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Financial Market Update – Week of 02/27

February 27, 2023

After starting 2023 with a boom in January, major U.S. stock indexes fell last week, marking the third straight week of declines for the S&P 500.

Summarizing last week’s U.S. equity market index activity, the large-cap S&P 500 shed 2.67%, the Nasdaq 100 decreased by 3.14%, and the Dow Jones Industrial Average dropped by 2.99%

Inflation Acceleration?

Factoring into the equity market declines last week was the Federal Reserve’s inflation gauge of choice: core personal consumption expenditures. Last week’s reading, representing the month of January, showed a monthly rise of 0.6% and a yearly uptick of 4.7% versus expectations for 0.5% and 4.4%, respectively.

The higher-than-expected Core PCE data should keep the Fed on alert and could contribute to a ” higher rates for longer” narrative.

U.S. Government Bond Yields Rise

U.S. 10-year note yields settled higher last week, finishing the holiday-shortened trading week near 15-week highs.

Friday’s 10-year note yield settlement was 3.948%, up from its 3.827% settlement the previous week.

Rate hike uncertainty and renewed inflationary concerns contributed to the rally in yields. For those keeping score at home, the 2-year/10-year Treasury yield curve remains inverted.

Big Retailers Offer Cautious Outlooks

It was a tough week for the retail sector. In fact, it was the worst one since July 2022, as both Walmart and Home Depot issued cautious guidance.

Walmart topped consensus estimates for the fourth quarter but issued a cautious sales outlook for 2023. 

Walmart’s Chief Financial Officer John David Rainey said, “Our value proposition is certainly resonating with consumers right now, but there’s a lot of macroeconomic uncertainty. We’re adopting a cautious outlook, and we want to make sure we’re responsive to whatever environment we’re going to find ourselves in.”

Home Depot struck a similar tone albeit with less positive results, as the retailer’s Q4 revenue missed analyst expectations for the first time since 2019.

The home improvement retailer saw outsized growth over the last couple of years, boosted by the pandemic home improvement boom. The current macroeconomic backdrop seems to be impacting sales, however.

Home Depot FCO Richard McPhail said, “So we work from kind of a fundamental assumption that consumer spending will be flat. We know that our market has seen a gradual shift that reflects the broader shift in the economy, in consumer spending from goods to services.”

Q4 GDP Revised

Fourth quarter gross domestic product (GDP) data was revised lower last week, with revised data showing a 2.7% year-over-year gain versus the 2.9% initial estimate.

The GDP revision was linked to a downward revision in consumer spending, while the Federal Reserve’s key inflation metrics were revised higher.

Between the GDP revision, CPI, and Core PCE, the cumulative data contributes to a backdrop that favors more interest rate hikes.

Quiet Economic Calendar

The economic calendar is a quiet one this week. The environment could be a good backdrop for the markets to catch their breath after factoring in more rate hikes at future Fed meetings.

Consumer confidence, ISM Manufacturing Purchasing Managers’ Index, and ISM Services Purchasing Managers’ Index are the major economic data points for release this week.

Present Theme

The Fed has broadcasted several clues over the last month that its rate hike crusade may not be over. Now, the Fed has more data in the form of higher Core PCE to use as ammo for future rate hikes. Let’s remember that the Fed has communicated that their policy decisions will be “data-dependent.” Well, the most recent inflation data points have been higher than expected.

A Reminder Regarding Our Commitment

As we continue on our long-term investing journey, it’s important to stay focused on long-term goals, not short-term developments. Markets do not move up or down in a straight line.

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