EQUITY MARKETS MIXED AS EARNINGS SEASON GETS IN FULL SWING AND VOLATILITY HITS LOWEST LEVEL SINCE LATE 2021

Weekly Market Update — April 22, 2023

• U.S. equity markets were mixed this week, with only the smaller-cap Russell 2000 squeaking out a gain of 0.4%
• The other 3 major indices recorded losses and were tightly bunched, as NASDAQ (-0.4%), the S&P 500 (-0.1%) and the DJIA (-0.2%) registered small losses, with the DJIA snapping its weekly winning streak at four
• To summarize, there was very little volatility in daily price action with the indices basically moving sideways
• There was also very little in terms of economic data and while there was a decent amount of earnings this week, it seems as if Wall Street is waiting for next week’s earnings batch, which includes the big names like Microsoft, Amazon, Alphabet (Google), and Meta Platforms (Facebook)
• Of the big names reporting this week, Tesla reported disappointing Q1 results and dropped about 10% on Thursday
• Of the 11 S&P 500 sectors, 8 of the 11 declined, with Communication Services (-3.1%) and Energy (-2.5%) being the worst
• Of the 3 sectors that gained, the best were Real Estate (+1.6%) and Consumer staples (+1.7%)
• Oil dropped this week as WTI crude oil futures fell 5.5% to $77.86/barrel
• The 2-year Treasury yield rose to 4.16% and the 10-year Treasury rose five basis points to 3.57%

*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.

Stock Markets Essentially Trade Sideways This Week

The major U.S. equity benchmarks ended the week mixed, with the DJIA snapping its consecutive string of positive returns at 4. There was relatively little economic data to digest, but there were plenty of first-quarter earnings reports to parse through. And interestingly, the CBOE Volatility Index, Wall Streets “fear index,” fell to its lowest level since late 2021.

The stock market spent most of the week moving among very tight ranges, and ended up with modest losses, except for the smaller-cap Russell 2000 which managed a modest gain. Generally speaking, earnings results have been better than expected, but next week will be a big test as some big names report. As such, it was as if Wall Street was holding its breath this week and waiting to see what next week might bring, as trading was unusually light this week too.

Reviewing the week’s economic data:

• Total housing starts declined 0.8% this month
• Single-unit starts were up 2.7% month-over-month
• Building permits declined 8.8% month-over-month
• The weekly MBA Mortgage Application Index fell 8.8% with purchase applications dropping 10% and refinance applications declining 6.0%
• Existing home sales declined 2.4% month-over-month in March and sales were down 22.0% from the same period a year ago
• Initial jobless claims for the week ending April 15 increased by 5,000 to 245,000

Existing Home Sales Off in March

Existing-home sales edged lower in March, according to the National Association of Realtors. Month-over-month sales declined in three out of four major U.S. regions, while sales in the Northeast remained steady. All regions posted year-over-year decreases.

• Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – fell 2.4% from February to a seasonally adjusted annual rate of 4.44 million in March.
• Year-over-year, sales waned 22.0% (down from 5.69 million in March 2022).
• The median existing-home price for all housing types in March was $375,700, a decline of 0.9% from March 2022 ($379,300). Price climbed slightly in three regions but dropped in the West.
• Properties typically remained on the market for 29 days in March, down from 34 days in February but up from 17 days in March 2022.
• Sixty-five percent of homes sold in March were on the market for less than a month.

Regional Breakdown

• Existing-home sales in the Northeast were unchanged from February at an annual rate of 520,000 in March, but down 21.2% from March 2022. The median price in the Northeast was $395,400, up 1.0% from one year ago.
• In the Midwest, existing-home sales retracted 5.5% from one month ago to an annual rate of 1.03 million in March, falling 17.6% from the previous year. The median price in the Midwest was $273,400, up 1.7% from March 2022.
• Existing-home sales in the South receded 1.0% in March from February to an annual rate of 2.07 million, a 20.4% decrease from the prior year. The median price in the South was $347,600, an increase of 0.3% from one year ago.
• In the West, existing-home sales declined 3.5% from the previous month to an annual rate of 820,000 in March, down 30.5% from the prior year. The median price in the West was $565,400, down 7.5% from March 2022.

Earnings Season is a Mixed Bag

According to Friday’s press release from research firm FactSet:

• “For Q1 2023 (with 18% of S&P 500 companies reporting actual results), 76% of S&P 500 companies has reported a positive EPS surprise and 63% of S&P 500 companies have reported a positive revenue surprise.
• For Q1 2023, the blended earnings decline for the S&P 500 is -6.2%. If -6.2% is the actual decline for the quarter, it will mark the largest earnings decline reported by the index since Q2 2020 (-31.6%).
• On March 31, the estimated earnings decline for Q1 2023 was -6.7%. Six sectors are reporting higher earnings today (compared to Mar. 31) due to positive EPS surprises.
• For Q2 2023, 9 S&P 500 companies have issued negative EPS guidance and 5 S&P 500 companies have issued positive EPS guidance.
• The forward 12-month P/E ratio for the S&P 500 is 18.2. This P/E ratio is below the 5-year average (18.5) but above the 10-year average (17.3).”

Jobless Claims Increase

The Department of Labor reported that initial claims was 245,000, an increase of 5,000 from the previous week’s revised level. Further, the 4-week moving average was 239,750, a decrease of 500 from the previous week’s revised average.

• The advance seasonally adjusted insured unemployment rate was 1.3 percent for the week ending April 8, an increase of 0.1 percentage point from the previous week’s unrevised rate.
• The advance number for seasonally adjusted insured unemployment during the week ending April 8 was 1,865,000, an increase of 61,000 from the previous week’s revised level. This is the highest level for insured unemployment since November 27, 2021 when it was 1,964,000.
• The 4-week moving average was 1,827,250, an increase of 15,250 from the previous week’s revised average. This is the highest level for this average since December 18, 2021 when it was 1,838,000.

Business Formations

Projected Business Formations (within 4 quarters) for March 2023 were 33,663, an increase of 5.4% compared to February 2023. The projected business formations are forward looking, providing an estimate of the number of new business startups that will appear from the cohort of business applications in a given month. It does not provide an estimate of the total number of business startups that appeared within a specific month. In other words, the Census Bureau is projecting that 33,663 new business startups with payroll tax liabilities will form within 4 quarters of application from all the business applications filed during March 2023. The 5.4% increase indicates that for March 2023 there will be 5.4% more businesses projected to form within 4 quarters of application, compared to the analogous projections for February 2023.

Sources

nar.realtor ;dol.gov;census.gov;factset.com;msci.com;fidelity.com;nasdaq.com;wsj.com; morningstar.com;