What happened last week
- The market saw year-to-date highs in stocks despite a lack of progress on the debt ceiling negotiations in Washington.
- Hawkish Fed commentary and a lack of further banking stress drove bond yields to post-Silicon Valley Bank collapse highs.
- US economic data continues to point to underlying resilience.
What we’re watching this week
- Daily debt ceiling negotiations will be the headline grabber this week.
- Core PCE (personal consumption expenditures), the Fed’s preferred inflation gauge, will be released Friday. Last week’s FOMC (Federal Open Market Committee) meeting notes will be released Wednesday.
- While we are past the bulk of first quarter company earnings, some consumer-facing retail companies and one many investors are watching, NVIDIA Corporation, report earnings this week.
Horizon’s Investment Management Views
As the Federal Government’s checking account rapidly approaches a zero balance, investors pushed the S&P 500 Index to year-to-date highs last week, led by both the market’s top (mega-caps) and bottom (small-caps). Our sense is that Wall Street just wants what is considered a man-made crisis to go away. The expected 11th-hour government resolution, which might arrive by the end of this week, may spark a brief rally with troubled cyclical stocks.
The back-and-forth negotiations in Washington are distracting from another major market development of the past few weeks – the rise in Treasury yields across the yield curve. Both the 2-year and 10-year Treasury yields ended last week at post-Silicon Valley Bank collapse highs amid hawkish talk from Fed members. Recent Fed messaging indicates that there is a substitution between regional bank instability and the level of yields – no further bank failures could mean higher interest rates. We doubt this story is completely over, but we aren’t yet at levels where interest rates threaten equity valuations. We expect the market to focus on this after the debt ceiling drama has passed.
Economic data continues to point to a resilient U.S. consumer, evidenced by stronger retail sales last week. Jobless claims, one of our key indicators of consumer strength, are also moving in a positive direction, pushing back the arguably most anticipated recession ever. However, data overseas has been weakening as the China reopening process hits some bumps and there are signs of a slowdown in Europe. In a change from recent trends, the dollar rose last week on these developments. We are monitoring the situation, as this could be a headwind to international equities, and may impact portfolio positioning in these markets.
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