Batten-Down the Hatches

Apr 24, 2023

By Pete Biebel, Senior Vice President
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The stock market sailed through fairly calm seas last week. For most of the popular averages, it was their narrowest range week in more than a year. And that was in spite of some undercurrents that had to be navigated in what was the first full week of the new earnings season.

In retrospect, the voyage has been relatively placid for the past month following the brief tempest in bank stocks in March. Quantifying the market’s calm, the CBOE Volatility Index, VIX, ended last week at its lowest level in more than 18 months. Some believe that’s a bullish sign: The market has no fear. Others might argue that the low VIX reading is indicative of the calm before the storm. And there’s plenty of potential storm fuel on the horizon.

The first of the dark clouds could appear this week as we enter the biggest week of the new earnings season. More than 200 of the component companies in the S&P 500 Index (SPX) are on deck to report, including many of the largest stocks in the index. The reports this week are not only significant potential catalysts by their sheer number, but also because the rate of overall earnings growth (or lack thereof) is one of the remaining wildcards in the market’s log of concerns.

The market already has concluded that the Fed has set its course; it will hike its benchmark rate by 25-basis points one or two more times at most. So, though many may focus on Fed action, we don’t expect any surprises there. And the stock market is not likely to show much interest in the debt ceiling debate unless and until a government shutdown is looming. Everybody expects that Congress will eventually tackle the debt ceiling issue.

But the market still doesn’t have a good heading on future earnings. Corporate profits for the first quarter are expected to decline by a bit more than 6%. This week we’ll find out how well actual results jibe with expectations. Positive surprises will probably be rewarded. But any shortfalls, in either current earnings or forward guidance, could result in a shellacking for individual stocks. By the end of the week, analysts should have a much better bearing on the degree to which future earnings estimates need to be adjusted up or down.

This week also brings key economic reports that could cause stocks to alter course. Thursday’s update on first-quarter GDP is expected to show slower growth. A 2% annual growth rate is expected, down from the earlier 2.6% estimate, but a number much lower than that could roil the markets. Then on Friday, the Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index, will be announced. The year-over-year increase is expected to drop to about 4.2% from 5%.

Another potentially large dark cloud that could form in the near future is a credit crunch and specifically the degree to which our economy is impacted by possibly tighter lending conditions. Higher mortgage rates have already put the squeeze on anyone who’s had to, or will soon have to, refinance debt. Now, in the wake of the March bank failures, regional banks have experienced large depositor withdrawals and, as a result, may need to further tighten their lending standards. Commercial real estate is the sector where the impacts of tighter and more expensive credit could have the earliest and greatest impact.

One safe-harbor market has recently shown signs that investors are beginning to fret about the debt ceiling hijinks. Congress has been spending money like drunken sailors in recent years, and it’s not surprising that some investors might question the ability of our legislators to take prudent steps in a timely manner. The evidence is in the price swings in the various maturities of Treasury Bills. Investors have apparently been gobbling up T-Bills with very short maturities, i.e., ones that will pay off before the debt ceiling could be reached. Investors have also apparently been bailing on T-Bills maturing in those months that have the greatest potential to be in the possible default timeframe. Estimates of when the Treasury will run out of cash if the debt ceiling is not raised range from early June to late July. The yield on four-week Bills has fallen about 20% over the past month, from about 4.6% to about 3.7%. Over that same time, the yield on slightly longer three-month Bills has increased from a bit below 4.7% to a bit above 5%.

In a further effort to clear some fog, let’s put the spotlight on VIX. I mentioned above that this volatility index has fallen to its lowest level since late 2021. Last week I heard an explanation of one factor that could be causing the index to have a bias lower. The phenomenon is likely the impact of the new hot game in town: “zero days to expiration options” or “0DTE options.” Over the past six months, trading volume has exploded in these ultra-short-term contracts. It’s speculation on steroids. While I don’t expect to ever trade such contracts, I’m willing to let the kids have their fun. Apparently, the shift in speculative activity to 0DTE contracts from more traditional time frames has caused premiums in longer contracts to thin. Because the VIX Index is based on 30-day premiums, it may now be biased lower.

For the week, the NASDAQ Composite Index (COMP) was the big loser, sinking 0.42%. The Dow Jones Industrial Average (DJIA) also ended the week under water, down 0.23%. SPX tried bobbing back to the surface late in the week but couldn’t quite get its head above water; it lost 0.1% for the week. The best of the U.S. equity sectors last week were the sectors that had been underperforming through the first three months of the year. Consumer Staples, Real Estate, Utilities and Financials all gained between 1% and 2% for the week. The biggest loser was Communication Services, which fell 2.6%, but which still leads all other sectors with a year-to-date gain of more than 20%.

SPX ended last week near 4134, still within easy reach of the February high, but it seems to have a pretty significant barrier in the 4150 area. The index could slump back into the 4000 – 4050 range without doing any technical damage. And, as I wrote last time, things would get exciting if the index fell into the mid-3900s, and things would likely get messy if SPX falls below 3900.

In addition to the A-list GDP and PCE reports mentioned above, the economic report calendar includes several lesser stars that are still capable of sparking a reaction from the audience.

Date Report



Monday 4/24/2023 Dallas Fed Manufacturing Index, April


Tuesday 4/25/2023 Case-Shiller Home Price Index, February, M/M



Consumer Confidence, April



New Home Sales, March, SAAR



Wednesday 4/26/2023 Durable Goods Orders, March, M/M



Durable Goods ex-Transportation, March, M/M



International Trade, Trade Deficit, March



Thursday 4/27/2023 GDP, Q1, SAAR



Initial Jobless Claims



Continuing Claims



Pending Home Sales Index, March, M/M



Friday 4/28/2023 Personal Income, March, M/M



Personal Spending, March, M/M



PCE Price Index, March, Y/Y



Core PCE Price Index, March, Y/Y



Employment Cost Index, Q1, Q/Q



Chicago PMI, April



Consumer Sentiment, April




Links to previously published commentaries can be found at Investment Insights/Weekly Market Commentary/Market