Last Week on Wall Street

Last Week on WallStreet - May 20th, 2023

S&P 500: 1.65% DOW: 0.38% NASDAQ: 3.03% 10-YR: 3.69%

What Happened?

Equity market investors were greeted with relief over the last five trading days as the S&P 500 and Nasdaq posted their best weeks since March. The debt ceiling contributed to both ups and downs this week. President Biden expressed confidence on Wednesday that the party leaders would come to a resolution on the issue and that all were committed to avoiding anything resembling a default. Speaker McCarthy displayed a similar tone in comments on Thursday that boosted stocks. Optimism pulled back Friday on news that GOP negotiators walked out of a meeting on the topic.

New bond issues, Chair Powell's comments, and fresh economic data led to a rise in yields this week, sending fixed-income prices lower. Traders have been forced to contend with the slight possibility of another hike and potentially no cuts later this year. This lifted the 10-year Treasury yield to its highest level since March 10th.

Beneath the surface, the underlying S&P sectors diverged drastically after a couple of weeks with tight performance. Technology (4.4%) continued its year-to-date dominance followed up by Communications (2.8%) and Discretionary (2.5%). Defensive areas of the market, such as Utilities (-4.1%) and Staples (-1.5%), fell sharply along with Real Estate (-2.3%).


Retail Sales Rose 0.4% in April, Less Than Expected As Consumers Struggle With Inflation

  • The advanced sales report for April showed an increase of 0.4%, below the Dow Jones estimate for 0.8%
  • Ex-autos sales increased 0.4%, in line with expectations
  • On an annual basis, sales were up just 1.6%
  • Miscellaneous store retailers led gainers with a 2.4% increase, while online sales rose 1.2%

The key takeaway - April's mark provides the first increase in month-over-month retail sales since January, somewhat alleviating immediate fears of recession. However, a closer look at the report in context still paints a complicated picture. When inflation is taken into account, the increase in sales is mostly accounted for by price increases and the year-over-year number is far behind CPI of 4.9%. The report shows consumers are treading water and how long they can keep it up as high-interest rates weigh on households remains a mystery.


Powell Says Bank Stress Could Influence Rate Path

  • Speaking at a monetary conference in Washington, Federal Reserve Chair Jerome Powell said that the recent banking stress could mean the central bank won't have to raise rates as high as it otherwise would have
  • He spoke on the separation principle, in which policymakers use emergency lending tools to stabilize financial markets while keeping interest rates high to fight inflation, as a method for approaching their current issues
  • Powell also stated that "the risk of doing too much versus too little is becoming more balanced"

The key takeaway - The Fed Chair made a rare appearance outside the confines of an FOMC press conference on Friday. Powell has made a distinct change in his comments during the last 2 appearances by opening the door to less hawkish policy going forward. While he retains the rhetoric around inflation being of primary concern and that failing to do enough is the least preferable consequence, his language now allows for more flexibility in how the central bank moves forward. He did say that current market pricing for the path of interest rates does not match their forecasts.


US Existing Home Sales Post Second Straight Monthly Decline

  • Existing home sales dropped 3.4% to a seasonally adjusted annual rate of 4.28 million units last month
  • Home resales, which account for a big chunk of U.S. housing sales, tumbled 23.2% on a year-on-year basis in April
  • The median existing house price fell 1.7% from a year earlier to $388,800
  • At April's sales pace, it would take 2.9 months to exhaust the current inventory. 4-7 months of supply is viewed as healthy

The key takeaway - The housing market continues to take it on the chin as higher interest rates deter prospective home buyers from borrowing. The ultra-tight supply of houses on the market is further hindering the ability of buyers to enter. Interest rates reinforce tight supply by keeping existing homeowners in their current properties for longer meaning no end is in sight for supply to loosen. Housing is awaiting a recovery after a year-plus of intense pain and after some constructive action early in the year, the last two reports indicate we may be waiting a little longer.


From the Waterloo Watercooler

Republican Gov. Greg Gianforte signed a law that makes Montana the first US state to comprehensively ban the Chinese-owned app

F1’s Emilia Romagna Grand Prix in Italy has been canceled after flooding led to at least eight deaths and the evacuation of 5,000 people in the area

Elizabeth Holmes must report to prison on May 30 after her bid to stay out of jail while she challenges her conviction for defrauding Theranos investors was denied

The San Antonio Spurs were victorious in the 2023 NBA draft lottery, meaning they’ll have the right to select French basketball phenom Victor Wembanyama, who’s regarded as the best NBA prospect since LeBron James