Watch the CPK Market Action Report: May 2023
Fears of a looming recession were overcome late in the month with solid big-tech earnings allowing the three major averages to close higher again. Will big tech be a longer-term answer for the market’s ability to keep forging higher?
Watch the Market Action Report now:
Market Action Report
May 2023
INTRO TAG
Fears of a looming recession were overcome late in the month with solid big-tech earnings allowing the three major averages to close higher again. Will big tech be a longer-term answer for the market’s ability to keep forging higher?
That action starts now!
INDEX PERFORMANCE RECAP
All the major indices were able to rebound in a late month rally to close higher with the Dow Jones Industrials gaining 2.56% and the S&P 500 1.64%. The Nasdaq Composite was also able to edge higher as well by just .66%.
EQUITY UPDATE
For the second month in a row, mega cap tech stocks captured all the attention. So long as we continue to face concerns of higher interest rates and a potential recession, these companies will most likely be the darling child due to their extremely large revenue base, growth potential and cash balances. However, they are not immune to market pullbacks. For equities to climb any higher from here, the Fed will need to pause rate hikes, economic growth will need to either be stable or rebounding and labor markets will need to moderately deteriorate.
BOND UPDATE
After a quick dip early in the month followed by a sharp reversal, the month over month change for bond yields was nominal with the 5yr settling at 3.53%, the 10yr at 3.45% and the 30yr 3.67%.
The inverted yield curve of the 10- and 2-year treasuries continue to signal a potential recession in 2024. Historically, inverted yield curves typically last less than 10 months and are followed by a high probability of a recession within 6-36 months. While the initial inversion happened in March of 2022, it was short-lived. The two inverted again in July of 2022. So, we are right at the 10-month mark.
The key levels to watch for the 2yr will be 3.76% and 4.26%. A break lower would imply a dovish Fed and slowing growth while a break above would signal high inflation and more rate hikes.
COMMODITY UPDATE
The June ’23 Crude dropped nearly 7.5% peak to trough for the month, closing out at $76.78/bbl. On the charts, the new YTD high achieved in mid-April has added a bullish bias to the market and a rebound back towards $80 is increasingly likely; however, on a longer time frame economic worries will remain a major headwind for oil in 2023, leaving risks for a collapse to new lows elevated.
Copper also saw a pullback for the month dropping just over 6% and closing out at $3.87. Looking ahead, we will continue to monitor copper futures as additional weakness will be a more convincing sign from the markets that the macroeconomic backdrop is beginning to deteriorate quickly.
Gold fell below the $2,000 level closing out just above $1990/oz. Looking ahead, the story remains largely the same as it has been for the last few weeks; if the dollar and yields do not resume their declines, it will be very hard for gold to retest the YTD highs.
CURRENCY UPDATE
The US dollar fell slightly for the month to $101.67. The dollar has traded within a broad range between 100-ish and 102.5-ish level. Until we get economic data that is either much stronger or weaker than expected or the Fed shatters or endorses the “hike/pause/pivot/cut” expectation, I’d expect the dollar to remain rangebound.
ECONOMIC UPDATE
End of month inflation reports were all higher than expected. While they weren’t terrible, none of them had declined. If core inflation remains stickier than expected, this week’s 25 bps rate hike will not be the last one, potentially weighing on stocks.
As for growth, the reports were a bit conflicting with some pointing to a sudden weakness while others were implying strength. This is typical of economies that are approaching a transition from growth to contraction or just the opposite.
The Q1 GDP reports missed on the headline, but with inventory adjustments removed, they revealed strong readings indicating there was no slowdown in consumer spending for the quarter and that is a general positive.
THE WRAP
As we look ahead to the month of May, there are some critical events we need to focus on as early as this week. At the FOMC meeting, the market will want to know if the Fed will formally signal a pause via a language change in their statement. The jobs report will need to show signs of a slowing labor market. Finally, we will need to see improvement in both the ISM PMI and the manufacturing PMI to avoid increased concerns of a “hard landing”. Anything less, this market will surely have good reason for a 5-10% correction from current levels.
CPK FOCUS
For the month of May, the cash allocation in our equity models remains at 40% due to the model’s more aggressive nature.
Our broad focus is on International Equities Commodities.
In International Equities, our focus is on Europe Emerging, Europe Developed and Latin America.
As for Commodities, our focus is on Precious Metals and Agriculture.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISKS, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the May 2023 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!