Weekly Recap:

by Eric Criscuolo & Michael Reinking, CFA

The S&P 500 ran its weekly winning streak to 8 last week. It also had risen in 9 of the past 12 months coming into May. That’s even better than Landry Shamet’s 3-point shooting percentage during the playoffs (60% by the way). A decline in oil provided support for equities overall as we continued to set record highs.

This was a short week owing to the rather soggy Memorial Day weekend. Despite the weekend rainout it was still nice to know the cycle of the seasons continued as Summer returned once again,  unofficially at least, in the Northern Hemisphere. Speaking of cyclicality, Iran headlines continued to toy with the idea of progress towards a resolution. Maynard James Keenan coos that “Constant. Over. Stimulation Numbs Me”, but markets have not yet become completely numb to the parade of news that have offered more hope than finality. 

We’ll continue to wallop the lifeless equine here. Reports out of Iran of a Memorandum of Understanding drove some optimistic price action on Wednesday. Axios then delivered one of their patented Hormuz Headline Humdingers, reporting on Thursday that the US and Iran reached a deal on a 60-day MOU to extend the ceasefire and launch nuclear talks- not missiles, thankfully. Just a little while later, multiple reports confirmed the reporting, just awaiting Trump’s sign-off. On Friday Trump announced he would lift the naval blockade of Hormuz if the Strait is opened but did not reach a conclusion on the tentative agreement overall. There’s a couple of issues that are kinda big and remain outstanding beyond the Strait: nuclear weapons for instance. Notwithstanding this minor detail, it seems to be the most tangible progress on the Iran situation since the ceasefire and at least partially validates the market’s position throughout the conflict that a resolution was in the near-future.

Since the war began February 28, the S&P is up 10%, reaching successive record highs. Maybe even more eye-opening is the Russell 2000 up 11%. That has happened despite Brent crude up ~30% and the 10y yield up 50bp (and as high as 70bp) since the bombing began.

For the week the S&P 500 ended up over 1%, hitting yet another record high and closing in on the next whole number milestone at 7600. It also took its weekly winning streak to 9, closing in on the 11-staright playoff wins by the Knicks.

The equal-weight S&P modestly underperformed with many large cap tech names seeing big gains, but still managed to rise 1%. The Russell 2000 outperformed. A pull back in yields and oil were tailwinds for equities overall and especially for the small caps, which also saw big gains in thematic groups.

Tech was the big winner as the sector gained almost 5%. The NYSE 100 gained 4%, NYSE Semiconductor index gained 6%, IGV software ETF 8% and the DRAM memory ETF added 20%. That’s only its second biggest weekly gain since debuting two months ago. The gain includes South Korea’s SK Hynix jumping another 20% as it became the latest member of the trillion dollar market cap club.

Sector breadth was less robust as only 4 of 11 sectors were higher. Tech led as we mentioned. Consumer Discretionary benefitted from crude’s second straight weekly decline.  Retail earnings were generally solid but stock reactions were mixed, though the XRT retail ETF rose by 2%. Travel and Leisure names are benefiting from the decline in oil and the gaming group saw the long-sought acquisition of CZR by Fertitta Entertainment for ~$18B EV.

Retail earnings were generally solid, stock reactions were mixed.

Materials gained as well as oil’s retreat and Iran progress eased concerns around input costs. Energy was the obvious laggard as crude fell >10%, though US natural gas rose ~10%. Defensive sectors also lagged. Staples fell 3% and Utilities 2%.

Higher-risk areas of the equity market saw very strong gains until Friday. The space sector was mooning with many smaller companies up over 20% into Friday. A (slightly) lower valuation for SpaceX plus the explosion of a Blue Origin rocket hit those names with some gravity on Friday. Quantum computing saw similar price action, though a lot of the move higher was concentrated on Thursday after IBM announced $10B in quantum investments over the next five years. Neoclouds and rare earth names also saw solid gains this week.

As we close out May, let’s look at monthly performance. The S&P is up 5%, just about doubling up the equal-weight index as big tech saw sharp gains. The NYSE 100 Index was up over 10% and the ICE Semis over 20%. Given that, it should be no surprise that Tech was easily the best sector in May, up just under 15%. Energy and the defensive (and yield-sensitive) Utilities lagged, down 6%. Consumer Staples, another defensive sector was down as well, as were Financials. Banks and Insurance names were mostly lower while financial services were mixed.

It’s been quite the recovery for software stocks. At the worst of the “SAAS-pocolypse” the IGV software ETF was down over 25% YTD.  Since mid-April it has made it back to almost unchanged.

Despite the relentless move higher, there are Caution signs on the road. Only 25% of stocks in the S&P 500 beat the index’s 5% gain this month. The median S&P stock is 14% below its 52w Closing High and about 30% of stocks are at least 20% below their 52w high.

Citadel’s Scott Rubner took it a step further. Just 28% of S&P 500 stocks outperformed the index over the past 30 trading days, a 1st percentile observation over the past 30 years. 

The NAAIM Exposure Index hit 98.39 this week, the highest since December 17. A reading of 100 indicates NAAIM members are fully invested in the market. Anything over 100 indicates leverage. The room to add more exposure is shrinking without driving leverage higher. 

Nomura’s Charlie McElligot noted the extreme reach for upside and abandoning of downside protection in the semiconductor space as Call Skew mooned while Put Skew all but disappeared.

Equities have reached record highs as volatility (VIX) is hitting very subdued levels (~15). A lot of that is due to a divergence between correlations (green line below) as they fall and dispersion between the index and its constituents (grey line) as it rises. Stocks are moving more independently and with wider variance, but the net effect is more calm at the index level.

It was a bit of a quieter week on the economic data front. On Tuesday, the Conference Board released its Consumer Confidence which ticked slightly lower from April driven by the present situation index while the expectations index improved. I thought it was worth highlighting that this reading has not been as negative as the U of Mich survey which fell sharply last week. 

The impact of inflation has been a big driver of that negativity. This week's personal income and spending were yet another set of data points highlighting that the consumer, particularly at the low end of the income scale, could be running on borrowed time (pun intended). Personal spending was in line with expectations of 0.5%. However, income was flat m/m below estimates and down from the 0.5% increase last month. The personal savings rate fell to 2.6% and has been steadily declining over the last couple of years.

Durable goods orders were exceptionally strong up 7.9% over twice the estimate, with aircraft orders jumping 165%. However, when stripping out defense and aircraft, orders fell 1.1% - a rare decline in that metric over the past two years (see below), which is often viewed as a proxy for business spending.

Initial claims continued to tick up but remain low on an absolute level. Continuing claims data was pretty much in line with estimates and stayed on trend.

Which takes us to the main event of this week’s economic data PCE. Headline and core PCE rose 0.2% and 0.4% m.m, respectively, slightly below consensus and last month. The annual readings were spot on with expectations up 3.8% and 3.3% respectively, but up from last month, highlighting the lingering inflation issue for markets and the Fed. Below I’ve included, what is admittedly a very busy chart, looking at 6mo/12mo annualized PCE/Core but I’ve also included the Dallas Trimmed Mean PCE, which has been called out by new Fed Chair Warsh as his preferred gauge of inflation. The reading removes the outliers that rose (31% of the upper tail) and fell (24% of the lower tail) in an attempt to normalize the data to identify trend inflation.

As you can see this has been running below core-PCE however, this will lag as the impact of higher energy costs move through the system. Some of the items that were removed from the upper tail this month included not surprisingly fuel/gasoline, electricity and various food related products. However, computer software/accessories which was up 80% in the month, this is the impact of AI capex spending and isn’t likely to fully go away. It looks like the Knicks were impacting some of this data with tickets for spectator sports falling 18%, primarily in Atlanta, Philly and Cleavland but this will likely snap back and end up in the upper tail next month. The cost just to get in the door at MSG around $3,500 and bring your binoculars. 

After hearing from Fed Waller last week about removing the easing bias there has been a steady stream of Fed officials expressing concern of inflation moving in the wrong direction and prematurely viewing the impact of the Middle East as transitory.

Throughout the week yields have been drifting lower as oil prices have pulled back, reversing a good portion of the move higher over the last two weeks. Treasury yields are down 10-15bps across the curve. The odds of a hike by year end have dropped from 66% last Friday to ~45%. The USD index moved a touch lower this week after moving higher earlier in the month.

Global Equities - Tech heavy indices lead, China/India move lower - a microcosm of the month

Labor market data will be a key part of the calendar next week. The monthly non-farm payrolls will be out Thursday and ADP, Challenger cuts, initial claims and JOLTS data will preview that release. ISM PMIs will provide the latest broad look at the US economy. Most importantly, the Knicks will take the court in the NBA Finals. Have a great weekend.     

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