2023 | May 22

The Market

Stocks Gain

The major U.S. stock indexes posted weekly gains, with the NASDAQ outperforming the S&P 500 and the Dow for the fourth week in a row. The S&P 500’s gain of 1.6% lifted that index above a narrow range that it had been stuck in since the start of April.

An index that tracks U.S. large-cap growth stocks again outperformed its value counterpart by a wide margin, extending the growth equity style’s big year-to-date performance leadership. The growth index’s year-to-date gain was 19% as of Friday versus an essentially flat result for the value index. 

With many investors keeping a close eye on U.S. government debt ceiling negotiations in Washington, the yield of the 10-year U.S. Treasury bond rose to the highest level in more than two months. The bond was trading around 3.69% on Friday—up from a recent low of 3.29% on April 6, yet well below a peak of 4.07% on March 2.

A German stock market index climbed to a record high on Friday, eclipsing its prior peak set in November 2021. Germany is among several major European markets that have recorded strong year-to-date gains and outperformed U.S. indexes. 

For the third quarter in a row, the number of U.S. corporate executives mentioning the term “inflation” during their earnings conference calls has declined. FactSet reports that executives at 278 companies in the S&P 500 have discussed inflation during the nearly completed first-quarter earnings season. That’s down from 352 in all of last year’s fourth quarter and 402 in the third quarter.

Although U.S. government debt ceiling talks have added to the uncertainty that investors face, an index that tracks expectations of short-term stock market volatility remained far below its recent peak in mid-March. On Friday, the CBOE Volatility Index (VIX) was about 37% below its level of March 13, when bank failures triggered a round of market volatility.

After declining in February and March, U.S. retail sales posted a modest recovery in April, rising a seasonally adjusted 0.4%. The increase was driven in part by higher spending on automobiles, dining out, and online purchases. 

In addition to tracking the latest negotiations over the U.S. government debt ceiling, many investors will be looking ahead to Wednesday’s release of minutes from the U.S. Federal Reserve’s policy meeting that concluded on May 3. The minutes could shed light on Fed officials’ recent views as to whether to pause its rate-hiking cycle or lift rates for the eleventh meeting in a row. The next meeting is June 13–14.

Source: John Hancock Investment Management

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EL NIÑO IS COMING SOON

The list of items that have the potential to slow economic growth in the U.S. and/or the world is longer than anyone would like it to be. Now, there’s a new item on the list: El Niño.

El Niño is a change in the normal wind and wave patterns of the Pacific Ocean that occurs every few years. The change can significantly alter weather across the nation, according to the National Oceanic and Atmospheric Administration. It also can have a significant influence on economic growth, according to new research published in the journal Science.

Dartmouth scientists Christopher Callahan and Justin Mankin wanted to investigate how climate variability affects economic growth. They decided to quantify the impact previous El Niños have had on the world’s gross domestic product (GDP), which is the value of all goods and services produced. Eric Roston of Bloomberg reported:

“The new analysis uses a model that combines economic growth and climate variability from 1960 to 2019 and compares GDP growth around the world before and after El Niño events. The output suggests a ‘persistent’ impact on countries’ economic growth, especially in Peru, where the dynamic was first discovered, and around the tropics. They found that a powerful episode in 1997 and 1998 set world GDP back $5.7 trillion and a 1982/1983 El Niño reduced growth by $4.1 trillion.”

Scientists at the U.S. Climate Prediction Center say there is a 90% chance that an El Niño weather pattern will occur later this year. It remains to be seen whether or how El Niño will alter economic growth.

As an investor, it can be difficult to think of economic slowdowns and recessions as normal parts of the economic cycle, especially when financial markets head lower. If you’re concerned about the future, please let us know. One of our most important roles is helping clients maintain a long-term perspective.

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