The Personal Income and Outlays report showed personal consumption expenditures (PCE) rose a better-than-expected 0.8% m/m in March, indicating overall consumer spending remains robust.

Highlights for This Week Include:

  • Manufacturing conditions remain sluggish but consistent with further economic growth.
  • The labor market is showing signs of softening but remains tight and is supporting strong consumer spending that is keeping inflation stubbornly above the Federal Reserve’s (Fed’s) 2.0% objective. This suggests fewer potential interest rate cuts this year by the Fed than expected earlier in the year.
  • Pullbacks of 5% - 10% are to be expected in any given year, and so far, this pullback looks normal within an ongoing bull market. Profits, which provide the ultimate support for stocks, continue to come in better than expected and should be supported by the ongoing economic expansion.

Manufacturing Conditions Remain Sluggish

The April ISM Manufacturing PMI (a timely business survey of manufacturing conditions) slipped back below the 50 expansion/contraction mark, where it has been in 17 of the past 18 months. Major measures of activity were mostly lower, with new orders falling back into contraction, production growth moderating, and employment, inventories, and supplier delivery times all still contracting. The ISM estimates that the latest PMI corresponds with 1.9% annualized economic growth.

Labor Market Shows Signs of Softening

A major objective of the Fed’s higher interest rate policy is to cool an overheated labor market. The latest JOLTS report showed further progress on this objective. Job openings fell 3.7% in March to 8.5 million, the lowest level since February 2021. The job openings/unemployed ratio edged down to 1.32 from 1.36 in the prior month. It has come down substantially from peak levels earlier in this cycle, but it is still higher than pre-pandemic and higher than 1.0, indicating that there are more job openings than workers looking for jobs.

While the labor market has moved toward better balance, overall conditions continue to be tight. As a result, wage growth has moderated over the past year and a half, but it is still elevated and inconsistent with 2.0% inflation.

Tight Labor Market Supports Strong Consumer Spending but Keeps Inflation Elevated

The Personal Income and Outlays report showed personal consumption expenditures (PCE) rose a better-than-expected 0.8% m/m in March, indicating overall consumer spending remains robust. However, the tight labor market and strong consumer spending are contributing to stubbornly high inflation, with PCE prices (a preferred Fed inflation metric) rising 2.7% y/y, up from 2.5% in the prior month and above the Fed’s 2.0% objective. This reading suggests a lack of further progress toward the Fed’s goal and implies a delay in any potential interest rate cuts this year by the Fed.

Thoughts on April’s Stock Market Performance and Earnings Season

The S&P 500 fell 4.2% in April, with ten of the 11 sectors declining during the month. Leadership was mostly risk-off, with Utilities (supported by data center and AI demand growth projections) the lone sector registering a gain in April. Energy (supported by geopolitical concerns) and Consumer Staples (defensive earnings) also held up relatively well, both falling around 1.0% during the month. Real Estate has been the most negatively correlated with interest rates over the last year and was the biggest loser in April, plummeting 8.6% as the 10- year Treasury yield moved back above 4.5% for the first time since November.

While April was a tough month for stocks, we continue to view the current stock market pullback as a normal occurrence in an ongoing bull market. Major bear markets are usually associated with economic recessions while current economic indicators are consistent with further growth.

Stocks are ultimately supported by corporate profits, and earnings continue to come in better than expected. In aggregate, first-quarter earnings season has been solid. With 54% of S&P 500 companies reporting, 81.8% have beaten consensus estimates, up from a beat rate of 78.3% last quarter. Eight sectors currently have beat rates north of 80%, and seven sectors have a higher beat rate this quarter compared to last.

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