Weekly Market Update: May 1, 2023
The U.S. economy is slowing. True, the first look at the March-quarter gross domestic product (GDP) is expected to show a nice gain, but that will likely prove to be the high-water mark for 2023. The Federal Reserve’s most restrictive monetary policy course in four decades (designed to slow demand for goods and services and ultimately put downward pressure on prices) appears not to be concluded, and its effects are yet to be fully realized. There are already notable pockets of weakness in the economy, particularly the manufacturing and housing sectors.
The Conference Board’s Leading Economic Index (LEI) continues to fall. The LEI, which is a set of data that may help to forecast future economic activity, declined 1.2% in March. That was far worse than the 0.5% decline registered in February and the lowest reading since November, 2020. For the six-month period, the LEI was down a notable 4.5%. This, along with the continued inversion of the Treasury market yield curve, suggests a recession is likely later this year.
First-quarter earnings season is in focus. There, the results have been mixed. On the positive side, the majority of S&P 500 companies to report thus far have surpassed the lowered expectations, and the results from the banks, as a whole, did not reveal notable additional stress in the financial system. However, all signs point to the three-month period being the second consecutive quarterly profit decline.
Wall Street also is paying close attention to corporate profit margins. There is a growing concern that companies (e.g., Tesla) will not be able to maintain margins that were bolstered by a series of price increases over the last 12 months. If companies get pushback from a consumer sector that is showing signs of spending fatigue, it would hurt margins and ultimately make year-to-year profit comparisons more difficult.
Conclusion: Investors have taken the corporate earnings news in stride thus far, and there’s been an orderly reaction by the major equity averages. That said, we still recommend taking a cautious approach, given the uncertainty about the near-term economy and how the Federal Reserve plans to manage the monetary policy course in order to avoid a hard landing later this year.