Market Update - May 20

The stock market closed the session on a relatively upbeat note, but Monday's price action was somewhat lackluster on below-average volume. The major indices all closed near their highs of the day, sporting only modest gains.

Relative softness from the mega cap space in the early going limited index performance, yet moves below the surface were still somewhat modest. Some mega caps came back from early losses to close with a gain, offering a boost the major indices. Meta Platforms (META) maintained its outperformance throughout the session after it was upgraded to Buy from Hold at Loop Capital. The Vanguard Mega Cap Growth ETF (MGK) closed with a 0.2% gain.

The continued inclination to buy mega cap stocks reflected the anxiousness in the market related to uncertainty about the debt ceiling. This comes ahead of President Biden's meeting with congressional leaders on Tuesday to further discuss the debt ceiling.

Regional bank stocks had a nice rally, acting as a source of support for the broader market. The SPDR S&P Regional Banking ETF (KRE) logged a 3.2% gain and the S&P 500 financials sector (+0.8%) closed near the top of the leaderboard.

Some M&A activity that featured premium valuations provided added support to the broader market. Namely, Newmont (NEM) plans to acquire Newcrest for approximately $19 billion in a cash-and-stock deal, and Oneok (OKE) plans to acquire Magellan Midstream Partners (MMP) for approximately $18.8 billion, including assumed debt.

There was also some positive action on the regulatory front after EU regulators approved Microsoft's (MSFT) acquisition of Activision (ATVI).

Monday's economic data was limited to the New York Fed Empire State Manufacturing Survey for May, which plunged to -31.8 (Briefing.com consensus -1.8) from 10.8 in April. The dividing line between expansion and contraction for this survey is 0.0. The key takeaway from the survey is that the new orders index sank 53 points to -28.0, underscoring a sharp drop off in demand in May.

The day started out looking fairly similar to recent sessions. There was a slate of limiting factors keeping the market in check while gains from mega cap stocks offered some support.

The major indices closed near their worst levels of the day, though, after the S&P 500 and Dow Jones Industrial Average slipped to new session lows shortly after the news hit that President Biden will be cutting his G-7 trip short, skipping his Australia stop to return Sunday, according to NBC News.

There was no information about Tuesday's debt ceiling meeting between President Biden and congressional leaders before the close; however, House Speaker McCarthy said after the close that the two sides are still very far apart. Senate Majority Leader Schumer, meanwhile, said that everyone agreed that we need to be bipartisan and that having a bipartisan bill in both chambers is the only way we can avoid a default.

If not for gains in the mega cap space, losses would have been more pronounced by the close. The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.4% while the Vanguard Mega Cap Growth ETF (MGK) logged a 0.1% gain.

The DJIA registered the steepest decline among the major indices, partially weighed down by Home Depot's (HD) loss. Home Depot disappointed with its fiscal Q1 sales, comp sales, and FY24 guidance.

On a related note, market participants received retail sales data for April Tuesday morning. That report featured a 0.4% increase in total retail sales for April, but retail sales are not adjusted for inflation. Total retail sales were basically flat after adjusting for inflation, suggesting weaker demand than the headline number might imply.

China also reported some weaker-than-expected retail sales, along with weaker-than-expected industrial production and fixed asset investment data for April, playing into lingering concerns about the pace of global growth.

The FTC filed a lawsuit to block Amgen's (AMGN) acquisition of Horizon Therapeutics (HZNP), which was a big drag on that stock and added another headwind for equities.

Reviewing Tuesday's economic data:

• April Retail Sales 0.4% (Briefing.com consensus 0.7%); Prior was revised to -0.7% from -1.0%; April Retail Sales ex-auto 0.4% (Briefing.com consensus 0.3%); Prior was revised to -0.5% from -0.8%
  • Retail sales are not adjusted for inflation, so the key takeaway from the report is that total retail sales were up in April due primarily to price increases and not as much to increased demand.
• April Industrial Production 0.5% (Briefing.com consensus 0.0%); Prior was revised to 0.0% from 0.4%; April Capacity Utilization 79.7% (Briefing.com consensus 79.8%); Prior was revised to 79.4% from 79.8%
  • The key takeaway from the report is that manufacturing output bounced back in April, paced by a strong gain in the output of motor vehicles and parts that still defies a hard-landing scenario for the economy.
• March Business Inventories -0.1% (Briefing.com consensus 0.0%); Prior was revised to 0.0% from 0.2%'
• May NAHB Housing Market Index 50 (Briefing.com consensus 45); Prior 45

The stock market exhibited some softness right out of the gate, but quickly found upside momentum. Gains built up throughout the session, aided by some short-covering activity. The major indices all closed near their best levels of the day, which had the S&P 500 back above the 4,150 level.

Gains were driven by some positive responses to earnings and other corporate news, along with an emerging hope that the president and congressional leaders are more aligned with debt ceiling negotiations. Still, no deal has been reached and uncertainty remains in play for market participants. That uncertainty, though, was not enough to offset Wednesday's relatively strong showing, which had a pro-cyclical bias.

An uptick in single-family starts and single-family building permits in April, along with the Atlanta Fed's GDPNow model estimate for real GDP growth in the second quarter increasing to 2.9% from 2.6%, helped drive the cyclical trade.

Many stocks came along for the rally, leading nine of the 11 S&P 500 sectors to close with a gain. The financials sector sat atop the leaderboard, up 2.1%. This came after Western Alliance (WAL) said its deposits have increased by more than $2 billion since the end of the first quarter. This news put a bid in the bank stocks, which was aided by short-covering activity. The SPDR S&P Regional Bank ETF (KRE) jumped 7.4%.

Reviewing Wednesday's economic data:

• The MBA Mortgage Applications Index fell 5.7% with purchase applications declining 4.8% and refinancing applications dropping 8.0%.
• Total housing starts increased 2.2% month-over-month in April to a seasonally adjusted annual rate of 1.401 million (Briefing.com consensus 1.405 million) from a downwardly revised 1.371 million (from 1.420 million) in March. Single-family starts were up 1.6% month-over-month, but only because of a strong 59.5% increase in the West; single-family starts declined in all other regions.
• Building permits declined 1.5% month-over-month to 1.416 million (Briefing.com consensus 1.438 million) from an upwardly revised 1.437 million (from 1.413 million) in March. Single-unit permits rose 3.1% month-over-month, led by gains in all regions. The weakness in permits was driven by a 9.7% decline in permits for 5 units or more.
  • The key takeaway from the report is that single-family starts and permits were up, which is a welcome sign given the tight supply of existing homes for sale. Even so, the constraints of high financing rates and high prices are evident in single-unit starts being down 28.1% year-over-year and single-family permits being down 21.2% year-over-year.
• The weekly EIA Crude Oil Inventories showed a build of 5.04 million barrels after last week's build of 2.95 million barrels.

It was another good day for the stock market, building on Wednesday's gains. The major indices traded in mixed fashion, though, throughout most of the session until a late afternoon surge higher. That move saw the S&P 500 breach the 4,200 level for the first time since August 2022. Ultimately, the S&P 500 closed at its best level of the year, just a whisker shy of 4,200.

Mega cap stocks led the charge, again, with several names reaching new 52-week highs. Microsoft (MSFT), Alphabet (GOOG), Meta Platforms (META), and NVIDIA (NVDA) were the standouts in that regard.

The midday lull was presumably a reflection of ongoing hesitancy about the debt ceiling. House Speaker McCarthy said he "sees a path" to getting the debt limit bill on the House floor for a vote next week, yet other press reports suggest a debt ceiling deal won't be easy to reach.

Market participants were also reacting to some mixed economic data, including lower-than-expected weekly initial jobless claims, a better-than-expected Philadelphia Fed Index for May, and weaker-than-expected existing home sales and leading economic indicators for April.

Nonetheless, the afternoon rally was fairly broad based, ratcheting up as the mega cap stocks took another leg higher along with the semiconductor stocks. The PHLX Semiconductor Index jumped 3.2%.

Reviewing Thursday's economic data:

• Weekly Initial Claims 242K (Briefing.com consensus 259K); Prior 264K; Weekly Continuing Claims 1.799 mln; Prior was revised to 1.807 mln from 1.813 mln
  • The key takeaway from the report is that initial claims are at levels that are much closer to signaling tightness in the labor market, which means the Fed is apt to stick to its tighter policy for longer.
• May Philadelphia Fed Index -10.4 (Briefing.com consensus -16.0); Prior -31.3
• April Existing Home Sales 4.28 mln (Briefing.com consensus 4.30 mln); Prior was revised to 4.43 mln from 4.44 mln
  • The key takeaway from the report is the recognition that the inventory of existing homes for sale remains tight, which is due in part to the strength of the labor market (and ability to work remotely) and the jump in mortgage rates that is deterring existing home owners' interest in moving.
• April Leading Indicators -0.6% (Briefing.com consensus -0.5%); Prior -1.2%

The stock market kicked off this options expiration day on an upbeat note, but rolled over fairly quickly. Opening gains had the S&P 500 back above the 4,200 level before the market turned lower around 11:00 a.m. ET when Fed Chair Powell began speaking at a panel discussion regarding perspectives on monetary policy.

Equities seemed to be responding to worries about the debt ceiling and regional banks, though, rather than Mr. Powell's comments. Briefly, Mr. Powell said that inflation is "far above" the Fed's objective, but also said that rates may not have to rise as much because of credit conditions. These views were comparable to what he shared during his press conference following the FOMC meeting earlier this month, so they weren't necessarily surprising.

What was surprising was a tweet from Punchbowl News reporter Jake Sherman that "debt limit talks between the White House and House Republicans have been paused, per multiple sources involved in the talks." Around the same time, CNN reported that Treasury Secretary Yellen told bank CEOs that more mergers might be needed. The latter news stirred some renewed angst in the banking space. The SPDR S&P Regional Banking ETF (KRE) closed with a 1.8% loss.

Ultimately, the major indices were able to climb somewhat off their lows to close with more modest losses; however, the S&P 500 remained pinned below 4,200 on a closing basis.

There was no notable U.S. economic data on Friday.