EQUITIES SNAP THEIR WINNING WAYS

Weekly Market Update — June 24, 2023

• It was a short-week of trading given Monday’s holiday and when Friday’s final Wall Street bell tolled, the 5-week winning streak for the S&P 500 and the 8-week winning streak for NASDAQ were snapped
• The smaller-cap Russell 2000 was hit the hardest, as it dropped 2.9% on the week, whereas the mega-cap DJIA lost 1.7% and the tech-laden NASDAQ and large-cap S&P 500 both lost 1.4%
• The developed, large cap international markets, represented by MSCI EAFE, lost an uncomfortable 3.8%
• There was a decent amount of economic activity to report, but the Fed once again overshadowed the markets, especially when Fed Chair Powell said in his testimony before the House Financial Services Committee that there could be two more rate hikes before the end of the year
• Many other central banks announced rate hikes, including the Bank of England (+50 bps to 5.00%), Norges Bank (+50 bps to 3.75%), Swiss National Bank (+25 bps to 1.75%), and Central Bank of Turkey (+650 bps to 15.0%), further spooking investors
• Existing home sales declined 20.4% year-over-year in May, which was much worse than anticipated
• The Conference Board’s Leading Economic Index declined for the 14th consecutive month
• Weekly initial jobless claims remain elevated above 260,000
• Housing starts leapt 21.7% month-over-month while total building permits rose 5.2% month-over-month
• Of the 11 S&P 500 sectors, only Health Care registered a gain, as it moved up a paltry +0.2%
• Of the 10 sectors in the red, Real Estate (-4.0%) and Energy (-3.5%) were hit the hardest
• WTI Crude dropped 3.7% to under $70/barrel and is off almost 14% YTD

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Stocks Snap Their Winning Ways

The major U.S. benchmarks snapped a 5-week (the S&P 500) and 8-week (NASDAQ) winning streak on the holiday-shortened trading week. Despite the negative numbers, Growth stocks outperformed Value shares, but Large-caps outperformed Smaller-caps by a healthy margin. Markets were closed on Monday in observance of the Juneteenth holiday.

The biggest shadow hanging over Wall Street was once again the Fed, as Wall Street is bracing for additional Federal Reserve rate hikes later this year, despite the Fed recently pausing its 10-rate hike streak. In prepared testimony before Congress, Fed Chair Powell said that “nearly all expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” That’s pretty clear.

Further, the Fed’s latest Summary of Economic Predictions showed that a majority of those on the policy committee expect at least two 25-basis point rate hikes this year. And it didn’t help Wall Street’s worries when a bunch of central banks outside the U.S. – like the Bank of England and Norway’s central bank – hiked rates.

Reviewing the week’s economic data, we saw that:

• Total housing starts surged 21.7% month-over-month
• Total building permits increased 5.2% month-over-month
• The weekly MBA Mortgage Applications Index rose 0.5% with purchase applications rising 2.0% and refinancing applications falling 2.0%
• Q1 Current Account Balance came in at -$219.3 billion
• Initial jobless claims were unchanged at 264,000
• Existing home sales increased 0.2% month-over-month in May
• Existing home sales were down 20.4% from the same period a year ago
• The Conference Board’s Leading Indicators fell 0.7% in May
• June IHS Markit Manufacturing PMI came in at 46.3
• June IHS Markit Services PMI came in at 54.1

Leading Indicators Decline Again

On Thursday, the Conference Board announced that its Leading Economic Index (LEI) for the U.S. declined by 0.7% in May 2023 to 106.7 (2016=100), following a decline of 0.6% in April. The LEI is down 4.3% over the six-month period between November 2022 and May 2023 – a steeper rate of decline than its 3.8% contraction over the previous six months from May to November 2022.

Directly from the release: “the US LEI continued to fall in May as a result of deterioration in the gauges of consumer expectations for business conditions, ISM New Orders Index, a negative yield spread, and worsening credit conditions. The US Leading Index has declined in each of the last fourteen months and continues to point to weaker economic activity ahead. Rising interest rates paired with persistent inflation will continue to further dampen economic activity. While we revised our Q2 GDP forecast from negative to slight growth, we project that the US economy will contract over the Q3 2023 to Q1 2024 period. The recession likely will be due to continued tightness in monetary policy and lower government spending.”

Further, the Conference Board Coincident Economic Index (CEI) for the U.S. increased by 0.2% in May 2023 to 110.2 (2016=100), after rising by 0.3% in April. The CEI is now up 0.8% over the six-month period between November 2022 and May 2023—down slightly from the 0.9% growth it recorded over the previous six months. The CEI’s component indicators—payroll employment, personal income less transfer payments, manufacturing trade and sales, and industrial production—are included among the data used to determine recessions in the US. While recent data for industrial production have contributed negatively to coincident index, sales, employment, and income growth remained positive.

Finally, the Conference Board Lagging Economic Index (LAG) for the U.S. increased by 0.1% in May 2023 to 118.4 (2016 = 100), reversing a decline of 0.1% in April. The LAG is up 0.6% over the six-month period from November 2022 to April 2023, much slower than its growth rate of 3.3% over the previous six months.

Building Permits, Housing Starts and Housing Completions Up From April

On Tuesday, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced the following new residential construction statistics for May 2023:

Building Permits

• Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,491,000.
• This is 5.2% above the revised April rate of 1,417,000.
• This is 12.7% below the May 2022 rate of 1,708,000.
• Single-family authorizations in May were at a rate of 897,000.
• This is 4.8% above the revised April figure of 856,000.
• Authorizations of units in buildings with five units or more were at a rate of 542,000 in May.

Housing Starts

• Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,631,000.
• This is 21.7% above the revised April estimate of 1,340,000.
• This is 5.7% above the May 2022 rate of 1,543,000.
• Single-family housing starts in May were at a rate of 997,000
• This is 18.5% above the revised April figure of 841,000.
• The May rate for units in buildings with five units or more was 624,000.

Housing Completions

• Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,518,000.
• This is 9.5% above the revised April estimate of 1,386,000.
• This is 5.0% above the May 2022 rate of 1,446,000.
• Single-family housing completions in May were at a rate of 1,009,000; this is 3.9% above the revised April rate of 971,000.
• The May rate for units in buildings with five units or more was 493,000.

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