Dear Friends,
As the warmer weather begins to set in this time of year, we find ourselves eagerly anticipating the arrival of summer. As we begin Memorial Day weekend and look forward to spending time with friends and family, please join us in remembering and honoring those who made the ultimate sacrifice in the service of our nation.
Economy, Geopolitics, and Commodities
1. Emerging US Debt Deal Would Raise Limit, Cap Spending for Two Years
Republican and White House negotiators are moving closer to an agreement to raise the debt limit and cap federal spending for two years, according to people familiar with the matter, as time grows short to avert a catastrophic US default.
US stocks rose early Friday as traders weighed the reports of an emerging deal against strong economic data pointing toward another Federal Reserve interest rate increase. Yields on Treasury bills maturing in early June tumbled, a sign that investors are regaining confidence in on-time repayment during the window when a US default would be likely without a deal.
The two sides have narrowed differences in talks over recent days, according to the people, though the details agreed to are tentative and a final accord is still not in hand. The two sides have yet to agree on the amount of the cap. Under the terms of the emerging agreement, defense spending would be permitted to rise 3% next year in line with President Joe Biden’s budget request. Early Friday, Deputy Treasury Secretary Wally Adeyemo warned that payments to Social Security beneficiaries, veterans, and others would be delayed if there’s a default. But he said he’s gaining some confidence an agreement will be reached.
2. Updated US GDP Result for the First Quarter of 2023
Real gross domestic product (GDP), the broadest measure of economic output, increased at an annual rate of 1.3 percent in the first quarter of 2023, according to the “second” estimate released by the Bureau of Economic Analysis on May 25th. In the fourth quarter of 2022, real GDP increased 2.6 percent.
The GDP estimate released on May 25th is based on more complete source data than was available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 1.1 percent. The updated estimates primarily reflected an upward revision to private inventory investment.
The increase in real GDP reflected increases in consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in private inventory investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, have increased.
Private-sector business activity expanded at a robust pace in May, mostly thanks to the services sector, according to preliminary survey data released by S&P Global on Tuesday. Service-providing businesses reported stronger demand, an easier time hiring workers, and increased optimism for business activity in the year ahead. Meanwhile, the US manufacturing sector fell back into contraction territory in May as manufacturers reported substantially weaker demand.
3. An Asynchronous Global Economic Expansion
Despite the challenges of high inflation, tightening financial conditions, and geopolitical conflicts, the global economy is likely to avert a recession. World real GDP growth picked up from an annual rate of 1.6% quarter over quarter in the final quarter of 2022 to 2.5% in the first quarter of 2023. Aside from a mild deceleration in the second quarter, this moderate growth pace will likely be sustained. After a 3.1% advance in 2022, the S&P Global Market Intelligence forecast calls for world real GDP to increase 2.3% in 2023, 2.6% in 2024, and 2.9% in 2025. While the aggregate data depicts a smooth global growth path, there is considerable turbulence below the surface.
Different sectors are experiencing the ups and downs of business cycles but at different times. Economic cycles also vary across countries, reflecting the timing of COVID-19 outbreaks and policy responses or the impacts of the Russia-Ukraine war on international trade and capital flows. The result is an asynchronous global expansion. S&P Global’s recent Purchasing Managers’ Index™ (PMI™) surveys through April signal strong resilience in service sectors but stagnation in manufacturing. Global consumer spending is projected to increase in step with real GDP, supported by income gains and savings accumulated during the pandemic. With the end of pandemic-related restrictions, the composition of consumer spending has shifted back to services. The result has been strong gains in travel, food services, recreation, healthcare, and personal services. As pent-up demand is satisfied, however, spending on services will likely decelerate in the year ahead.
The global economic expansion will proceed at a moderate pace, led by service sectors. Economic performance will vary widely across sectors and regions, with Europe and the Americas experiencing sluggish growth and parts of Asia-Pacific and Africa enjoying healthy expansions. With commodity prices on a downward path and supply constraints easing, inflation will diminish, allowing monetary policies to ease in 2024-25.
4. Commodity Prices Are Down as Bearish Sentiment Remains
Europe’s benchmark gas price has dropped more than 90% from its all-time high last summer. At just under 30 euros—equivalent to about $32—a megawatt-hour, it has fallen to the top of the range in which gas traded for a decade before 2021, a factor feeding into lower inflation in the eurozone. The recent drop in crude and diesel prices around the world—another sign the economy is slowing—will take the heat out of consumer-price growth, too.
The Materials Price Index (MPI) by S&P Global Market Intelligence decreased 1.3% last week, the sixth consecutive weekly decline and the eighth out of the last ten weeks. The decrease was widespread with eight of the 10 subcomponents falling. The story of the last few months has been one of falling commodity prices with the MPI decreasing in 14 out of the last 18 weeks. The index sits 32% below its year-ago level. Declining industrial metal prices were the major driver of last week’s decrease in the MPI.
The latest economic data releases reaffirm the narrative that although consumer demand remains upbeat in many countries, the manufacturing sector is stagnating. Improving supply conditions-both from increasing output and better logistics and the sluggish demand for industrial materials is creating room for the continued downward correction in materials pricing.
5. US Jobless Claims Tick up While Prior Weeks Revised Lower
Recent data on applications for US unemployment benefits were revised substantially lower after one state detected a surge in fraud, suggesting the labor market isn’t softening as much as previously thought. Initial unemployment claims in the two weeks through May 13 were revised down by a combined 50,000, Labor Department data showed Thursday. In the most recent week, claims increased by 4,000 to 229,000.
A report earlier Thursday showed Massachusetts downwardly revised three months’ worth of claims that the state said were largely due to fraud. That’s roughly 171,000 in total fewer applications than previously reported, based on non-seasonally adjusted data. The new data show the labor market isn’t softening nearly to the extent that some thought it was. The overall level of claims is still low, indicating resilient demand for workers. On an unadjusted basis, nationwide claims ticked up to 202,044 last week, led by Connecticut and Texas.
The data can be choppy from week to week. The four-week moving average of initial claims, which smooths out some of the volatility, was unchanged at 231,750. Continuing claims, which include people who have received unemployment benefits for a week or more and are a good indicator of how hard it is for people to find work after losing their jobs, edged lower to 1.79 million in the week ended May 13.
Financial Markets
1. Stocks Rally Friday, Nasdaq Notches Fifth Straight Week of Wins
Stocks jumped Friday as traders grew hopeful that lawmakers will reach a deal to raise the U.S. debt ceiling, avoiding a potentially catastrophic default. The Dow Jones Industrial Average climbed 328.69 points, or 1% to settle at 33,093.34. The S&P 500 gained 1.3% to close at 4,205.45, and the Nasdaq Composite advanced 2.2% to 12,975.69.
Intel and American Express rose 5.8% and 4.1%, respectively to lead the Dow higher. The S&P 500 tech and consumer discretionary sectors popped more than 2% each.
The Nasdaq notched its fifth straight weekly gain, rising 2.5%. The S&P 500 also posted a one-week advance, advancing 0.3%. The Dow was the laggard this week, losing 1%.
2. Just Seven Companies Are Carrying the S&P 500 in 2023
Big Tech is largely fueling the S&P 500’s positive performance in 2023, with investors buying just seven stocks and selling pretty much everything else.
Those seven stocks — Apple Inc., Alphabet Inc., Meta Platforms Inc. Microsoft Corp., NVIDIA Corp., Amazon.com Inc., and Tesla Inc. — have seen significant gains after a bleak 2022, and the collective gains have kept the S&P 500 in positive territory in 2023, with the overall index rising about 7% since the start of the year. Without these seven stocks, which make up nearly 26% of the large-cap index’s total weight, the S&P 500 would be down 0.8% on the year, through May 16.
These seven mega-cap stocks have all significantly outperformed the rest of the index as investors have moved to the relative safety of Big Tech amid ongoing interest rate hikes, stubbornly high inflation, the persistent threat of a recession, and the debt ceiling drama in the US. If you exclude the top ten tech stocks from the S&P 500, the rest of the 490 stocks would be marginally in the red – perhaps better reflecting wider angst around recession, the Federal Reserve’s monetary policy, the U.S. debt ceiling, and geopolitics. There are certainly plenty of concerns that these mega stocks may be overbought and just too expensive – even though that concern will hardly be a new worry for these stocks. JPMorgan’s team points out that the top five FAANG stocks – Meta, Apple, Amazon, Netflix, and Alphabet – have a price/earnings ratio one standard deviation above historical averages and this may at least hold them back.
3. Nvidia Eyes the $1 Trillion Club as AI Outlook Sparks Rally
Nvidia Corp. is within touching distance of $1 trillion market value — poised to become only the ninth firm ever to hit that milestone — as the artificial intelligence frenzy boosts demand for processors that can accelerate computing.
Shares in the Santa Clara, California-based firm soared as much as 26% after its raised sales forecast smashed expectations. The chipmaker’s market value rose by $199 billion at one point to a record $955 billion, before paring gains. Up by $163 billion as of 9:36 a.m. in New York, Nvidia’s market value addition would rank among the biggest in US history. Apple Inc.’s $191 billion one-day pop in November and a slightly smaller surge in Amazon.com Inc. in February 2022 top the record books. A trillion dollars data center infrastructure will be upgraded to handle so-called accelerated computing. Nvidia Chief Executive Jensen Huang said the rise of language-generating tools such as OpenAI’s ChatGPT and other artificial intelligence applications is driving demand for computing power. Nvidia’s chips are key to creating AI tools, analysts say, and building one such AI system can require thousands of Nvidia’s computing engines.
4. Albemarle to Supply Ford with Lithium Hydroxide for EVs
Albemarle said it has struck a five-year deal to supply Ford Motor with lithium hydroxide, starting in 2026. Charlotte, N.C.-based Albemarle said it will supply the automaker with more than 100,000 metric tons of battery-grade lithium hydroxide for about 3 million future Ford electric vehicle batteries.
“With the growing demand for EVs in the United States, our customers are seeking to regionalize their supply chain for greater security, sustainability and lower costs,” said Eric Norris, president of Albemarle Energy Storage.
The two companies will also explore further collaboration to develop a closed-loop solution for lithium-ion battery recycling. Ford is set to discuss its latest agreements for battery raw materials on Monday morning at an investor event.
5. Tesla, Ford Team Up in EV-Charging Deal
Tesla is opening some of its fast-charging networks to Ford Motor customers in the U.S. and Canada, the companies’ chief executives said in a joint appearance Thursday. The deal would give Ford customers access to more than 12,000 fast chargers, known as Superchargers, beginning in early 2024. The Detroit company also plans to adopt Tesla’s charging port.
Tesla’s Supercharger network, which includes more than 17,700 fast-chargers in the U.S. at more than 1,650 locations, is widely regarded as the most reliable in an industry where finding operable charging equipment can be difficult. Much like cell phones, electric vehicles use a variety of chargers. Finding a charger that works for any given vehicle can make it harder to power up. The deal with Ford indicates Tesla is having success in convincing other EV makers to adopt its charging technology.
A Ford spokeswoman said pricing would be competitive and that the company would share details closer to the program’s 2024 launch. Owners of Ford vehicles equipped with another charging port would be able to access Tesla’s network using an adapter, Ford said. The White House earlier this year said Tesla would open part of its proprietary Supercharger network to other kinds of vehicles. The move was expected to qualify the company for a share of billions of federal dollars available to build a national network of EV chargers
6. Gap Inc Posts Surprise Profit, Shares Jump 16% After Hours
Gap Inc on Thursday reported a surprise profit in the first quarter, and its shares jumped 16% in extended trading as the apparel retailer cited restructuring efforts and easing supply chain costs. U.S. companies are starting to see some relief from sky-high costs of freight and manufacturing after years of supply-chain snags. Gap’s quarterly merchandise margin increased by 610 basis points on an adjusted basis due to lower air freight expenses and improved promotional activity.
The company has seen two consecutive quarters of lower inventory as it works to clear excess apparel purchased last year. Inventory volumes declined 27% from a year earlier, according to Chief Financial Officer Katrina O’Connell. Gap, like many retailers, sped up its ordering as consumer demand surged during the COVID-19 pandemic, only to be left with piles of unsold inventory as spending normalized.
Since September, the retailer has eliminated about 2,300 corporate positions in two rounds of layoffs, joining a set of big U.S. companies that are downsizing in earnest as high inflation eats into consumer wallets. Interim CEO Bob Martin in a post-earnings call said job cuts should contribute to nearly $550 million in estimated annualized savings on a cumulative basis. Executives pointed to lower spending on salaries and other operating costs in a bid to improve margins, along with efforts to reduce inventories. Still, sales for all of Gap’s four brands declined in the quarter as the retailer struggled to update inventory and match consumer trends.
Sources:
(1) www.bloomberg.com
(2) www.spglobal.com
(3) www.cnbc.com
(4) www.wsj.com
(5) www.bea.gov
(6) www.reuters.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
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