The S&P 500 Index closed lower for the second consecutive week and posted its sixth week of moving less than 1.0% in either direction. On the week, the U.S. stock barometer lost 0.3% and is now down 0.6% over the last three months. In addition, the NASDAQ Composite posted a small gain on the week, rising +0.4%, driven higher by some strength in Big Tech. However, the Dow Jones Industrials Average lost 1.1% last week, weighed down by stocks like The Walt Disney Company, which experienced a larger-than-expected subscriber loss in Disney+. Digging deeper, Communication Services (+4.3%) was the standout S&P 500 sector on the week, lifted higher by Alphabet’s +11.3% boost following positive takeaways on its Artificial Intelligence (AI) commentary at a developer conference. Nevertheless, nine of eleven S&P 500 sectors finished the week lower. Notably, cyclical areas, such as Energy and Materials, each lost roughly 2.0% last week and acted as the main drags on the S&P 500.
Recession anxiety continues to hang over many areas of the market at the moment, which contributed to sending West Texas Intermediate (WTI) oil lower for the fourth consecutive week. WTI settled down 1.8% last week to $70.09 per barrel. Over the last year, WTI has fallen over 35%. Helping round out areas outside of stocks last week, Gold was marginally weaker but held above $2,000 per ounce. The 2-year U.S. Treasury yield finished at 4.00%, while the 10-year Treasury yield ended the week at 3.47%. And the U.S. Dollar Index rose +1.5% last week.     
Unfortunately, there hasn’t been a definitive trend across stocks over the last few months, despite periods of volatility (e.g., March’s regional banking stress). Thus, there’s been a tug-of-war going on in the market for months, and it’s unclear whether the next leg in the S&P 500 will be higher or lower from here. Notably, we believe the bulls and bears each make compelling arguments for their case.
Bulls vs. Bears: Each Make a Compelling Case, So Where do Investors Go from Here?
For the bulls, stocks have shown resiliency despite the back-and-forth in prices over recent months. This is partly because economic conditions have slowed but held firm in several key measures (e.g., labor, services activity, and consumer spending). In addition, inflation continues to cool, the Federal Reserve is likely near the end of its rate hiking campaign, and consumers/businesses are well-positioned to weather a mild recession, in our view.
However, the bears can quickly point to negative year over year earnings growth, back half profit estimates that are likely too high, still elevated inflation, a higher for-longer rate environment, and competition from bonds and cash-like investments. Throw in added uncertainty about the debt ceiling and regional banking stress, and it’s easier to see why stocks haven’t been able to gain much ground over the last six months.

So where does that leave investors? We believe stocks are unlikely to experience a meaningful uptrend until the uncertainty regarding the debt ceiling is lifted and contagion risks among regional banks are quelled. At the same time, a higher-for-longer rate environment may anchor stock prices if inflation continues to stubbornly/slowly fall and the economy muddles along without a more material downtrend. Simply, as long as this many macroeconomic conditions remain in flux, the bulls and bears will likely keep sparing, leading to fleeting directional drives in the stock market. In our view, such an environment calls for investors to maintain a slightly defensive yet balanced portfolio approach and be willing to adjust their views as conditions evolve.
Inflation Comes in as Expected; Debt Ceiling and Regional Bank Volatility Weigh on Investors
On the inflation front, the April Consumer Price Index (CPI) came in largely as expected last week, both in the headline and core readings. Investors gravitated to the decline in core services inflation as a positive sign inflation is moving in the right direction. But although headline CPI ticked down to +4.9% year-over-year last month from +5.0% in March (its tenth consecutive monthly decline), and inflation is showing broader evidence of slowing, price pressures remain elevated. On a brighter note, the core April Producer Price Index posted its lowest year-over-year increase since March 2021. The decline in producer price inflation should filter through to consumers over time. Overall, last week’s inflation reports help support the view that the Federal Reserve is likely ready to pause rate hikes in June. However, a preliminary look at May Michigan Sentiment last week showed longer-term inflation expectations at a 12-year high among survey respondents and does not support the broader market view of Fed rate cuts later this year, in our opinion. With initial jobless claims at their highest level in nineteen months, the Fed will have a chance to look at another read on inflation as well as the May nonfarm payrolls report before deciding how to steer rate policy at its June meeting.
The debt ceiling showdown in Washington and ongoing regional banking concerns kept investors on guard last week. The stock market continues to price in an eventual resolution to the debt ceiling (without a default) and has shown little volatility around the issue over recent weeks/days. The White House and Congressional leaders met last week to revitalize discussions on both sides of the aisle, with staff-level talks now taking place in an effort to move towards both sides finding common ground on a debt ceiling agreement. Raising the debt ceiling (likely accompanied by spending cuts and claw backs of unspent COVID-19 aid/faster permitting for investment projects) or extending the debt ceiling to later this year when both sides can negotiate a broader budget deal are the two most likely outcomes, in our view. Nevertheless, investors are anxious the political theater will spill over past the date the U.S. government could default on its obligations, with the X-date potentially hitting as soon as June 1st. Simply, the closer we move to the X-date without a debt ceiling resolution (even if it's temporary), the greater the risk the market begins to react, which we suspect will likely be a negative for stock prices.
Lending Standards are Tightening Across Banks: What Does this Mean for Investors?
Last week, the Federal Reserve released its latest Senior Loan Officer Opinion Survey on Bank Lending Practices. To almost no one’s surprise, the latest survey showed lending standards tightened across large and small U.S. banks in the first quarter. In addition, demand for all types of loans decreased. Importantly, respondents in the survey expect a less favorable lending environment, more uncertainty around the macroeconomic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns regarding banks’ funding costs/liquidity positions. Moving forward, companies and consumers needing to borrow will likely face higher costs, stricter requirements, and possibly an inability to borrow depending on their creditworthiness. Reduced lending and higher borrowing costs are not exactly a recipe to spur economic growth. But on the brighter side, tighter lending standards and less loan demand can help do some of the Fed’s work by slowing the economy down (e.g., less borrowing), which could help reduce inflation pressures over time. In addition, we suspect a further decline in loan demand would comfort Fed officials willing to pause rate hikes and remain on the sidelines for a period. In the background, PacWest Bancorp lost roughly 55% of its value last week after it reported a loss of deposits, quickly spurring renewed fears about regional banks' overall health. More broadly, the S&P 500 Regional Bank Index lost 4.7% last week and is down 48.5% during the previous three months.
This week, the economic and earnings calendar is relatively thin but squarely focused on the consumer. Tuesday’s April retail sales report is expected to show a faster pace of growth in the headline figure, though see moderation from March’s level when autos and fuel are excluded. April home data, including building permits, housing starts, and existing home sales, will be other key reports that color the consumer’s housing appetite. And on the earnings front, a batch of retailers this week will help close out the first quarter earnings season. Walmart, Target, The Home Depot, TJX Companies, and Ross Stores will deliver their profit reports across the week, again lending further insight into how consumers continue to spend through elevated inflation pressures and an increasingly uncertain economic environment. In addition, Federal Reserve speeches line the week, with Fed Chair Powell sitting on a panel discussion with former Fed Chair Ben Bernanke on Friday. We expect policymakers to lean heavily into views expressing “data dependency” and leading into a June rate decision. Finally, headlines over the debt ceiling showdown in Washington and ongoing regional banking stress will likely grab investors’ attention all week.                 
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The Consumer Price Index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics.

The Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) is a quarterly survey of up to 80 large domestic banks and 24 branches of international banks the Federal Reserve conducts to gain insight into bank lending practices and conditions.

Producer Price Index (PPI) measures change in the prices paid to U.S. producers of goods and services. It is a measure of inflation at the wholesale level. The index is published monthly by the U.S. Bureau of Labor Statistics (BLS).

University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample of households in the coterminous U.S. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.

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