Hope you are all doing well. The S&P 500 and the Dow posted modest declines that were roughly equal in scale to the previous week’s gains, while the NASDAQ was essentially flat. Although stocks made sizable daily movements in the latest week, the indexes have stayed in a narrow range since early April. King Charles III was crowned this weekend, I have broken down this week’s update using the coronation traditions.
The Recognition
Markets are recognizing that the banking crisis is not completely over. After First Republic Bank was acquired by J.P. Morgan last weekend, this past week additional West Coast-based regional banks, including PacWest Bancorp, Western Alliance, and Zions Bank, all saw substantial declines in their share prices. A handful of banks fell by as much as 50% on Thursday, only to recover most of that ground on Friday as their shares rallied. In the wake of recent bank failures, regional banks’ balance sheets have come under intense scrutiny. This is NOT going to be a 2008 type of scenario. However deposit volatility will continue. U.S. banks will continue to tighten lending standards which makes it more difficult for consumers and corporations to get loans. This should eventually put downward pressure on property prices.
The Coronation Oath
Central banks continue to honor their oath to fight inflation, while markets treat every word from Fed Chair Jerome Powell like a royal decree. For its tenth meeting in a row, the U.S. Federal Reserve lifted its benchmark interest rate. Rates have now risen to a range of 5.00% to 5.25%. Markets however got excited that Chair Powell hinted at the possibility of a pause in its rate-hiking cycle. Markets are moving on the Fed’s latest policy statement which removed language that had been in previous statements indicating that it “anticipates that some additional policy firming may be appropriate” The markets are assuming the statement’s omission is indicative that a pause is coming. I still believe that we may see the Fed raise one more time. The very next day the European Central Bank (ECB) followed the Fed’s lead. The ECB raised by a quarter percentage point to 3.25%—the highest in nearly 15 years. ECB president Christine Lagarde signaled that the ECB isn’t yet ready to pause its inflation-fighting campaign.
The Anointing
Apple stock ended the week on fire surging more than 4.5% on Friday. Apple reported another stellar quarter and seems to be the anointed leader of this year’s market rally. So far roughly 85% of S&P 500 companies have reported first-quarter results, key metrics this earnings season have come in better than their one-year averages. Furthermore, the overall earnings outlook for full-year 2023 has improved in recent weeks.
The Investiture
While Congress does not have a formal investiture of regal power they do have the power to limit how much the country spends. Pressure is growing on Congress and the White House to negotiate to avoid a potential default. The treasury secretary, Janet Yellen scared markets with comments that the government’s capacity to use special accounting measures to keep paying bills may be exhausted by June 1. That is several weeks earlier than had previously been expected. The president invited congressional leaders to meet with him on May 9 to discuss potential deals to lift the debt ceiling. I still expect Congress will lift the debt ceiling and avoid default.
The Crowning
The Biden administration continues to point to the labor market as its crowning economic achievement. The U.S. labor market performance has consistently surprised on the upside. This week was no exception as 253,000 jobs added in April exceeded expectations. The unemployment rate slipped to 3.4%, the lowest level since 1969. The low unemployment is not surprising to me because roughly 10,000 Americans turn 65 each day and many are exiting the workforce. There are simply not enough workers to fill those jobs.
