Market Monitor: May Mid-Month Update

Headlines and Highlights
  • Debt ceiling talks ramp up: Negotiations between the White House and congressional Republicans on increasing the nation’s $31.4 trillion debt limit are intensifying with as little as two weeks remaining before a potential government default. House Republicans demand reductions to federal spending as condition to any agreement while President Joe Biden has insisted that raising the debt limit not be tied to spending cuts. While the two sides’ public positions remain far apart, reports suggest the framework of a possible agreement is doable. Treasury Secretary Janet Yellen said the government could become unable to pay all its bills on time as soon as June 1st if Congress does not raise the debt limit by then.
  • Inflation dips under 5% for first time in two years: Prices for airfares, hotel stays and new cars fell in April and shelter costs saw their smallest increase in a year as the Consumer Price Index ticked down to 4.9% year-over-year. Excluding the volatile food and energy categories, core CPI also edged lower to 5.4%. The annual CPI rate has now fallen for 10 straight months – growing evidence that the Federal Reserve’s rate-hike campaign to crack down on inflation is working.
  • U.S. companies show more resilience than expected: S&P 500 companies have reported better profits than Wall Street anticipated, a hopeful sign for the economy in the face of higher interest rates and regional bank stress. With first-quarter reporting season more than 90% complete, companies are on track to deliver earnings that were down for a second straight quarter but only 2.5% below a year ago, according to FactSet – less than half the predicted decline. S&P 500 firms have reported the highest percentage of positive earnings “surprises” since the third quarter of 2021, with 78% surpassing analysts’ estimates.
Chart of Interest

market monitor

Narrowly negative: S&P 500 firms steadily outperformed analysts’ bleak 1st-quarter profit estimates.
Sources: FactSet, Altair Advisers

Key Takeaways
  • The debt ceiling showdown appears headed down to the wire, as is typical for negotiations, before a possible June 1st We still expect it to be eventually resolved without a first-ever U.S. default. Both sides appear to be working seriously toward a deal, and neither would gain from an economically disastrous default.
  • Inflation’s latest decline should help keep the Federal Reserve on track to pause its interest rate-hike campaign, which Chair Jerome Powell hinted at on May 3rd after the Fed raised the rate to a range of 5.00% to 5.25%. CPI dropping under 5% means that real interest rates – the Fed’s nominal policy rate minus inflation – are now positive for the first time since May 2020. Prior rate-hike cycles have usually ended soon after real rates turned positive.
  • The Fed cited mounting concern about the recent banking turmoil, saying in a report that it could spur a broad credit crunch that slows the economy. In contrast, investors’ initial worries about the regional banking crisis appear to have ebbed. After pouring $362.2 billion into money market funds in March, investors deposited just $7.8 billion there in April, according to Morningstar Direct data.
  • Markets have been mixed in the second quarter and are likely to remain in a narrow trading range until concerns about the debt ceiling and U.S. regional banks are resolved. The S&P 500 was up 0.8% since March 31st as of mid-month while the small-caps benchmark was down 2.1% and U.S. REITs were down 1.4%. The benchmarks for international developed stocks and emerging-markets stocks were +2.9% and -0.6%, respectively. Bonds were narrowly mixed.
  • The labor market, long a linchpin of the economy, remains healthy despite slowing. U.S. job openings fell to the lowest level (9.6 million) since April 2021, down from 12 million a year earlier, but remain well above pre-pandemic levels. Additionally, U.S. employers added 253,000 jobs in April and the unemployment rate dipped to a 54-year low of 3.4%.

The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice