Heading into summer…

“Stock market doesn’t only teach to make money, but it also teaches lot about life, patience, persistence and wisdom.”

― Raj Mishra  

Well, the week ended with the S&P 500 adding 1.65%, the Nasdaq continued its rally up another 3.04% and the FTSE a fractional .03%. As we near the end of May and into what looks to be an anemic summer, the S&P 500 has been trading in a 2% range the past 6 week and the 10-year Treasury has been yielding 3.3-3.6%, while short term rates yield between 4-5.5%, indicating an inverted yield curve, (a classic indicator of a possible recession). The market is awaiting a breakout up or down depending on the results of inflation, the debt negotiations between the House and the Biden administration, and the resulting impact on Federal Reserve monetary policy.

 Last week the Republican led congress proposed a budget which includes several provisions to rain in the reckless spending, arguing that it is the root cause of inflation which is hampering economic growth. The markets faltered as the White House seemed to dig in its heels but on Wednesday both sides emerged with all smiles and confidence that a “framework” for a deal had been reached. This led to a big day on Wall Street countering the earlier weeks pessimism.

Gas prices continue to slip as we approach the start of the summer driving season this Memorial Day. New housing starts and existing home sales slipped below expectation. Both are signs that the economy is slowing. In contrast to the US markets, European markets have enjoyed a very robust recovery from the October lows and highlight that it was a good choice to increase our exposure there. Home Depot lowered expectations, which may be a harbinger of things to come because one of our key indicators is consumer spending and big box retailers will tell you a lot.

Just a few words on the Bank situation: First Republic, Silicon Valley and Signature Banks’ failures all seem to be name bank problems and not a systemic problem like in 2008. However, expect to see some more failures. The FDIC and other Federal regulators will most likely stiffen regulations and add more stress testing to capital liability ratios for mid-size banks. One other development is several proposals were floated about raising FDIC insurance caps or outright eliminating them.  But it seems Congress has some stomach for possibly raising limits on business payroll account deposits only.

Finally, the Federal reserve in its open market meeting this month raised interest rates 25 basis points, (much to Bill’s chagrin) and left the door open, based on near future inflation data, on whether they will pause and see what happens or raise another 25 points in June’s FMOC.

This week we will see if peace reigns in the kingdom as the Republican House, Senate and White House can reach a deal on the debt ceiling which nobody in Washington wants to get blamed for, especially in a coming election year. The Federal Reserve will probably not telegraph their intentions as Chairman Powell stays mum on his plans, but several regional Federal Reserve presidents have been purposely quoted as saying another rate increase is not an impossibility. The markets have priced in this anticipated good news both on inflation continuing to come down and the Federal Reserve maybe actually cutting rates later this year. The reality… Probably not going to happen until next year.

The overall portfolio strategy is to increase our exposure to commodities, energy, specifically natural gas, as we trim and take a little profit from the S&P 500 positions. With Gold at all-time highs, my maxim is that when everyone is talking about it and every television and radio commercial is trying to sell it to you, the gains have already been mostly realized. We will continue to favor short term bonds as that is where the returns are now.

We expect our clients will see an increase in our short-term bond exposure as we wait to see the Federal Reserve’s next move and the direction of inflation.

Enjoy your Memorial Day holiday as the start of summer is upon us.

Mike