Market Recap 5/18/2023 | StreetFins®

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A recap of the past week in 3 short headlines.

Fourth Week in A Row

In the latest week, the U.S. stock market experienced positive gains, with the NASDAQ leading the way for the fourth consecutive week. The S&P 500 finally broke free from a narrow range it had been stuck in since April, recording a notable 1.6% increase. This market review covers several key developments, including the continued outperformance of growth stocks compared to value stocks, the rise in bond yields, Germany’s record-breaking stock market, declining concerns about inflation, and the overall calmness observed in the market despite ongoing discussions about the U.S. government debt ceiling.

U.S. large-cap growth stocks maintained their impressive performance and continued to outperform their value counterparts by a significant margin. The growth equity style showed strong year-to-date performance, with the growth index achieving a substantial 19% gain as of Friday. In contrast, the value index saw nearly flat results during the same period. Investors closely monitored U.S. government debt ceiling negotiations, which contributed to a rebound in the yield on the 10-year U.S. Treasury bond. The yield reached its highest level in over two months, trading around 3.69% on Friday. Although this marked a notable increase from the low of 3.29% seen in early April, it remained well below the peak of 4.07% observed on March 2.

Germany’s stock market index set a new all-time high, surpassing its previous peak from November 2021. The strong performance of major European markets, including Germany, has outpaced that of U.S. indexes, underscoring the strength of the European economy.

There has been a decline in discussions of inflation during corporate earnings conference calls for the third consecutive quarter. FactSet data reveals that the number of S&P 500 companies mentioning inflation during the first-quarter earnings season decreased to 278, down from 352 in the previous quarter and 402 in the third quarter of the previous year. This trend suggests a potential easing of inflation concerns among corporate leaders. Despite ongoing uncertainties surrounding the U.S. government debt ceiling talks, the market has remained relatively calm. The Cboe Volatility Index (VIX), an indicator of short-term stock market volatility, has been significantly lower than its peak in mid-March. On Friday, the VIX was approximately 37% lower than its level on March 13, when market volatility increased due to bank failures. This relative market calm reflects investor confidence despite potential challenges.

In conclusion, the U.S. stock market experienced weekly gains, with the NASDAQ leading the way and the S&P 500 breaking free from a previous range. Growth stocks continued to outperform value stocks, and bond yields rose while remaining below their previous peak. Germany’s stock market achieved a new record, highlighting the strength of the European economy. Moreover, declining mentions of inflation during earnings calls and a relatively calm market atmosphere demonstrate positive sentiments among investors.

2. Too Strong?

The US economy is experiencing a slowdown, but it may still be too strong to bring down inflation and avoid a recession. The gross domestic product (GDP) growth rate decreased to 1.1% in the first quarter of the year compared to higher rates in previous quarters. The Federal Reserve has been trying to cool down the economy to combat high inflation while avoiding a recession. They have raised interest rates to over 5% from near zero in the past 15 months, which slows down the economy by reducing consumer spending and business investment. Inflation has started to taper off, but it is uncertain if the economy will slow down enough to reach the Fed’s 2% target for inflation without further interest rate increases. The second-quarter evidence is mixed, with consumer attitudes souring and reduced spending on big-ticket items. However, retail sales have risen, especially in the auto industry. The labor market remains strong, with businesses hiring and adding jobs, keeping the unemployment rate low. The strong labor market presents a challenge as rising wages contribute to inflation. The Fed may need to raise interest rates again if inflation remains high and the labor market stays tight, which increases the likelihood of a recession. Some economists predict a recession by the end of the year, citing softer consumer spending, declining business investment, and struggling housing and manufacturing industries.

3. Student Loans

Millions of student-loan borrowers, including Kate Eminger, find themselves in a state of limbo as they anticipate the end of the years-long pandemic-era freeze on payments. With the freeze coming to a close, borrowers are grappling with various concerns, such as uncertain payment amounts, communication issues with loan servicers, and accessing loan forgiveness programs. As the government prepares to resume payments on federal student loans, borrowers, advocates, and servicers are bracing for a potentially chaotic transition.

Student loan borrowers, like Kate Eminger, are facing a myriad of challenges as they approach the end of the payment freeze imposed during the pandemic. The uncertainty surrounding payment amounts and timing has caused anxiety among borrowers, as a specific date for the payment restart has yet to be determined. Additionally, significant changes to the student-loan system during the freeze have made loans more manageable for some borrowers, but navigating these benefits has become increasingly complex due to shifting rules and initiatives.

Legal battles and political pressure surrounding the payment freeze have added to the uncertainty, with lawsuits challenging the freeze and legislative efforts by congressional Republicans to end it. Such factors create additional pressure on the Biden administration to resume payments. The impact of the freeze on borrowers’ mental health has also been a concern, as uncertainty about repayment terms, forgiveness plans, and balances can lead to psychological distress and even suicidal ideation.

Another challenge is the lack of communication and resources for borrowers. Loan servicers are expected to face difficulties in handling the anticipated surge of calls, while limited resources, reduced call-center hours, and funding cuts may hinder a smooth transition back into repayment for borrowers.

To address these challenges, the Department of Education has expressed its commitment to supporting student loan borrowers. Efforts to increase accountability for loan servicers are underway, aiming to address long-standing complaints about inadequate information provision. The Biden administration has also launched various forgiveness initiatives to simplify access to existing forgiveness options. However, some eligible borrowers are still waiting for relief, raising concerns about making payments on loans that should be canceled.

President Biden’s plan to make student-loan bills more affordable through changes to the repayment system faces delays and criticism. Conservative advocacy groups and Republican members of Congress question the viability of these proposed changes. The resumption of payments will impose a significant financial burden on borrowers, similar to a tax increase, particularly at a time when inflation and economic uncertainties loom.

As the pandemic-era freeze on student-loan payments draws to a close, borrowers like Kate Eminger face a multitude of uncertainties and challenges. The lack of clarity regarding payment amounts and timing, combined with legal battles, limited resources, and ongoing system changes, adds to the anxiety and burden on borrowers. The Biden administration’s forgiveness initiatives and proposed repayment system changes aim to alleviate some of these concerns, but their full implementation and effectiveness remain to be seen. Clear communication, sufficient resources, and support are crucial to ensure a smooth transition for student loan borrowers, considering the potential impact on their financial well-being and mental health.

Summary:

The U.S. stock market saw positive gains in the latest week, with the NASDAQ leading for the fourth consecutive week and the S&P 500 breaking free from a narrow range since April. Growth stocks continued to outperform value stocks, while bond yields rose but remained below their previous peak. Germany’s stock market reached a new record high, showcasing the strength of the European economy. Declining concerns about inflation and relative market calm amid ongoing debt ceiling talks were also observed. The U.S. economy is facing a slowdown, but it may still be too strong to effectively tackle inflation and avoid a recession. GDP growth rate decreased to 1.1% in the first quarter, and the Federal Reserve has been raising interest rates to cool down the economy and combat inflation. However, uncertainties remain about whether the economy will slow down enough to meet the Fed’s inflation target without further rate increases, with mixed evidence from the second quarter. As the pandemic-era freeze on student loan payments comes to an end, borrowers face numerous challenges and uncertainties. Concerns include uncertain payment amounts, communication issues with loan servicers, accessing loan forgiveness programs, and the potential impact on borrowers’ mental health. Efforts are being made to support borrowers through increased accountability for loan servicers and forgiveness initiatives, but delays, criticism, and financial burdens persist. Clear communication, resources, and support are crucial for a smooth transition and the well-being of student loan borrowers.