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May 20, 2024

Beacon Weekly Investment Insights 5.20.24

Portfolio Manager, Charles Pawlik, CFA, CFP®, provides insights to guide you through changing market conditions. Please read the full text below or download the PDF version.

Equity markets finished last week in positive territory for the fourth week in a row.  The S&P 500 returned 1.5% for the week, the tech-heavy Nasdaq ended the week up 2.1%, and the Dow Jones Industrial Average was up 1.2%, with the blue-chip index closing above the milestone 40,000 level.  Small-cap stocks outpaced the S&P 500, with the Russell 2000 index closing the week up 1.7%.  The continued advance in equity markets comes on the heels of better than expected corporate earnings, signs of some moderation in the economy although still in the context of a solid backdrop, and inflation data that was not as bad as was feared, furthering the “soft-landing” narrative and expectation for the Fed to cut rates later on this year.  At present, futures markets are pricing in two 0.25% rate cuts for this year (September and December), after recent expectations for 1 or no rate cuts following higher than expected inflation readings in the first quarter.  Yields were also supportive, with the 10-year treasury yield moving down to 4.42%, from 4.50% to start the week.  Gold also continues its advance amidst demand from central banks, closing the week at $2,417.70/ounce, and is now up 16.68% for the year.

Both the PPI (producer price index) which is a measure of the wholesale inflation, and CPI (consumer price index) reports were released last week.  Although the PPI came in above expectations, with the Core reading increasing 0.4% for the month of April vs. expectations for a 0.2% increase, the more closely watched CPI reading came in largely in-line with expectations, with many market participants bracing for a potential upside surprise.  At the headline level, CPI increased by 0.3% in April which was below expectations for a 0.4% increase, and increased 3.4% year-over-year, in-line with expectations.  Core CPI, which excludes food and energy, increased by 0.3% in April and 3.6% year-over-year, both in line with expectations. 

Retail sales figures were also released last week, which came in well below expectations with a flat reading relative to estimates for a 0.4% increase, and down significantly from the prior reading of 0.6%.  As noted above, this retail sales report showing signs of a slowdown in consumer spending, alongside recent jobs and consumer sentiment data for April that were weaker than expected, have pointed to some softening in the economy. Further to this point, the leading economic index which includes several subcomponents that are leading indicators meant to provide a gauge as to where the economy is headed, was released last Friday.  The report also pointed to softening in the economy, with a reading of -0.6% in April, relative to expectations for a -0.3% decrease, after last month’s -0.3% decrease.  There was also plenty of Fed speak last week, including Chair Powell who reiterated last Tuesday that he still sees inflation moving down in the coming months and it is unlikely that the next move would be an interest rate hike, but that the Fed needs to gain more confidence in this forecast.

Increased risk-taking in equity markets was also prevalent last week, with renewed momentum earlier on in the week for some meme stocks like GameStop, which spiked as high as $64/share from $17/share to start the week, before giving back most of those gains by the end of the week and ultimately closing up 27%.  In addition, Bitcoin closed up 9.1% for the week.  Walmart also reported earnings last week, and provided somewhat of an offset to concerns about the consumer, with a solid earnings report and comparable sales coming ahead of expectations, pushing shares up close to 7%.  The company did however, add to commentary from other retailers around value-seeking behavior from shoppers.

With 93% of companies in the S&P 500 having reported earnings, aggregate earnings growth for the first quarter has come in well ahead of expectations at 5.7% vs. expectations for 3.4% growth heading into the quarter.  An above average 78% of companies beat earnings expectations, while a below average 60% of companies exceeded revenue expectations, pointing to companies doing a good job protecting margins.

The Fed speak will continue this week, alongside the release of the minutes from the Fed’s May FOMC meeting.  Existing and new home sales are set to be released on Wednesday and Thursday, respectively.  The S&P Flash U.S. Manufacturing and Services PMI data will be released on Thursday, with Durable-goods orders and consumer sentiment data on the docket for Friday.  The primary focus for markets however, will be Nvidia’s earnings release on Wednesday, which certainly has the potential to move markets meaningfully.