Stock Market This Week

Stock Market This Week – 06/03/23

Common sense prevailed, a debt ceiling limit deal was reached this past week, and a bill passed by the House and the Senate in large majorities. It will be signed into law by June 5^th, the theoretical last date when the United States would default. The effect of the deal was immediate on the 1-month U.S. Treasury rates. They had climbed from 5.5% in mid-May to over 6% by May 26^th. By June 2^nd, they had returned to 5.28%. Moreover, the stock market surged, and market volatility declined.

The long-term effect of the debt ceiling limit deal is to hold spending flat over the next two years but declining after accounting for inflation. This should lower the total public debt as a percentage of gross domestic product (GDP) over the next two years. The value spiked in the second quarter of 2020 because of the COVID-19 pandemic and has slowly decreased since then.

The United States economy continues to move from strength-to-strength belying pessimistic forecasters. The U.S. jobs report showed a net gain, and the unemployment rate is still near a record low. In addition, wages increased, albeit slower than inflation. Also, job openings rose. However, on the negative side, manufacturing is contracting, but the services economy, a much larger part of the economy, is growing steadily.

At this point, a recession is likely not in the cards.

Stock Market Overview

In response to good news this week, the stock market was buoyant, with the Dow Jones 30 rallying 700 points on Friday alone. The daily gain was the highest so far in 2023.

As shown by data from Stock Rover*, all the major indices increased this week, led by the Russell 2000, followed by the Nasdaq, Dow Jones Industrial Average (DJIA), and the S&P 500 Index. The Nasdaq is on its straight positive week. So far, tech and growth stocks are ruling the roost in 2023. The weekly gain almost ended the S&P 500 bear market.

All 11 sectors had positive returns for the week. Real Estate, Consumer Cyclical, and Basic Materials were the top three sectors for the week. But the Technology, Utilities, and Consumer Defensive sectors performed worst.

Oil prices fell to under $72 per barrel. The VIX dropped almost 14%, below the long-term average. Gold remained below $2,000 per ounce.

The Nasdaq is performing the best for the year, followed by the S&P 500 Index, the 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 turned around as many bank share prices recover. Banks are major dividend payers. The table below shows their performance by category. Moreover, passive income streams continue to rise.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 24.79X, and the Schiller P/E Ratio is about 29.97X. 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*.

Consumer Confidence

The Conference Board’s Consumer Confidence Index® decreased in May to 102.3 (1985=100), down from April’s upwardly revised 103.7 reading. The report measures the level of consumer confidence in economic activity and is a leading indicator that predicts consumer spending and overall economic activity. Based on consumers’ short-term outlook for income and business, the Expectations Index ticked to 71.5 from 71.7 the previous month. A reading of 80 tends to signal a recession within a year. The index has been below 80 for 14 of the last 15 months. 

“Consumer confidence declined in May as consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. However, consumers’ inflation expectations remained elevated but stable, with a majority expecting inflation to average 6.1% over the next 12 months, slightly lower than the peak of 7.9% reached in 2022. In addition, consumers that plan to purchase homes over the next six months held steady at about 5.6%, while plans to buy autos and big-ticket appliances increased as compared to April.

Manufacturing

The ISM® (Institute for Supply Management®) Manufacturing PMI® reported 46.9% for May, as business activity dropped 0.2 percentage points from the previous month. A value below 50% is indicative of a shrinking economy. This marks the seventh consecutive month in contraction territory after 30 months of growth and represents the longest stretch since the Great Recession. “The U.S. manufacturing sector shrank again, with the Manufacturing PMI® losing a bit of ground compared to the previous month, indicating a faster rate of contraction. However, the May composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period.”, said Timothy Fiore, chairman of the ISM® Manufacturing Business Survey Committee. 

Of the six largest manufacturing industries, only transportation equipment grew in May. The forward-looking new orders sub-index, which has been in contraction territory for nine consecutive months, tumbled 3.1 percentage points, dropping to 42.6%. The Prices Index, which measures what companies pay for raw materials and other supplies, showed prices dropping, decreasing nine percentage points to 44.2%. The Employment Index expanded for the second month, increasing by 1.2 percentage points to 51.4%. The Backlog of Orders Index declined 5.6 percentage points to 37.5% and has now contracted for the eighth consecutive month following 27 months of expansion.

Job Growth

The U.S. Bureau of Labor Statistics reported 339,000 jobs were added as the unemployment rate increased to 3.7% in May from 3.4% the previous month. March and April’s employment readings were revised upward for a combined (+52,000) more jobs. The number of unemployed workers increased to 6.1 million from 5.7 million the previous month, while employment levels declined (-310,000) to 160.72 million. Professional and business services added (+54,000) jobs, followed by government (+56,000), health care (+52,000), leisure and hospitality (+48,000), and construction (+25,000). Employment was mostly the same in other major industries, including mining, quarrying, oil and gas extraction, manufacturing, wholesale trade, retail trade, information, financial activities, and other services. 

The number of people jobless for less than five weeks increased slightly (+217,000) to 2.1 million. The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.2 million, accounting for 19.8% of the total unemployed. The U-6 unemployment rate, which includes those who have stopped looking for work and those working part-time, rose to 6.7% from 6.6% in April. The labor force participation rate held steady at 62.6%, leaving it below the pre-pandemic level of 63.4%. Average hourly earnings increased by 0.3% in May. At $33.44, average hourly earnings are up 4.3% from a year ago.

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