- “Flash” U.S. purchasing manager surveys (early results) from S&P Global continue to recover in March. Services are accelerating while manufacturing surveys indicate moderation in the ongoing contraction. Durable goods orders fell 1% in February, an improvement from the 5% decline in January, but consistent with the contraction signaled in the purchasing manager survey. Services data reflect a strong labor market; weekly initial jobless claims remained below 200,000 for the ninth week out of 12 so far in 2023.
- The recent stabilization of mortgage rates at a multi-decade high may be helping the U.S. housing market, with February data indicating strong rebounds in new home sales. The annualized rate of 640,000 new homes is the highest since August 2022, and 4.58 million annualized existing home sales is the highest since September 2022. Despite low inventories and poor affordability due to still-elevated mortgage rates, housing demand appears to be recovering.
- Flash March purchasing manager surveys indicate modest improvements for Europe and Japan, led by service sectors. Service sector surveys improved for both regions, helped by travel and tourism. Manufacturing sentiment improved for both regions as well but continues to signal contraction in activity; orders remain light and supply disruptions have mostly ended.
Market News
Market analysis
March 27, 2023
At a glance
Equity markets rallied despite the Federal Reserve’s increase to its target interest rate in its battle against inflation. Business sentiment indicators point to a still-strong services economy.
Source: Global Economic Health Check, U.S. Bank Asset Management Group, March 24, 2023.
U.S. Bank Global Economic Health Check
The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.
Number of the week:
13%
The NASDAQ Composite’s return so far in 2023. The S&P 500 is up 3.4%.
Term of the week:
Growth stock
Any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends, because the issuers are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term.
Quote of the week:
“Year-to-date performance leadership is led by growth stocks versus value, with overall performance lacking breadth. The S&P 500 is up 3.4% for the year as of Friday’s close, far below the 13% gain of the technology- and growth-oriented NASDAQ Composite. Additionally, the growth-oriented Communication Services (18.4%), Consumer Discretionary (9.6%) and Information Technology (17.6%) sectors, the worst-performers in 2022, are the only S&P 500 sectors posting gains for the year.”
― Terry Sandven, Portfolio Manager, Chief Equity Strategist, U.S. Bank
Global economy
Quick take: Global manufacturing activity remains modest, but services businesses are seeing solid activity.
Our view: Our U.S. Health Check highlights positive but below-trend economic activity and decelerating momentum as the Federal Reserve (Fed) tightens monetary policy to combat elevated inflation. Outside the U.S., our foreign scores are below median and slowing.
Equity markets
Quick take: U.S. equities appear rangebound, with the S&P 500 moving between 3,800 and 4,200, impacted by the effects of still-elevated inflation and the Fed’s recent interest rate hike, mixed messaging surrounding uninsured deposits and the approaching kickoff of first quarter earnings reports.
Our view: Inflation, interest rates and earnings remain key to equity returns. Persistent inflation, rising interest rates and uncertainty over the pace of earnings growth in 2023 remain headwinds to advancing equity prices.
- Growth stocks are leading year-to-date equity market performance, though overall performance lacks breadth. The S&P 500 is up 3.4% for the year as of Friday’s close, far below the 13% gain of the technology- and growth-oriented NASDAQ Composite. Additionally, the growth-oriented Communication Services (18.4%), Consumer Discretionary (9.6%) and Information Technology (17.6%) sectors, the worst-performers in 2022, are the only S&P 500 sectors posting gains for the year. It is difficult to envision equities trending meaningfully higher without greater participation from other sectors.
- Dividend-yielding equities are lagging. Somewhat surprisingly, many companies with compelling dividend profiles are lagging so far in 2023. Real Estate, Energy, Utilities, Consumer Staples and Financials — sectors with the highest dividend yields — are among the worst-performing sectors year-to-date.
- Consensus earnings projections for 2023 are approximately $220 per share, essentially flat year-over-year, with downward bias. We expect visibility of 2023 estimates will improve following first quarter results and forward guidance from company managers. At current levels, the S&P 500 trades at 18.0 times trailing- and forward-12-month estimates, neither at high nor low extremes.
- The first quarter reporting period unofficially begins during the week of April 10 with the release of results from several money center banks. We will be watching consumer and business spending trends, resilience of consumer spending on “experiences” versus durable goods, progress toward resolution of supply chain inefficiencies, inventory levels, profit margins and bank deposit and lending trends.
Bond markets
Quick take: The Fed increased interest rates last week by 0.25% to a range of 4.75% to 5.00% as a part of its ongoing effort to cool inflation. However, Treasury yields fell following the meeting, reflecting concerns that stress in the financial system will lead to interest rate cuts later this year.
Our view: We favor normal allocations to fixed income, comprised primarily of high-quality bonds, to aid in reducing overall portfolio volatility. Monetary policy and tightening lending standards will play key roles in determining the cost and availability of credit as we approach the second quarter.
- Fed guidance projects a year-end policy rate of 5.00% to 5.25%, but investors price in interest rate cuts to a year-end policy rate around 4%. High inflation pressured the Fed to raise rates last week despite tightening financial conditions in recent weeks brought on by two bank failures in the United States. Fed Chairman Jerome Powell noted the banking system remains strong, but he anticipates tighter lending conditions for consumers and businesses that could aid in bringing inflation lower while dampening growth. The Fed revised its official statement to include “some additional policy firming may be appropriate” versus its prior statement, which said “ongoing increases” — a subtle downgrade to the likely number of additional rate hikes. Interest rates fell last week, reflecting investors’ expectations the Fed will cut rates starting in the third quarter. High inflation, the uncertain outlook for monetary policy and strains on the banking sector contribute to ongoing Treasury yield volatility and investor unease.
- High-quality bonds outperformed riskier bonds last week, reflecting investor preferences for traditional safe havens. This indicates investors demand greater compensation for credit risk. Corporate and municipal bond credit fundamentals are still strong, with issuers benefiting from low borrowing costs in 2020 and 2021, but slowing earnings and tax revenue growth paired with higher refinancing costs may stress individual issuers. Moody’s (a credit rating agency) downgraded bond ratings at a faster pace than upgrades recently, showing evidence of tougher financial conditions ahead. We favor normal fixed income exposures that consist primarily of high-quality bonds due to compelling yield and modest exposure to price risk.
Real assets
Quick take: Real assets lagged the broader market last week as policymakers’ actions to ease banking system stress provided a boost to more growth-oriented investments. Commodities were the top performers among real assets, led by a recovery in crude oil prices from the large fall experienced the previous week. Real Estate trailed, unable to shake banking system stress.
Our view: We continue to see value in real assets’ defensive sectors. We favor tangible assets with stable cash flows as the market moves into a year plagued by declines in economic growth and corporate earnings. Commodities remain vulnerable as expectations for falling inflation and decelerating economic growth come to fruition.
- Real Estate trailed the S&P 500 by 2.7% last week despite declining interest rates. Industrial and retail properties were the top performers, trailing the broader market by 1.3%, while data centers lagged the S&P 500 by 7.8%.
- Infrastructure trailed the S&P 500 by 1.9% last week. Airports and toll roads led performance, while railroads trailed the S&P 500 by 2.8%.
- Crude oil prices rose 3.8% last week, with the dollar falling and inventories of refined products declining more than expected. We see the crude market as undersupplied over a longer time horizon, which should be supportive for prices. However, we acknowledge downside exists if the global economy slows.
This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.
Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The NASDAQ Composite Index is a market-capitalization weighted average of roughly 5,000 stocks that are electronically traded in the NASDAQ market. The S&P Global Purchasing Managers' Index data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies.
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