Market Journal - Issue 15
Apple carries the market and the FOMC may have done their last rate hike
Welcome to the fifteenth edition of the 3X Trading Market Recap & Outlook Report. The 3X Trading Team reviews economic data releases, notable earnings, and other remarkable news and uses that information in alignment with technical analysis to establish opinions on the market’s outlook. That information is consolidated and compiled into this report every week for publication on the Dividend Dollars website and 3X Trading. The members of the 3X Trading Team are not traders nor investment analysts by practice or profession. They are learning within this server just like many of our members. Therefore, nothing should be taken as financial advice, please so your own due diligence before making trade or investment decisions. Rather, this report is just another resource within our toolbox and should be used to provide additional information and opinions on the market and its happenings. Enjoy reading!
Dividend Dollars’s Stock Market Outlook & Opinion
Last week we ended with the statement “…overall performance for next week will ultimately be determined by the reaction to the FOMC decision and if continued earnings surprises can negate a downward move or enhance an upward one”. And that is precisely what we saw. Earnings, with the exception of $AAPL didn’t move the market much. The FOMC meeting sure did, and the jobs report that followed. We were in a solid downtrend for the week that only became negated last minute on account of $AAPL’s earnings and the strong jobs report.
At this stage in the earnings season, a majority of companies have reported and the market has recorded its best performance relative to analyst expectations since Q4 2021. The number of positive EPS surprises and the size of the surprises are above their 10 year averages, despite a year-over-year decline in earnings for two quarters in a row.
85% of the companies in the S&P 500 have reported. Of those, 79% have reported EPS that beat estimates by an average of 7%. Five of the eleven S&P sectors have reported year-over-year EPS growth, with consumer discretionary and industrials leading the pack. Materials and Utilities lag behind. Eight of the sectors are reporting year-over-year growth in revenues.
Looking ahead, analysts still expect earnings growth for the second half of the year, meanwhile, Mike Wilson, the Chief Investment Officer at Morgan Stanley, cautions investors to not be tricked by earnings beats as he has continued to warn of a coming slowdown in earnings and even potential earnings recession.
We were hesitant to make any call aside from volatility on account of earnings being the main item that would control price action this week. Earnings did push the market higher by roughly 1%, with over a 2% swing from the mid-week low to the end-of-week high. I’d say the volatility call and it's reasoning was correct.
Though the market ended the week slightly down, SPX still managed to climb back above the key $4,100 level. Technicals this week are not much different from last week. However, a slightly less chaotic earnings and data calendar may help the market be a bit more fruitful this next week. There are not many heavy hitters on the docket, the key will be the CPI report on Wednesday. Much like this last week, I expect moves on Monday and Tuesday to slight as we anticipate the CPI report. After which, the reception of the report may determine direction through the end of the week. With heavy earnings mostly out of the way and a week for investors to digest the effects of the most recent Fed rate hike, I think the market is poised to have a green week next week if CPI plays ball.
Weekly Market Review
The stock market closed the first week of May on an upbeat note, but Friday's positive price action was not enough to recoup the week's losses for most of the major indices. The S&P 500 approached its February high level (4,195) this week, at 4,186 on Monday, before slipping below the 4,050 level on Thursday. Market-moving events were full and plenty this week with earnings, FOMC rate hike, ECB rate hike, employment numbers, and a surprise announcement from Treasury Secretary Janet Yellen that measures to pay the nation’s bills could be exhausted as soon as June 1st. It was later announced that President Biden will meet with House Speaker McCarthy and other Congressional leaders on May 9 to discuss the debt ceiling.
Debt ceiling worries, growth concerns, bank fallout, and overtightening were all overarching themes that drove the price action this week; however, Friday's trade was dictated by the upbeat response to Apple's earnings report, the April Employment Report, and a needed rebound in the regional bank stocks.
We learned last weekend that First Republic Bank ($FRC) was seized by regulators. The FDIC facilitated a deal for JPMorgan Chase ($JPM) to acquire a majority of assets and assume deposits and certain liabilities of $FRC. Then on Thursday, PacWest ($PACW) confirmed it's searching for a sale. Concerns continued to mount after Western Alliance ($WAL) is also considered strategic alternatives, including a possible sale, yet Western Alliance disputed the report, calling it "categorically false in all respects." Both fell sharply this week, despite solid gains being made by the banking sector in general.
Worries about central banks overtightening occurred on Wednesday after the FOMC voted to raise fed funds rate by 25 basis points to 5.00-5.25%, which was largely expected. The indices fell that day on the view that the Fed is not inclined to cut interest rates soon despite a contrary view that has been priced into the fed funds futures market. Some of Fed Chair Powell's statements in his press conference included his acknowledgement that the process of getting inflation back down to 2% has a long way to go. He added that if the Fed's inflation forecast is broadly right, it would not be appropriate to cut rates. A number of other central banks followed suit with their own 25 bps hikes as well.
By Friday, some concerns about overtightening started to dissipate. The shift in sentiment was in response to the April Employment Report, which was good enough to encourage thoughts that a soft landing for the economy may still be possible despite the Fed's aggressive rate hikes. Apple ($AAPL) also drove a lot of the market’s gains on Friday following its pleasing earnings report and capital return plan.
Only 3 of the 11 S&P 500 sectors closed with gains this week unsurprisingly led by the information technology sector (+0.3%), benefiting from the move in Apple. The defensive-oriented health care (+0.04%) and utilities (+0.07%) sectors also outperformed. The energy sector (-5.8%) saw the biggest decline followed by financials (-2.5%) and communication services (-2.6%).
The stock market started May on a positive note as investors looked ahead to a busy week of potential market-moving events such as the Federal Open Market Committee (FOMC) decision, followed by the European Central Bank meeting, Apple's earnings report on Thursday, and the April Employment Report on Friday.
The S&P 500 index rose to 4,186, breaching its February high closing level (4,179) on Monday, but couldn't maintain its posture above that level by the close. Ultimately, the major indices closed just below flat, due to lagging mega-cap stocks such as Apple, Amazon, Alphabet, Tesla and Microsoft.
Weakness in bank stocks also weighed on the index performance, with the SPDR S&P Regional Banking ETF down 2.8% and the SPDR S&P Bank ETF down 2.2%. This followed news over the weekend that regulators seized First Republic Bank. Subsequently, JPMorgan Chase acquired a substantial majority of assets and assumed the deposits and certain liabilities of FRC through a deal facilitated by the Federal Deposit Insurance Corporation.
The energy sector (-1.3%) was the worst performer, led by falling oil prices, another manifestation of growth concerns, and losses in Exxon, which was downgraded to Neutral from Buy at Goldman Sachs. Notably, it was the only sector to move more than 1.0% in any direction.
On Monday's economic data front, the April IHS Markit Manufacturing PMI was 50.2, down slightly from 50.4 in the prior month. Meanwhile, the March Construction Spending showed an increase of 0.3%, beating consensus of 0.1%, though new single-family construction remained weak. Finally, the April ISM Manufacturing Index was 47.1%, up from 46.3% in the prior month, reflecting a continued state of contraction in manufacturing activity, albeit with some notable strength in nonresidential spending to offset that weakness.
Tuesday's market saw a downturn driven by concerns of economic slowdown and the unexpected drop in bank stocks. These worries were compounded by Treasury Secretary Yellen's warning about the government's ability to meet its financial obligations by June. Despite opening below the 4,100 level, the S&P 500 was able to recover somewhat from its lowest point and closed with losses of 1.1%. Wednesday's FOMC policy decision continues to hold attention; while a 25 basis point rate hike is expected, it is unclear how the directive and Chair Powell's comments will be interpreted.
Bank stocks were hit hard due to concerns about the economic slowdown affecting earnings. PacWest and Western Alliance suffered the most significant losses in the regional bank industry, while larger banks like JPMorgan Chase and Bank of America underperformed the broader market.
Concerns about the economic slowdown were enhanced by weak manufacturing PMI readings for April in the eurozone, a decline in nondefense capital goods orders for March, and a JOLTs - Job Openings Report for March that showed a shrink in openings. Additionally, global growth concerns led to falling commodity prices notably in oil and copper.
Tuesday's economic data showed that factory orders rose by 0.9% in March, with nondefense aircraft and parts orders driving the increase. However, new orders were down 0.7% month-over-month for the 2nd straight month when excluding transportation. The March JOLTS - Job Openings stood at 9.590 million compared to 9.974 million from the prior month.
The stock market closed with losses, with major indices ending near their lows for the day. Investors were cautious ahead of the Federal Open Market Committee policy decision and press conference by Fed Chair Powell.
While the FOMC's decision to raise the target range for the fed funds rate by 25 basis points to 5.00-5.25% was largely expected, the market experienced some volatility as Fed Chair Powell spoke during his press conference. His comments, including acknowledging that the process of getting inflation back down to 2.0% would take time and that cutting rates would not be appropriate, were seen as less market-friendly than expected. The fed funds futures market however, is pricing in three rate cuts by year-end, according to the CME FedWatch Tool.
In other news, the ADP Employment Change for April came in at 296,000, well above the consensus of 142,000 and the March figure of 142,000. The final IHS Markit Services PMI for April fell slightly to 53.6 from 53.7, while the ISM Non-Manufacturing Index increased to 51.9% from 51.2% in March, indicating continued growth in the services sector at a somewhat faster pace than the prior month. Overall, the majority of respondents to the ISM survey were positive about business conditions, although some expressed concerns about inflation and an economic slowdown.
The stock market had a down day following the FOMC rate hike, with the major indices closing off their lows. Concerns about central banks overtightening and a potential economic slowdown contributed to the weakness, as several central banks followed the FOMC's lead and raised their key lending rates.
The regional bank industry also faced ongoing issues, with PacWest considering strategic options and Western Alliance disputing reports of a possible sale, as previously mentioned. The SPDR S&P Regional Bank ETF and the SPDR S&P Bank ETF both saw significant declines.
9 of the 11 S&P 500 sectors closed in the red, with the financials and communication services sectors showing the largest declines. Despite the rough day, there was a successful IPO with Johnson & Johnson's consumer health spinoff Kenvue going public.
Weekly initial jobless claims continued to run well below levels seen during prior recessions. March trade balance had a deficit of -$64.2 billion exhibiting weak import activity and a cooling of the US economy. Q1 productivity came in at -2.7%, much lower than the expected -0.1%. The weak productivity is feeding into the elevated labor costs were contributing to elevated inflation and the Fed's thinking that it will have to keep rates higher for longer.
The stock market had a positive close for the first week of May, with major indices showing strength throughout the day. The S&P 500 almost reached the 4,150 level before pulling back slightly at the close. Apple's pleasing earnings report and capital return plan contributed to a nearly 5% gain in its stock price, which helped boost the technology sector. Regional bank stocks also rebounded, with PacWest and Western Alliance experiencing outsized gains due to short-covering activity. The financials, energy, and technology sectors were the top performers for the day, with the Russell 2000 also outperforming thanks to strength from regional bank stocks and energy shares.
Market participants were also digesting the April employment report, which showed that nonfarm payrolls grew by 253,000 (compared to a consensus of 180,000) and the unemployment rate fell to 3.4% (compared to a consensus of 3.6%). Average hourly earnings also increased by 0.5%, beating the 0.3% expectation. These results suggest that the Fed may not need to cut rates soon, but at the same time, the continued strength in the labor market after nine rate hikes (the 10th rate hike came after the data for April were collected) provides hope that a soft landing for the economy is still possible.