Manufacturing production was in contraction and consumer spending stayed unchanged in April, while the number of claims for U.S. unemployment benefits touched 1.8 million, the highest level since December 2021. Almost every indicator of real estate weakness was negative; for example, construction permits were down 8.8 percent and existing house sales were down 2.4 percent, while new home sales were up 9.6 percent, thanks to somewhat lower mortgage rates.
U.S. stocks did well, with non-cyclical firms doing better than growth-sensitive ones. When looking at market performance and profits so far this year, mega-cap companies are clearly the stars. About 40% of the April return on the S&P 500 was attributable to Apple (+2.9%) and Microsoft (+6.6%); in terms of the profit’s growth anticipated for the whole S&P 500 in 2023, more than 83% is attributable to Amazon.
Since the U.S. currency was lower, developed international markets had returns that were comparable to the U.S. Amidst the continuing conflict in Ukraine, investors appeared to regain faith in Eastern European countries like Poland (+13.5%) and the Czech Republic (+7.7%). In contrast, China's stock market dropped (-5.2%) due to the weakest economic growth forecast since the early 1990s, excluding COVID-19.
As assessed by the Personal Consumption Expenditures (PCE) Index, headline inflation in March (the most recent measurement) continued to trend lower at 4.2% on an annualized basis. However, the Fed's preferred measure of consumer spending, core PCE (excluding food and petrol), remained steady at 4.6%, which caused a little disturbance in the bond market as investors anticipated another interest rate rise for bonds with shorter maturities. At the same time, investors paid their taxes by selling bonds, which resulted in a slight loss for the bonds.
Commodities persisted in their struggles in a market that was less worried about inflation running amok and more concerned about economic fragility; industrial metals fell 3.8% in April, while most real assets area enjoyed gains comparable to equities markets. With long-term forecasts for real (inflation-adjusted) interest rates remaining mostly constant, Treasury Inflation Protected Securities (TIPS) remained flat on the fixed income side.
Commodity Trading Advisors (CTAs), a subset of hedge funds that employ a managed futures strategy, saw increased directionality across a variety of trading sectors, including commodities, fixed income, interest rates, and currency, while other hedge fund strategies maintained their trend of modest or flat performance. Markets where trends are building and sticking around are ideal for CTAs, as we discussed last month.
As investors, it is only natural for us to consider if recent market changes signal a turning point for the economy or the markets, even though predicting is often seen as a futile endeavor. From our vantage point, there are many potential causes of uncertainty that might contribute to sustained volatility. The data we have seen in the last several months has been less than stellar, with the majority of indicators pointing to a recession. For instance, while the unemployment rate may be relatively stable, it does not always mean that the labor market is bright: New job vacancies are at a two-year low, while layoffs have increased. Similarly discouraging has been the real estate data: Existing house sales have dropped almost 22% year-over-year, after a 2.4% monthly decline. The aforementioned decline in new house starts and permits is occurring simultaneously.
Consumer spending has declined, which is more concerning. People are cutting down on their spending on things like plane tickets, hotel stays, dining out, and entertainment. Real (inflation-adjusted) consumer expenditure has been on a declining trend for four of the last five months, with a 0.3% drop in March after a 0.4% drop in February, when housing and healthcare are removed. In addition to a 0.8% decline in March, spending on "durable goods" (such as automobiles and large appliances) has fallen for four of the previous five months. because in large part to government stimulus, the United States economy has been able to weather the recent economic storms, including the height of the COVID-19 pandemic, because to a sturdy consumer base. The next several months are anticipated to bring further challenges that will put resilience to the test, including ongoing inflation, the end of stimulus, tighter credit/less liquidity, slower GDP, and the repercussions of the bank’s failures.