Market Update - May 13

The stock market entered the new month on a mostly positive note ahead of another busy week of potentially market-moving events. Investors are eyeing the FOMC decision on Wednesday, the ECB meeting and Apple's (AAPL) earnings report on Thursday, and the April Employment Report on Friday.

Monday's action saw the S&P 500 breach its February high closing level (4,179), hitting 4,186 at its high of the day, but it was unable to maintain a posture above that level by the close. Ultimately, the major indices all closed just below their flat lines. Index level performance was muted by lagging mega cap stocks.

Apple, Amazon.com (AMZN), Alphabet (GOOG), Tesla (TSLA), and Microsoft (MSFT) all registered losses. The Vanguard Mega Cap Growth ETF (MGK) fell 0.2% while the S&P 500 closed flat.

Weak bank stocks were another limiting factor for index performance. The SPDR S&P Regional Banking ETF (KRE) fell 2.8% and the SPDR S&P Bank ETF (KBE) fell 2.2%. This followed news over the weekend that First Republic Bank (FRC) was seized by regulators. Subsequently, the FDIC facilitated a deal whereby JPMorgan Chase (JPM ) acquired a substantial majority of assets and assumed the deposits and certain liabilities of FRC.

Treasuries were weak on Monday following an ISM Manufacturing Index that was improved from last month, but still below 50% -- the dividing line between expansion and contraction -- for the sixth consecutive month.

The energy sector (-1.3%) was the worst performer by a decent margin due to falling oil prices, another manifestation of growth concerns, and losses in Exxon (XOM), which was downgraded to Neutral from Buy at Goldman Sachs. Notably, it was the only sector to move more than 1.0% in either direction.

Reviewing Monday's economic data:

• April IHS Markit Manufacturing PMI - Final 50.2; Prior 50.4
• March Construction Spending 0.3% (Briefing.com consensus 0.1%); Prior was revised to -0.3% from -0.1%
  • The key takeaway from the report is that new single family construction continued to languish; however, there was some notable strength in nonresidential spending to offset that weakness.
• April ISM Manufacturing Index 47.1% (Briefing.com consensus 46.8%); Prior 46.3%
  • The key takeaway from the report is that manufacturing activity remains in a state of contraction, accented by ongoing weakness in new order growth and a quickening contraction in the backlog of orders; nonetheless, the employment index moving back into a state of expansion reflects some equanimity on the manufacturing outlook.

The stock market traded on the weaker side in front of the April Consumer Price Index Wednesday at 8:30 a.m. ET, yet losses were modest in scope. The Dow Jones Industrial Average (DJIA) and Russell 2000 at one point stretched into positive territory, showing small gains, but slipped back into red figures, joining the S&P 500 and Nasdaq there by the closing bell.

Ongoing concerns about the debt ceiling were a limiting factor due to the specter of the 4:00 p.m. ET meeting between President Biden and congressional leaders to discuss the debt ceiling.

The relative outperformance of the DJIA was fueled in part by a gain in Boeing (BA) on the news that its has received 150 firm orders for its 737 Max-10 aircraft, and options for 150 more, from Ryanair. Meanwhile, relative strength in energy shares along with some rebound action in regional bank stocks led to the relative outperformance of the Russell 2000.

U.S. economic data on Tuesday was limited to the April NFIB Small Business Optimism Index, which fell to 89.0 -- a 10-year low -- from 90.1. There was also some tepid trade data out of China for April, which featured an 8.5% yr/yr increase in exports and a 7.9% yr/yr decline in imports. In March, exports were up 14.8% yr/yr while imports were down just 1.4% yr/yr.

Wednesday's trade was mostly mixed. The Dow Jones Industrial Average spent most of the session in negative territory while the Nasdaq and S&P 500 outperformed, supported by gains in the mega cap space.

Price action was somewhat tepid until a rebound effort took root in the afternoon when the S&P 500 briefly slipped below the 4,100 level. Ultimately, the Nasdaq and S&P 500 closed comfortably above unchanged levels. Mega cap stocks offered integral support to the broader market, leaving the Vanguard Mega Cap Growth ETF (MGK) up 1.1% while the Invesco S&P 500 Equal Weight ETF (RSP) closed flat and the market-cap weighted S&P 500 rose 0.5%.

Alphabet (GOOG) was a big driver of the mega cap outperformance, as it rallied amidst the company's presentation at its Developers Conference, which included updates on its AI initiatives.

Initially, market participants reacted favorably to the April Consumer Price Index (CPI), but a closer look fostered uncertainty about the Fed's policy path. Total CPI was up 4.9% year-over-year in April, down from 5.0% in March, which marks the sub-5.0% reading in two-years. Core-CPI, which excludes food and energy, was up 5.5% year-over-year in April, down from 5.6% in March.

Presumably, the April CPI report will sway the Fed to entertain holding the target range for the fed funds rate steady at 5.00-5.25% at its June meeting, but importantly, a 5-handle on core-CPI isn't going to sway the Fed to think it needs to cut rates anytime soon.

That understanding, along with ongoing concerns about the debt ceiling and a possible hard landing for the economy, kept the market in check through most of the session.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index rose 6.3% with refinancing applications jumping 10% and purchase applications rising 5%.
• Total CPI was up 0.4% month-over-month (Briefing.com consensus +0.4%) and up 4.9% year-over-year, versus up 5.0% in March. Core-CPI, which excludes food and energy, was also up 0.4% month-over-month (Briefing.com consensus +0.3%) and up 5.5% year-over-year, versus up 5.6% in March.
• The index for shelter (+0.4%) was the largest contributor to the increase in total CPI and core-CPI; however, the 0.4% increase was the smallest increase for the shelter index since January 2022.
  • The key takeaway from the report as far as the market is concerned is that the moderation in inflation, coupled with the moderation in the shelter index, should at least spur the Fed to entertain keeping its policy rate on hold when it meets again in June.
• The weekly EIA crude oil inventories data showed a build of 2.95 million barrels after last week's draw of 1.28 million barrels.
• The April Treasury Budget showed a surplus of $176.2 billion compared to a surplus of $308.2 billion in the same period a year ago. The Treasury Budget data is not seasonally adjusted so the April 2023 figure cannot be compared to the March 2023 figure. The surplus in April was the result of receipts ($638.5 billion) exceeding outlays ($462.3 billion).
  • The key takeaway from the report is that individual income and corporate tax receipts combined were $461.5 billion, which was 32.3% less than April 2022.

The major indices closed in mixed fashion near their highs of the day, yet the underlying market was quite a bit weaker than index level performance suggested. Growth concerns sparked some flight to safety buying interest in the mega cap stocks, which drove a lot of the index level action.

Alphabet (GOOG) continued to rally after its Developers Conference on Wednesday, logging some of the biggest gains for the mega caps. Amazon.com (AMZN), Meta Platforms (META), and Tesla (TSLA) all rose more than 1.0% while Apple (AAPL) closed with a slim gain. The Vanguard Mega Cap Growth ETF (MGK) rose 0.2%. Coincidentally, the Nasdaq Composite also gained 0.2% while the Nasdaq 100 gained 0.3%.

The Invesco S&P 500 Equal Weight ETF (RSP), though, fell 0.5%. Decliners led advancers by a greater than 2-to-1 margin at the NYSE and a slightly less than 2-to-1 margin at the Nasdaq.

A sizable loss in Disney (DIS) weighed on general sentiment, leading the Dow Jones Industrial Average to underperform the other major indices. Disney reported fiscal Q2 results that featured a 2% year-over-year decline in Disney+ paid subscribers.

In addition to growth concerns and disappointing results from Disney, uncertainty about the debt ceiling and ongoing pressure on regional bank stocks loomed over the broader market. PacWest (PACW) saw another sharp decline after the company said its deposits declined approximately 9.5% for the week ending May 5. The SPDR S&P Regional Bank ETF (KRE) fell 2.5% and the SPDR S&P Bank ETF (KBE) fell 1.6%.

Reviewing Thursday's economic data:

• April PPI 0.2% (Briefing.com consensus 0.3%); Prior was revised to -0.4% from -0.5%; April Core PPI 0.2% (Briefing.com consensus 0.3%); Prior was revised to 0.0% from -0.1%
  • The key takeaway from the report is that producer inflation continued to moderate. On a year-over-year basis, total PPI was up 2.3% versus up 2.7% in March. Excluding food and energy, PPI was up 3.2% versus 3.4% in March.
• Weekly Initial Claims 264K (Briefing.com consensus 247K); Prior 242K; Weekly Continuing Claims 1.813 mln; Prior was revised to 1.801 mln from 1.805 mln
  • The key takeaway from the report is that initial claims reached their highest level since October 30, 2021, tracking in a direction that reflects a labor market that is becoming less tight.

The stock market started the day on a more upbeat note. For most of the session, though, index level price action was negative. There was a late afternoon bounce after the S&P 500 briefly slipped below the 4,100 level, leaving the major indices with only modest losses on a lightly traded day.

Mega cap stocks had been supporting the broader market for most of the week, yet money flows reversed somewhat on Friday. The Vanguard Mega Cap Growth ETF (MGK) fell 0.3% while the Invesco S&P 500 Equal Weight ETF (RSP) closed flat and the market-cap weighted S&P 500 fell 0.2%.

Market breadth showed somewhat mixed action under the index surface. Decliners had only a slim lead over advancers at both the NYSE and the Nasdaq.

S&P 500 sector performance was also mixed with many of the sectors closing near their flat lines. The consumer discretionary (-0.9%) sector was the worst performer due to losses in Amazon.com (AMZN) and Tesla (TSLA). Meanwhile, lingering growth concerns led to the relative outperformance of the defensive-oriented utilities (+0.4%) and consumer staples (+0.3%) sectors.

Reviewing Friday's economic data:

• April Import Prices 0.4%; Prior was revised to -0.8% from -0.6%
• April Import Prices ex-oil 0.0%; Prior -0.5%
• April Export Prices 0.2%; Prior was revised to -0.6% from -0.3%
• April Export Prices ex-ag. 0.2%; Prior was revised to -0.5% from -0.2%
  • The key takeaway from the report is that it follows suit with the April CPI and PPI reports from earlier in the week, which showed a moderation in inflation pressures on a year-over-year basis.
• May Univ. of Michigan Consumer Sentiment - Prelim 57.7 (Briefing.com consensus 62.9); Prior 63.5
  • The key takeaway from the report is that consumer sentiment has weakened amid concerns about the economic outlook, which threatens to curtail discretionary spending activity that, in turn, would weigh on growth.