June 1st, 2023
Despite the many recent years of polarizing political narratives one has had to endure it’s surprising to me the amount of materialized bipartisanship that we’ve witnessed… Covid relief bills in 2020. Infrastructure bill. The CHIPS Act. Even in foreign policy – there’s been an unusual amount of accord – GOP leadership remains steadfastly supportive of Ukraine, while Biden and the Dems have agreed on the need to resist growing Chinese power and bringing back manufacturing jobs to the US. Not all perfect, but several wins for bipartisanship – a glimmer of hope which we don’t seem to hear much of on the evening news.
Having said that, the recent fight over the debt ceiling seemed more like a return to the pointless obstructionism and grandstanding that characterized politics in the 2010s. Holding the debt ceiling hostage as a means to pursing meaningful austerity measures may have seemed, to some, as a good bargaining chip. But, as its proven to be in the past, it has only warranted further mistrust in our US politics among our citizens, a downgraded credit rating, and has certainly stoked the flames of US politics being viewed as a dysfunctional clown show by our allies at a time when we need to foster an image of dependability and unity.
“Crisis” avoided – Biden and McCarthy have stuck a deal. If you were stressed about a default now is a good time to breathe a sigh of relief. The main elements of the deal appear to be:
- A freeze on non-defense discretionary spending in 2024 and a 1% increase in 2025
- A 3% increase in defense spending
- Expanding work requirements for SNAP (food stamps) and some smaller welfare programs
- Resumption of student debt payments (though no alteration to Biden’s debt relief plan)
- Reducing IRS funding
- Clawing back unused Covid relief money
- Some very minor changes on permitting
In other words, a rather anticlimactic ending to a stress inducing couple of months. Some positives, some negatives, but really a whole lot of “meh.” Regardless, the deed is done, the market is pleased and I’m happy to see this behind us. On to more important things: slowing GDP and persisting inflation.
And now, your Monthly Market & Economic Update by the numbers.
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Warmly,
Mark S Sauer
Market Update
Global Equities: Lawmakers wrapped up the month by ironing out their debt ceiling differences. The Nasdaq Composite shrugged off the debt ceiling drama in May thanks to huge gains for Nvidia (NVDA), and any stock with exposure to artificial intelligence and chip manufacturing. SMH (VanEcks Semiconductor ETF – returned a gain of 16.41% for the month of May. The Nasdaq wrapped up the month with a gain of 7.47%, massively outperforming the S&P 500’s 0.11% return and the Dow Jones Industrial Average’s -3.36% loss. Developed Market International stocks lagged, -3.65% while Emerging markets fell slightly less at -1.06%.
Economic Update
Debt Ceiling Concluded: The absurdity of the debt ceiling negotiations continued throughout the month with pressure mounting. Fitch Ratings put the US debt on watch for downgrade. Fitch also warned that polarized US politics risk a downgrade even with the default being averted as it was anticipated. Over the weekend, President Biden and House Speaker McCarthy announced a deal had been reached, it passed in the Republican-led House on Wednesday before heading to the Democrat-controlled Senate where it also passed. Treasury Secretary Janet had placed a June 5th deadline for default – making the deal by the skin of our teeth.
Inflation Not Budging: Federal Reserve policymakers got their latest inflation data point, and it was not encouraging. Core Personal Consumption Expenditure (PCE) came in hotter than expected in April, up from 0.3% in March to 0.4%. The annual rate also ticked up from 4.6% to 4.7%, reflecting inflation that is persistently strong despite the Fed’s aggressive rate hikes. Odds of a June rate hike jumped from less than 30% at the beginning of the week to 60% as of Friday.
Earnings Season: First quarter earnings season closed out with a bang, thanks to a big beat from Nvidia (NVDA), which sent shares surging nearly 25% and propelling the graphics-card maker to near a trillion-dollar valuation. 76.6% of companies beat their earnings projections – the best we’ve seen since Q1 of 2022. Looking at forward guidance for Q2, 58 companies issued negative guidance and 41 issued positive guidance. While recession risk is still looming, companies were less concerned on their earnings calls, according to a FactSet analysis. In other earnings news, Lowe’s (LOW) cut guidance despite beating on earnings and revenue, Costco (COST) posted rare earnings miss, TD Bank (TD) missed and raised provisions for bad loans, and Ulta Beauty (ULTA) slightly beat but shares fell on slowing sales and increased instances of “shrink”, or retail theft, in its stores.
Charts of the Month
The State of the Consumer
This month I want to explore the ‘state of the consumer’. As optimistic as I’ve been this year one must also address the glaring systemic issues creeping their way into the foreground.
If the fate of the US economy rests in the hands of the American consumer there could be major trouble on the horizon as warning signs are starting to appear in several indicators. Consumers are out of savings, but still spending. Meaning they are taking on more credit card debt to keep up with elevated prices. Data shows credit card balances have eclipsed $1 Trillion to reach a new all-time high. For more than a third of US adults, outstanding credit card debt now exceeds their personal savings according to a recent report by Bankrate.com.
Furthermore, the cost of carrying those credit card balances has risen, with the average credit card interest rate over 20% for all existing accounts and over 22% for new accounts according to WalletHub.com.
Data from the US Bureau of Economic Analysis shows that consumers appear to be taking on an unsustainable amount of personal debt. Personal Interest payments from US Consumers had fallen below the trendline (blue dotted line on below chart) following COVID thanks to decreased spending and ultra-low interest rates. But since 2022, interest payments have increased dramatically, as evidenced by the sharp upward slope nearing $450 billion annually.
After first quarter earnings proved resilient, many investors are hoping that the widely projected decline in corporate earnings had been averted. Stocks, especially growth-oriented ones, have rallied nicely year-to-date in hopes that high margins and growing earnings are here to stay. But if consumers are maxing out their credit cards and overextending household budgets, eventually the spending will dramatically slow. If the US consumer taps out, an earnings downturn could show up when companies report after mid-year. In that scenario, it would be up to the Fed to rescue the stock market once again with rate cuts – which has been my projection since the start of 2023 – although the central bank will be hard pressed to do so given the stickiness of inflation data.
It is hard to imagine a recession with 3.4% unemployment, but things can change quickly when economic growth is being financed on a 22% interest rate credit card. As investors, keeping a close eye on credit card and mortgage delinquencies, automobile repossessions, and other leading indicators should be high on the priority list. The debt will come due eventually, and US consumers seem to be near maxed out.
Nasdaq Vs. S&P 500
Year-to-date the Nasdaq is up well over 30% while the S&P has had a sluggish recovery in comparison. I would project that the Nasdaq’s explosive growth will slow in the coming months while the S&P will play a little catch-up.
