Stock Market This Week

Stock Market This Week – 05/20/23

The stock market is seemingly shrugging off fears of a default on the United States debt. Although negotiations are progressing between the two sides, no guarantee exists they will compromise and come to an agreement and raise the debt ceiling.

That said, the bond market is reacting, and the cost to insure against a U.S. default is skyrocketing. According to the N.Y. Times, credit default swaps view U.S. debt as “riskier than countries like Bulgaria, Croatia, Greece, Mexico and the Philippines. Compared with Germany, the cost of insuring U.S. debt is about 50 times more.”

Although the default risk is low, the consequences are still being determined because the U.S. has never defaulted on its debt in modern times. But hypothetically, government salaries won’t be paid; Social Security checks may not go out, debt payments may be missed, etc. As a result, the United States’ credit rating may be lowered, like in 2011, when the administration and Congress had a protracted battle over the debt ceiling.

Stock Market Overview

The stock market had a positive week. 

As shown by data from Stock Rover*, all the major indices increased this week. The Nasdaq performed best, followed by the Russell 2000, the S&P 500 Index, and the Dow Jones Industrial Average (DJIA).

Seven of the 11 sectors had positive returns for the week. Technology, Financial Services, and Communication Services were the top three sectors for the week. But the Consumer Defensive, Real Estate, and Utilities sectors performed worst.

Oil prices rose 2.3% to $71+ per barrel, reversing its downward trend. The VIX plunged and is below the long-term average. Gold declined to below $2,000 per ounce.

The Nasdaq is performing the best for the year, followed by the S&P 500 Index, Russell 2000, and the Dow 30. Notably, the Nasdaq is in a bull market. In addition, 6 of the 11 sectors are up year-to-date. The three best-performing sectors are Technology, Communication Services, and Consumer Cyclical. But the worst-performing sectors are Financial Services, Utilities, and Energy.

The dividend growth investing strategy has put in mixed returns as banks and energy stocks declined but is bouncing back. The table below shows their performance by category. Two of the five categories are in positive territory.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 24.27X, and the Schiller P/E Ratio is about 29.38X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent correction and a bear market and rebound. Earnings multiples of more than 30X are overvalued based on historical data.

Economic News This Week

Provided by Stock Rover*.

Retail Sales

The Commerce Department reported advance U.S. retail and food services sales rose 0.4% to $686.1B in April; this follows March’s revised (-0.7%) and February’s (-0.4%) readings. Retail sales, adjusted for seasonal shifts but not inflation, were up (+1.6%) year over year. In addition, total sales from February 2023 through April 2023 were up (+3.1%) year over year. Much of the sales rebound is attributable to increases in spending for motor vehicles & parts (+0.4%) and internet retailers (+1.2%). In addition, miscellaneous store retailers (+2.4%), health & personal care (+0.9%), general merchandise (+0.9%), and restaurants (+0.6%) all saw sales increases. On the other hand, sales at sport & hobby (-3.3%), gas stations (-0.8%), home furnishings (-0.7%), and electronics & appliances (-0.5%) all saw decreases. 

Excluding autos and gasoline, sales were up (+0.6%) for the month. Excluding autos, sales increased (+0.4%). Core retail sales, a measurement that excludes spending on autos, gasoline, building materials, and food services, increased (+0.7%) in April after decreasing (-0.3%) in March and rising (+0.5%) in February and (+2.3%) in January.

Building Permits and Starts

The U.S. Census Bureau reported new residential building permits were down 1.5% in April to a seasonally adjusted 1.416M (-21.1%) below the April 2022 rate of 1.795M. However, single-family permits were up a seven-month high (+3.1%) to 855K, from a revised March figure of 829K. In addition, new residential building permits increased in the South (+4.3%) and West (+3.8%), while the Northeast (-23.6%) and Midwest (-15.2%) posted declines.

Privately-owned housing starts were up (+2.2%) to 1.401M, (-22.3%) below the April 2022 rate of 1.803M. Single-family starts increased (+1.6%) to 846K, as single-family homebuilding increased in the West (+59.5%). The Midwest (-20.5%), Northeast (-10.3%), and South (-6.1%) all saw single-family starts fall. Privately-owned housing completions reported at 1.375M, down (-10.4%) from a revised March figure of 1.534M, up slightly (+1.0%) over April 2022. Single-family housing completions were reported at a 15-month low of 971K, a (-6.5%) decrease from the revised March rate of 1.039M, down (-5.2%) from March 2022.

Philadelphia Fed Manufacturing Index

The latest report from the Philadelphia Federal Reserve indicated the Philadelphia Fed Manufacturing Index increased to -10.4 in May, up from a nearly three-year low of -31.3 the prior month. The index rates the relative level of general business conditions in the Philadelphia region, with a level above zero indicating expansion and below zero indicating contraction. The index is also widely followed as an indicator of conditions throughout the U.S. This is the ninth straight negative reading and the eleventh in the last twelve months. 

The report also showed that manufacturing activity continued to decline overall, with new orders and shipments remaining negative and employment declining. The index for current new orders rose 14 points to -8.9, the current shipments index rose 3 points to -4.7, and the future employment index rose 9 points to 12.6. The price indexes remained below long-run averages, with prices received declining 4 points to -7.0. Future indexes reflected muted expectations for growth, with the future general activity index falling 9 points to -10.3. Almost 37% of the firms surveyed expected decreased activity over the next six months. The future new orders index dropped from 9.8 to -2.3, and the future shipments index sank from 13.3 to 4.5.

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