Let’s first review the economic data. The biggest surprise was Friday’s S&P Global Purchasing Managers Index (PMI) that comes out ahead of the ISM reports by about a week. It jumped above 50 for the first time to an 11-month high—and this includes post-Silicon Valley Bank (SVB) data.
The strong S&P Global PMI followed weak data earlier in the week. The Philadelphia Fed regional Manufacturing Business Outlook Survey dropped significantly. Jobless claims were higher than expected. But on the S&P Global PMI report, yields jumped higher for what is usually a less important data release.
The short conclusion of the latest economic reports: unless something bad happens in the next two weeks, the Fed is on track to hike another 25 basis points at the May meeting. And the really big question is whether this is a one and done hike or will the Fed give us further explicit language for the path of rates. I think they will hint at a pause, but we have another 10 days of data to go.
This week we will get another Case-Shiller Housing report and updates on the money supply. Those data are lagged but are likely to show further drops. We will get the first quarter gross domestic product (GDP) report and estimates show 2%. It is worth repeating: the Fed’s own forecasts for overall GDP in 2023 imply negative GDP growth over next three quarters. Before the Fed meets, we will have jobless claims, personal income and spending, and ISM reports. The key employment report comes a few days after the Fed decides policy.
So far, stocks have really held in quite well with all this prevailing pessimism. We’ve seen patterns of morning selling and buying coming in the afternoon. Volatility levels as measured by the CBOE Volatility Index© (VIX©) fear gauge are falling.
Rebounding productivity might keep these earnings and margins safeguarded. Procter & Gamble’s (P&G) earnings report showcased why stocks are good hedges against inflation. P&G’s earnings and revenue came in strong from price increases, even though unit sales (volume) came in lower.
On the other side of price hikes in the Consumer Staples sector, we saw an early sign of price cuts competing for market share and growth with Tesla lowering the price points for electric vehicles (EVs). Tesla traded down on its earnings report and these price cuts and that weighed on the NASDAQ where Tesla is a large weight. Whether P&G raising prices or Tesla lowering them is more indicative of the broad trend in inflation will be something to watch carefully.
I still believe the cumulative effect of tightening rates and the banking reverberations will slow things down dramatically and make it hard for the stock market to break out from these high levels it has reached several times before. I remain uncharacteristically cautious until the Fed ‘gets it’ and not only pauses but says it is starting to look at rate cuts. I believe the real interest rate is too high to sustain normal growth at this point in the cycle.
Is it time to ‘Sell in May and Go Away’ as the famous market mantra suggests? We are approaching a challenging time for the markets. Summer rallies used to be quite a prominent market feature in 1960s and 1970s, but it has not been particularly good more recently. April has been a stronger month, particularly the first half. In short, seasonals and the Fed’s over-hawkishness are working against strong stock performance at the moment, yet increasingly there are signs the October lows will certainly hold.
Past performance is not indicative of future results. You cannot invest in an index.
Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree Investments, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
