Where’s the Beef?

Apr 3, 2023

By Pete Biebel, Senior Vice President
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The last week of March proved to be a very appetizing one for investors. The major stock market averages brought home the bacon with gains between 3% and 4%. Despite a bit of indigestion in the meat of the month, which forced the market to swallow some upsetting news from the banking sector, the market gobbled up gains through the later courses. Both the S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) finished at their highs of the month, with COMP very near its high for the year.

The gains in March meant that COMP had its first positive quarter in the past five, gaining nearly 17%. SPX was unable to match COMP’s juicy return; it cooked up just a 7% gain for the quarter. The Dow Jones Industrial Average (DJIA), apparently on a lower calorie diet, digested a mere 0.38% advance in the quarter. Technology and Communication Services were the two most voracious of the sectors, each climbing more than 20% year-to-date. Four of the 11 S&P sectors got smoked through the first three months of the year. Financials, Energy, Healthcare and Utilities lost 4% to 6% for the quarter.

The recipe for the sizzling late-month gains seemed to result from a shift in investors tastes. Early in the month fears of a more hawkish Fed tempered the appetite for stocks. But the bank failures and the subsequent potential for tightening credit standards had investors drooling over the prospect that the Fed would now be more likely to chuck its series of interest rate hikes and potentially even cut rates later in the year. So, investors’ beef with the Financials sector seems to have passed. Some of the bullishness was also fed by a sudden decline in interest rates that followed the bank failures. The yield on Two-Year Treasuries tumbled from a bit over 5% early in the month to a low of 3.78% near the end of the month. Over that same stretch, the yield on 10-Year Treasuries fell from 4.01% to 3.37%. Falling interest rates had investors gobbling up more growth-oriented stocks. Tasty sectors like Technology and Communication Services began to look down-right succulent.

Following the recent juicy returns, the issue now is whether there was enough substance to the strength in March to expect some continuation. Was there enough beef in the rally for the bulls to sink their teeth into? With COMP and SPX near their highs for the year, will they finally be able to break out of their 4½ month trading ranges?

One tendency that may favor stock prices going forward is that U.S. equities have a history of rallying in the months following the last hike in a Fed tightening cycle. SPX has averaged about an 8% gain in the three months following the Fed’s final rate increase, rising in five of the last six such scenarios. That suggests that if the Fed’s final hike came in March or will come in May, then we should expect the averages to trend higher through summer. However, the poorest post-final-hike performances were in cases where the economy entered recession near the end of tightening cycle.

Here’s another juicy tidbit to gnaw on… In the past 50 years, there have been 16 years in which SPX has climbed 8% or more through the first three months of the year. In every case, the index ended the year with a gain, and in 15 of those circumstances, SPX ended the year with a gain of from 10.8% to 45%. Perhaps this year’s +7% first quarter appetizer will prove to be just a taste of a profitable main course over the balance of the year.

One significant and less promising aspect of both the March rally and the year-to-date performance is that the big gainers are last year’s biggest losers. And there are a handful of defensive sectors that are still flat to down for the year. One result is that the Advance/Decline line, which is a cumulative record of the number of daily gainers versus losers on the NYSE, is still a long way from its old high. The market internals are telling us that the recent rally wasn’t as beefy as the overall percentages indicate. In other words, the breadth of the recent market action makes the advance look more like a rally in a continuing bear market than the beginning of a new bull market.

Another open question regards what factors might possibly drive stock prices higher. It seems unlikely that interest rates are going to decline any further. Where the market has savored the potential for a more dovish Fed, it will likely regurgitate the recent gains given any indication that “higher for longer” will be the Fed’s interest rate policy. And, as I detailed last time, we shouldn’t expect any help from either higher earnings or expanding price/earnings ratios. The new earnings season will begin next week. Expectations are for very little if any growth. And, given the relatively high yields available in fixed-income securities, equity P/Es are unlikely to expand.

SPX ended last week at 4109, less than 80 points from its February high. It wouldn’t take much follow-through to reach a new high for the year, though I still wouldn’t bet on it. More likely short-term would be for SPX to slump back into the 4050 area. Things would get exciting if the index fell into the mid-3900s, and things would likely get messy if SPX falls below 3900.

Late in the day on Sunday (U.S. time), OPEC+ announced that the group would cut its crude oil production by more than a combined one million barrels beginning next month. This new cut comes as a surprise as it follows a two-million-barrel reduction announced six months ago. Crude oil futures were trading higher by about 6.5% late Sunday.

The week ahead brings a fairly beefy menu of economic reports, but nothing that will give the market much to chew on. The employment data late in the week will likely be the most significant reports but note that the Non-Farm Payrolls and Unemployment Rate reports will come on the morning of Good Friday when stock and bond markets are closed.

Date Report Previous Consensus
Monday 4/3/2023 PMI Manufacturing, March 49.3
ISM Manufacturing Index, March 47.7 47.5
Construction Spending, February, M/M -0.1% 0.0%
Tuesday 4/4/2023 Total Motor Vehicle Sales, March, SAAR 14.9mm 14.9mm
Factory Orders, February, M/M -1.6% -0.4%
JOLTS Job Openings, February 10.824mm 10.400mm
Wednesday 4/5/2023 ADP Employment Report, March, M/M +242K +200K
ISM Services Index, March 55.1 54.4
Thursday 4/6/2023 Initial Jobless Claims 198K 201K
Continuing Claims 1,689K
Friday 4/7/2023 Good Friday – Stock & Bond Markets Closed
Non-Farm Payrolls, March, M/M +311K +240K
Unemployment Rate, March 3.6% 3.6%


Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market