Last Week
“Another Pullback” would have been a better title for our last commentary, rather than “Enter the Correction,” which proved premature as the market resumed its steady climb. In trader parlance, a “correction” is defined as a decline of 10%, and in this latest episode, there was only a slightly more than 6% drop from the top. The stock market tide lifted all boats last week, with the S&P 500 and the Russell 2000 gaining 2.7% and the Nasdaq Composite surging 4.2%. Over the last three years, the market’s “steady climb higher” has referred to the S&P 500, while the other market cap sectors have experienced a rockier ride.
As the chart above shows, small caps are still 13% below the level from three years ago, while mid-caps are only modestly positive. We attribute this disparity to the perception that more prominent companies are better positioned to withstand the widely anticipated challenging economic environment, particularly the headwind from higher interest rates and the possibility of a recession. The rationale for this sentiment is that smaller companies rely more on floating-rate bank lines, while large corporations more frequently issue fixed-rate bonds. The higher interest rates, in turn, are generated by the Fed’s monetary policy response to the higher inflation rate, while the recessionary concerns thus far have proven misguided. Last week’s economic data showed the inflation-adjusted gross domestic product in the first quarter growing below forecast at 1.6%, with the inflation higher than expected; this combination led to a chorus of “stagflation” from the talking heads on the business channels. We continue to view the economy as steady, with the price level high but a reasonable inflation rate running in the 2.5-3% area. Interest rates ticked up a few basis points during the week, reaching the highest levels of 2024, with the 10-year Treasury at 4.67% and the 2-year at 4.96%. The dollar held steady, while crude oil moved slightly higher, and gold retreated from its record high.
At the midpoint of the first quarter earnings season, the S&P 500 is now on track to show 3.5% growth, up from 0.6% the previous week. The improvement came across multiple sectors, with Big Tech providing the biggest boost. As such, the Technology sector performed at the top of the charts, with a 5.1% rally. Advancing issues outnumbered decliners by a factor greater than 2-1, and trading volume remained relatively heavy.
The Caleb Williams era is officially underway for the Chicago Bears following the NFL draft on Thursday night. Justin Fields supporters will wonder how he would have fared with Keenan Allen and perhaps Marvin Harrison Jr. to complement D.J. Moore on the receiving core. In the spirit of looking forward rather than backward, we will refrain from future references to what could have been.
This Week
It’s a busy calendar with the Federal Reserve meeting, the April jobs report, and several corporate earnings reports. The FOMC will almost certainly leave interest rates unchanged on Wednesday, but investors will be acutely focused on the language of the release for any changes from the last meeting. Fed Chairman Jerome Powell’s Q&A will also be closely watched as reporters will pepper him with questions about the timing of the first rate cut of the cycle.
The April jobs report from the Bureau of Labor Statistics on Friday is expected to show a gain of 210,000 jobs, down from over +300,000 in the previous month. Any surprises in the labor market might cast Chairman Powell’s comments in a new light.
In corporate earnings, 175 S&P 500 companies will report results, including Apple and Amazon, which are wrapping up reports from the Magnificent 7.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.