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Dividend Dollars’ Outlook & Opinion
Apologies for missing last week as I was out of town! Typically, we start these outlooks in reviewing our last week’s prediction. Two weeks ago, we called for moderate bullishness contingent on a debt ceiling deal. Looks like we’ve got that AND SOME since out last article. Since I was out, Q1 2023 earnings season has nearly ended with only 2 S&P 500 companies left to report. Overall, Q1 earnings has beat on EPS 78% of the time and revenues 67%. Both earnings and revenues levels reported better than what was expected by analysts when Q1 ended.
Moving on from earnings, this was a very light week for economic data. Initial Jobless Claims came in much higher than expected meanwhile the Trade Deficit and Consumer Credit readings came in better than expected. The data for the week was equally mixed with results under and over expectations. Though one week’s economic data does not make a trend, the job numbers is this week carried the biggest significance marking the 18th straight week above 200k and the highest reading since November 2021. This shows that the Fed’s 15-month tightening efforts may finally be starting to impact the labor market. The CME’s Fedwatch tool shows a high probability of a rate hike pause at next week’s meeting, with a 71.2% chance of a pause and a 28.8% chance of a 25 bps hike. That is up from a 21.2% of a hike one month ago.
Technical’s-wise, with the debt ceiling resolved, earnings season over, a strong labor market, and most of the negative catalysts out of the way, the push higher for these last two weeks were not unexpected. The market broke through the 4,200 level that we made note of in the last edition, and pushed higher to the new bull market level. After four consecutive failed attempts to break above it, the market solidified it on Friday with a close above 4,292.44 for the day, meaning a new bull market officially began in October 12th, 2022 when that level was set. While it still has a long way to go to reach all time highs (+11.7%), the SPX is comfortably above all of its major moving averages and now has to fall 20% before this new bull market can end.
Next week we have the CPI releases for May on Tuesday, followed by the FOMC rate decision on Wednesday, retail and jobs data on Thursday, and finally consumer sentiment data on Friday. Though there aren’t many releases, next week does carry a few heavy hitters with the CPI and FOMC. A rate hike could occur on Wednesday and I don’t expect that the CPI reading a day before will affect the decision unless it comes in way above expectations.
Despite the market’s surprising strength, some analysts are still forecasting a recession in 2023. You could even argue that with the bear market now over, a pullback seems overdue. That may be true, however sentiment indicators shows that it is unlikely. VIX’s level, open interest change, and open interest put call ratio change are all at bullish levels. Major ETF open interest changes and put call ratio changes are also at moderately bullish levels. Only two indicators are in worse shape this week, but none have moved into bearish or moderately bearish territories. Indicators and sentiment lead me to believe next week will be a moderately bullish one. I would like to see SPX close above 4,340 to end next week, however, if the Fed surprises the market and raises rates, next week could be volatile and red. Keep you eyes on the rate hike probabilities and the meeting and react accordingly.
Weekly Market Review
Summary:
Though it wasn’t particular impressive, it was a very constructive week for the bulls as the 4th and 7th straight week of gains for $SPY and $QQQ. The S&P 500 climbed past 4,300 for the first time since August, but it couldn’t maintain that position on a closing basis, ultimately settling just a whisker shy of 4,300, but high enough to meet the definition of a new bull market.
Unlike previous weeks, it seemed that some money was rotating out of mega-caps into other areas of the market as the $RSP rose 1% while $MGK closed down 0.2%. With the exception of $TSLA, some profit taking was occurring. $TSLA rose 14.2% this week on an announcement of a charging network with $GM. Meanwhile, $AAPL closed flat after introducing its new augmented reality headset at its Monday conference.
The market also reacted to some softer labor data readings this week as the initial claims report came in surprisingly high. The May ISM non-manufacturing index also surprisingly dipped close to contractionary levels.
The financials sector had surprising gains this week, primarily off of news of receding banking risks and recession potential. 9 of the 11 S&P 500 sectors ended with gains, lead by consumer discretionary, utilities, energy, industrials, and financials. Technology and healthcare were laggards for the week.
Monday:
The market closed a bit weakly after the ending rally of the prior week. Mega-cap strength supported the broader market, but it wasn’t enough to prevent the main indices from closing flat or slightly down. A fade started to occur after $AAPL and other mega-caps reacted to the news of the developer’s conference.
Growth concerns were also part of the narrative for the day as the ISM non-manufacturing index fell near to contraction areas. Weakness in bank stocks helped in the market’s downside efforts after the WSJ reported that large banks could face a 20% increase in capital requirements.
Economic data for the day included the IHS Markit Services PMI, the ISM Non-Manufacturing Index, and Factory Orders.
The PMI report rose to 54.9, up from 53.6. Service sectors continue to show a post-pandemic boom as spending switches from goods to services, however that is also where inflationary concerns lie. The survey data indicates that GDP is growing at an annualized rate of >2%.
The ISM for may fell to 50.3%, under a consensus of 52.3% and last month’s reading of 51.9%. Under 50% marks contractionary territory, so the May reading shows continued growth in the services sector, pulling growth away from manufacturing, but at a slower pace than last month. Survey respondents shows that business conditions are stable, yet concerns of a slowing economy are noted.
The Factory orders report increase 0.4% MoM, below a 0.8% expectation but up from a 0.6% increase in the prior month. Shipments of manufactured goods fell by 0.4% MoM after a 0.6% decline in March, showing that business spending may be picking up.
Tuesday:
The market had a decent day on Tuesday. The Russell 2000 showed nice gains while mega-caps lagged and dragged down the other indices. These rebounded around midday. The strength was evident in a 0.7% gain on the $RSP.
Strength in regional banks and energy stocks helped push the Russell to a 2.7% gain. The regional bank ETF $KRE was up 5% and the bank ETF $KBE was up 4.4%. Those moves were pushed by Goldman Sachs’ lowering their probability of a recession in the next year to 25% from 35% on account of improving banking risks.
For bad news, $COIN shares fell as the SEC charged the company for operating as an unregistered exchange, broker and clearing agency. There was no economic data to report for the day.
Wednesday:
Wednesday was upbeat despite mixed index performance. Mega-caps moved down, yet major indices held up well on higher than average volume. The Russel impressed again, gaining 1.8%. $AMZN, $MSFT, $NVDA, and $GOOGL all saw large declines as profit taking took place, pushing the $MGK down 1.7%.
Overall, the broader market was strong. The $RSP was up 0.7% as money flowed out of mega-caps into other areas with a bias towards economically sensitive sectors. Risings rates were a limiting factor for mega caps and growth stocks. Treasuries saw an uptick in selling after the Bank of Canada surprised with a 25 basis point rate hike.
Economic data for the day included the MBA mortgage report and the US Trade Deficit.
The weekly mortgage application index fell 1.4% with purchase applications down 2% and refinancing down 1%. The average interest rate of a conforming 30-year mortgage fell to 6.81%, down 10 basis points.
The US Trade deficit grew to $74.6B in April from a $60.6 reading in March. The widening deficit was the result of exports being $9.2B less than and imports being $4.8B more than March’s reading. This drop in exports shows a concerning decrease in demand for US goods.
Thursday:
Thursday was a decent day as mega caps drove action in early hours while the broader market was a bit weak. By the close, however, more stocks took place in the gains. $AAPL, $TSLA, $NVDA, and $AMZN (which was initiated with an overweight rating by Wells Fargo) recorded consecutive gains and were the biggest support factors in the market.
Market participants were also reacting to the weekly initial jobless claims report which came in at its highest level since November 2021, at 261k. This was worse than expectations by 24k. Continuing claims fell 37k to 1.757M. The bump in initial claims shows the softening in the labor market that the Fed has been wanting to see. Claims continue to be at levels above levels seen in prior recessions, which is a point that we were pleased to see. This was the only economic data for the day.
Friday:
Friday was mixed, but still closed out a constructive week for the bulls. The S&P 500 rose above 4,300 for the first time since August and marked a 20% gain on October’s low, which meets the criteria of a new bull market. That level couldn’t be held as we closed just under 4,300.
The mild gains for the day were broad based as the $RSP was up 0.1% and $MGK up 0.4% at close. It wasn’t this narrow at the open, but market breadth had shifted as the day progressed.
That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.
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Regards,
Dividend Dollars