by stocks such as Pepsi and Coca-Cola. The former made an all-time high in late 2022, while the latter is barely off its record high. Walmart was rocked in 2022, but has recovered the bulk of its losses, sitting less than $10 away from its previous high. Mondelez has powered on to new all-time highs, the latest being set in early April.

Outlook

VDC offers a diversified exposure in the consumer staples sector. These companies and this sector are the tortoises in the hare versus tortoise race of the investing world. Consumer staples earn nearly all of their relative outperformance versus the S&P 500 Index during bear markets. That isn’t to say they don’t perform well over time, as the returns data attests. During bear markets, these stocks hold up far better and that drives their long-term performance relative to the broader stock market.

For conservative investors and those drawing down principal in retirement, the lower volatility of consumers staples stocks, particularly during corrections, makes them a good sector overweight. Investors may also reassess their overall equity exposure in light of the cautionary signal being thrown off by staples’ outperformance. As long as the economy stays on track, money will flow into the markets and investors will continue bidding up consumer staples shares even if the overall market remains choppy.

 

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Market Perspective for May 8, 2023

Market Perspective for May 8, 2023

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For traders, the news cycle last week was dominated by the Federal Reserve as well as the April jobs report. On Wednesday, the Federal Open Market Committee (FOMC) met to announce an increase in the federal funds rate. The rate now sits at 5.25 percent, which is an increase of 25 basis points from March when the federal funds rate was set at 5 percent.

In prepared remarks, Fed Chair Jerome Powell said that there had been no decision made about a possible pause in interest rate hikes. It was expected that the May meeting would represent the final hike in the cycle before the Fed paused to evaluate the impact that rates were having on the broader market. However, the FOMC statement released on Wednesday did acknowledge that the hiking cycle was closer to the end than the beginning.

There was also an acknowledgement that recent stress in the banking sector would likely lead to a tighter credit market. It’s believed that stricter lending rules are equivalent to an additional 50 basis points of interest rate hikes.

Markets had been mostly flat on Wednesday prior to the news but experienced accelerated losses late in the trading session. The Dow had reached a daily high of 33,721 at 12:45 p.m. on May 3 but finished the session at 33,456. The S&P 500 was at 4,132 at 1:45 p.m. but finished the session at 4,099. The NASDAQ reached its daily high of 12.179 minutes after the news was released but also the day lower at 12.041.

On Friday, the Nonfarm Employment Change report from the Bureau of Labor Statistics (BLS) was released. It showed that the economy created 253,000 jobs during the month of April, which was well above the estimate of 181,000 jobs gained during that period. It was also revealed that average hourly earnings increased by .5 percent while the unemployment rate remained nearly unchanged at 3.4 percent. Analysts believed that average hourly earnings would increase by .3 percent while the unemployment rate would be 3.6 percent.

These figures are one of the reasons why the Federal Reserve was noncommittal about future interest rate hikes. Many economists believe that these figures indicate that the economy is still hot and that inflation is still a problem that has yet to be solved.

Major markets generally took the news positively as the NASDAQ jumped roughly 150 points to close the week at 12,235. The Dow 30 jumped about 200 points to finish the week at 33,674 while the S&P 500 was up about 30 points on the day to finish at 4,136. The NASDAQ finished the week up 0.25 percent while the Dow and S&P 500 were down 1.35 percent and 0.82 percent, respectively.

While the FOMC statements and BLS reports were among the biggest headlines of the week, they weren’t the only items released this week. On Monday, the Institute for Supply Management (ISM) released the monthly PMI survey results. The April result was 47.1 percent, which is slightly higher than the 46.3 percent reported a month ago. However, a figure under 50 percent means that the manufacturing sector is likely contracting.

Prior to the FOMC meeting on Wednesday, the ISM released its services PMI figure, which was 51.9 percent in April. That was higher than the estimated 51.8 percent and last month’s figure of 51.2 percent. The ADP nonfarm employment change report was also released on Wednesday and found that 296,000 jobs were added to the economy in April compared to an estimate of 148,000.

 

On Thursday, unemployment claim data for the past week was released. During the final week of April, there were a total of 242,000 claims made as opposed to an estimate of 239,000 claims during that period.

Several key reports are scheduled to be released next week including Core Price Index (CPI) and Producer Price Index (PPI) figures. These reports will provide important clues about inflation in the United States, which will likely influence future interest rate decisions.