The 107th annual Indianapolis 500 will be run this Sunday at Indianapolis Motor Speedway, which is nicknamed the “Brickyard” since the racing surface was originally paved in brick. Today the surface is paved over with asphalt, except for a distinct three-foot-wide line of bricks at the start-finish line. Average speeds over the entire 500-mile race tend to come in just shy of 200 m.p.h., making it one of the fastest spectator events in the world. This is a sharp contrast to the recent speed of events in the economy. Arguably the most anticipated recession in recent history still has not taken place, seemingly moving at a very slow speed and continuing to keep markets on edge.
The major stock market indices closed higher last week with the Nasdaq and S&P 500 having their best week since March and highest weekly close since August of last year. Big tech continues to lead the way with the usual suspects (Apple, Alphabet, Microsoft, etc.) all finishing at their highest levels in at least a year. Stocks moved higher throughout the week as debt ceiling negotiations appeared to be making progress in Washington, however both sides stepped away on Friday saying a “pause” was needed after talks hit an impasse. The major sticking point seems to be the size of discretionary spending caps. While there are continued signs of reluctance from both sides to negotiations and compromise, we remain optimistic an agreement will be reached and a default avoided since it remains in neither party’s best interest to let one occur. Good news on the negotiations front helps provide some thrust for the markets but we think it will be relatively short-lived and the markets will return to trading on fundamentals of the economy and corporate earnings.
The first quarter earnings season is drawing to a close and the profits of S&P 500 companies are estimated to have dropped almost 4% on average. Data compiled by Bloomberg shows that 78% of firms surpassed forecasts, but that is less impressive than it sounds knowing that analysts have lowered estimates. While we may (or may not) be teetering on the brink of an economic recession, a recession in earnings is likely already upon us.
The garage area at Indianapolis Motor Speedway is known as “Gasoline Alley” since that is where cars would refuel during the early days of the race. As a side note, gasoline was phased out in favor of methanol beginning in 1965 and since 2006 ethanol is the fuel used to power the racecars. Since everything seems to have a name at the Speedway, we would be remiss if we did not mention the “Snake Pit” which is the infield of the track where spectators often go on race day but has a reputation for rowdiness and disorderly conduct. When it comes to investing, there are probably times you might feel that your portfolio might need a trip to the garage for a “tune-up” and it might also seem that the markets undergo their own periods of rowdiness.
Last year could be considered a “rowdy” year in the markets with plenty of volatility and large losses across almost all asset classes. This year has been tamer in comparison with the stock market slowly melting upwards and bonds providing positive returns as interest rates have pulled back. Much of the reason for the melt-up in the stock market is the widely forecasted recession has yet to materialize, with some wondering if it ever will. The move higher in the markets is also attributable to the strong performance of the biggest names in the S&P 500 index, primarily big tech as we mentioned before, with the remainder of the index being nearly flat. While the tech-heavy Nasdaq is higher by double digits, the Dow Jones Industrial Average and Russell 2000 small cap index are both barely positive on the year, so the rally has not been widespread and is in fact concentrated in a small number of very large names. Since lower interest rates lead to a larger current value of future earnings, the biggest benefactor of the recent pullback in rates has been high growth companies.
Investors remain on edge wondering what the next moves are for the Federal Reserve. Anticipation of a pivot from the Fed, reversing course and beginning to lower interest rates, has been a tailwind for the stock market this year but the market has not always been correct when it comes to foreshadowing Fed moves. A few short weeks ago futures markets were pricing in about a zero percent chance of a rate hike at the Fed’s next meeting in June, but now that has increased to 25% so some intrigue remains into the Fed’s next move.
First quarter earnings season winds down this week but there are still notable names to report including some major retailers which will provide further signs about the health of consumers. Reports last week from Wal-Mart and Target indicated that spending is slowing and consumers are more price conscious. Debt ceiling negotiations will continue and could provide some volatility on a daily basis, but as mentioned earlier, barring the scenario where an agreement is not reached, this probably will not have a significant longer-term impact on the markets. There are also several economic releases this week which will provide indications on the health of the economy, with perhaps the most notable being the Fed’s preferred inflation gauge: the Personal Consumption Expenditures (PCE) Price Index. Current odds are showing the Fed will pause interest rate hikes at their next meeting but another elevated reading of PCE with no signs of significantly subsiding may be enough to push the Fed to raise rates another quarter point.
This week is the last full week in May and often is the case where markets are quieter over the summer. Should you “sell in May and go away?” We remain long term investors and do not advocate for trying to time the market, but there is little on the horizon that makes us think the market is going to make a large move in coming months. However, it is not worth the risk of not being invested and waiting for the right opportunity should a catalyst occur that sends markets soaring. As we have been discussing, many people are waiting for a recession, which may not occur, and if economic conditions improve considerably the markets are likely to move higher quickly.
Car racing is very fast but takes a considerable amount of preparation and one small error while on the racetrack can have a catastrophic effect. Both can also be said for retirement planning- it also takes a great deal of planning and can easily be derailed. Be certain you feel safe in your retirement and do not need to spend it under the caution flag. We would be glad to discuss your situation and help ensure you make it to the winner’s circle.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260