2023 | May 1

The Markets

Stocks Gain

The major U.S. stock indexes stumbled on Tuesday but recovered later in the week to post modest weekly gains of around 1%. Generally strong earnings results from the biggest technology companies provided much of the week’s positive momentum.

Stocks were mostly flat throughout April, resulting in a sharp pullback in an index that measures investors’ short-term expectations of market volatility. The S&P 500 added 1.5%, the Dow rose 2.5%, and the NASDAQ posted a tiny gain, while the CBOE Volatility Index (VIX) ended April at the lowest level since November 4, 2021.

U.S. economic growth remained in positive territory in this year’s first quarter, but it slowed markedly from the previous quarter and fell short of most economists’ forecasts. Amid still-high inflation, GDP grew at an annualized rate of 1.1% in the latest period, down from a 2.6% figure in last year’s fourth quarter.

At the midway point of earnings season, the proportion of S&P 500 companies that have beaten analysts’ earnings expectations is slightly higher than usual. Among those companies that had released first-quarter results as of Friday, 79% exceeded net income expectations, topping the five-year average of 77%, according to FactSet. Overall, earnings are expected to decline about 3.7% relative to a year ago.

Ahead of a U.S. Federal Reserve meeting, a report released on Friday showed that the Fed’s preferred gauge for tracking inflation continued to moderate. The Personal Consumption Expenditures Price Index rose at a 4.2% annual rate in March, down from a 5.1% increase in February. Excluding volatile food and energy prices, core inflation rose 4.6% in the latest month.

Government bond yields in the United States, Japan, and major European economies fell on Friday after Japan’s central bank kept its low interest-rate targets unchanged. Yields were also pressured by Friday’s release of weak GDP data from the eurozone, where the economy grew 0.1% in this year’s first quarter after shrinking in the final quarter of 2022.

After dropping more than 5% the previous week, the price of U.S. crude oil slipped again, falling below $77 on Friday. That’s down from a recent peak of more than $83 on April 12.

The U.S. Federal Reserve is scheduled to announce its next move on interest rates on Wednesday, with most observers expecting the Fed to lift its key benchmark by a quarter of a percentage point to a range of 5.00% to 5.25%. The Fed also raised by a quarter point at its most recent meeting in March, when it also revised its GDP growth forecast downward. 

Source: John Hancock Investment Management

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AJ Advisors recently sponsored a hole in the annual STARS golf tournament fund raiser which is a local non-profit which Andrew has served on the board for several years. STARS is focused on equitable access to mental health care. Since 1984, STARS services have had proven and lasting results including: strengthened youth resistance, increased refusal and decision-making skills related to alcohol, drugs, sexual activity and violence; increased school attachment; increased positive orientation to his/her own future; and have promoted youth involvement in their community. 

Why Is Inflation So Stubborn?

Inflation is proving to be almost as stubborn as an angry two-year-old determined to eat popsicles for breakfast. Many have pointed to the tight labor market as the reason prices continue to rise. While labor costs are an important factor, there are other issues at play, too.

When the national news reports on a shock – the war in Ukraine affecting food supplies, the pandemic affecting supply chains, bird flu producing an egg shortage, or a dairy farm explosion affecting the price of milk – companies may take the opportunity to raise prices because customers are less likely to complain about the increase, reported Tracy Alloway and Joe Weisenthal of Bloomberg.

Companies in an industry, such as soft drink makers or chicken wing restaurants, may raise prices in tandem, giving consumers little choice but to pay the higher price. When the shock is resolved and wholesale prices move lower, companies often don’t lower retail prices. Instead, they simply keep prices high.

Isabella Weber and Evan Wasner at UMass Amherst listened to earnings calls, compiled data on companies, and reviewed literature about corporate price-setting. Their research paper reported that overlapping emergencies in recent years have allowed companies to increase prices and profits. They dubbed the phenomenon “sellers’ inflation”. They wrote:

“Sellers’ inflation is not possible in a perfectly competitive economy, but in a highly concentrated economy in which large firms are price makers, it is a real possibility – as we are witnessing again today.”

Sellers’ inflation may be another reason inflation has been sticky.

In theory, a recession and falling consumer demand should cause companies to lower prices. However, as Weber and Wasner pointed out, recessions have the potential to hurt smaller businesses, if they have difficulty finding funding, and increase the power of larger ones.  

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