S&P 500 edges lower as inflation eases and debt ceiling looms

The longer you work, the more money you’ll have for retirement. But the longer you work, the less time you’ll have to enjoy that retirement. – Author unknown

It was another mixed week for the major stock averages as the Nasdaq Composite Index rose slightly, the Dow Jones Industrial Average fell about 1% and the S&P 500 Index edged modestly lower, making it the sixth straight week that this benchmark has experienced moves of less than 1% in either direction. The small gains and losses for the S&P 500 reflect the conflicting economic data that investors must parse every week as well as the uncertainty of the Federal Reserve’s monetary policy and the banking crisis. Investors did receive good news about inflation last week as the consumer price index (CPI) in April rose in line with estimates and increased 4.9% on an annual basis, slightly better than expected and fueling optimism that the trend is lower. It was the lowest annual pace for the consumer price index since April 2021 and lowered the odds considerably that the Fed will raise rates again in June. Since March 2022, the Fed has raised rates ten times, taking the federal funds rate to between 5% and 5.25%, the highest level in nearly 16 years. Inflation had been around 9% in June 2022 and although it has come down substantially, it’s still above the Fed’s target of 2%. While the market may expect no increase in the fed funds rate in June, the Federal Reserve may have other ideas. Last week New York Fed President John Williams said that its 2% target will not be met in two years and left open the possibility of more rate hikes. Another potential land mine is the failure of Congress to raise the debt ceiling as President Biden and House Speaker Kevin McCarthy met last week to find a solution before the U.S. Treasury is unable to pay its debts, possibly as early as June 1^st. Although Walt Disney reported disappointing earnings last week, of the S&P 500 companies that have posted their results, about 79% of them have topped earnings expectations while over 74% have exceeded sales estimates. Earnings season has been encouraging but for the stock market to advance, it must overcome a wall of worry that includes a debt-ceiling fight and a possible default if not resolved, tighter and more restrictive bank lending policies and increasing recession fears even as the labor market remains fairly robust.

Last Week

The producer price index (PPI) rose slightly in April and was less than expected and increased only 2.3% year-over-year, the smallest annual increase in more than 2 years. Weekly jobless claims rose by 22,000 to 264,000, the highest reading since October 30, 2021 and indicative of a slowing economy. The University of Michigan consumer sentiment index in May fell to its lowest level in 6 months on renewed fears about the economy.

For the week, the Dow Jones Industrial Average dropped 1.1% to close at 33,300 while the S&P 500 Index fell 0.3% to close at 4,124. The Nasdaq Composite Index gained 0.4% to close at 12,284.

This Week

The Leading Economic Index for April is forecast to decline again following a drop in March as it has reached its lowest level since November 2020. April retail sales are expected to rebound after falling in March as consumer spending remains healthy. April housing starts and existing home sales are both expected to decline from levels in March as higher mortgage rates discourage prospective buyers.

Retailers will dominate the quarterly earnings reports this week and the most prominent of these companies scheduled to report include Walmart, Target, Home Depot, TJX Companies, Ross Stores and Foot Locker. Other notable companies on the agenda include Cisco Systems, Applied Materials, Vodafone Group and Deere.

Portfolio Strategy

The next big hurdle for the stock market is fast-approaching and it involves raising the debt ceiling. After an initial meeting last week between the White House and congressional leaders, there was no resolution and a meeting that was scheduled again on Friday was postponed until this week. Treasury Secretary Janet Yellen has said that June 1^st is the day of reckoning as the U.S. Treasury will run out of money to pay its bills. If history is a guide, the impasse is unlikely to be resolved by then, but history also tells us that a deal will be reached eventually to avoid a default. It’s also feasible that Congress could kick the proverbial can down the road as the default deadline approaches, possibly to July 4^th when Congress recesses or at the end of September. The last time that the U.S. faced a similar situation back in 2011, the stock market plunged with large cap stocks performing better than small cap stocks and defensive sectors such as utilities and consumer staples holding up better than cyclical sectors of the market. While it may be tempting to sell your equity positions and go to cash until an agreement is reached and the debt ceiling is raised, long-term investors would be better served by staying the course and not making any investment changes. It’s not a question of whether or not the market recovers but how long it takes for the market to recover because history tells us it will. A plunge in the stock market could actually bring the White House and Congress to their senses and lead to an agreement that resolves their differences and raises the debt ceiling. The stock market has been trading mostly sideways recently, but as we get closer to the June 1st deadline with no resolution, expect volatility to increase.

As many of you already know, I’ve given my resignation from Hinsdale Associates as I’m retiring and my last day is today, May 15^th. It’s been exactly ten years that I’ve been Director of Investments and during that time, I’ve probably written nearly 500 of these Weekly Market Commentaries. Well, today marks my last newsletter. While I realize that not everyone who subscribes to the newsletter actually opens and reads it, I appreciate and thank those that have and hope it provided a useful guide to the markets each week.