Market Recap 5/22/2023 | StreetFins®

1. A Volatile Week

U.S. stock indexes had a volatile week, starting on a negative note but ultimately shifting in a positive direction towards the end. The NASDAQ stood out with an impressive 2.5% total return, while the S&P 500 managed to add 0.3%. Conversely, the Dow slipped 1.0%.

Debt concerns took center stage as talks to lift the federal government’s debt ceiling and avoid a potential debt default progressed slowly. The sluggish pace of negotiations between Congress and the White House initially weighed on the markets, but reports of progress later in the week provided some relief and shifted the momentum.

Yields on the 10-year U.S. Treasury bond rebounded for the second consecutive week, reaching the highest level in two and a half months. Closing around 3.80% on Friday, the yield had risen from 3.46% a few weeks earlier, although it remained below the recent peak of 4.07% in March.

The NASDAQ continued its strong performance, outperforming the S&P 500 and the Dow for the fifth consecutive week. This achievement was largely driven by robust results from selected information technology stocks. Over the past five weeks, the NASDAQ gained an impressive 7.5%, while the S&P 500 added 1.7%, and the Dow experienced a decline of 2.1%.

Earnings season concluded with mixed results, as companies in the S&P 500 recorded an average earnings decline of 2.2% compared to the same quarter a year earlier. This marked the second consecutive quarterly decline. However, the consumer discretionary sector stood out with remarkable earnings growth of 55%.

Minutes from the U.S. Federal Reserve’s policy meeting revealed a split among officials regarding the potential need for another interest-rate increase in the near future. While some officials anticipated an economic slowdown that might eliminate the need for further rate hikes, others believed another increase could be necessary. The upcoming June meeting will provide further insights into the Fed’s decision-making.

Inflation concerns persisted as the U.S. Federal Reserve’s preferred inflation tracking gauge showed an uptick in consumer prices during April. The Personal Consumption Expenditures Price Index rose at a 4.4% annual rate, slightly higher than the 4.2% increase observed in March. Excluding food and energy prices, core inflation rose to 4.7% in April compared to 4.6% previously.

Overall, the U.S. stock market experienced a week of ups and downs influenced by factors such as debt concerns, yield fluctuations, earnings performance, Federal Reserve dynamics, and persistent inflation. While earnings results were mixed, the NASDAQ’s strong performance provided a glimmer of optimism. Investors will continue to monitor developments related to the debt ceiling and Federal Reserve decisions in the coming weeks.

2. The Debt Ceiling

In the week ahead, investors can expect debt ceiling concerns to fade as the focus shifts towards the Federal Reserve’s rate announcement and the May jobs report. President Biden and House Speaker Kevin McCarthy reached a tentative debt ceiling deal, alleviating some of the uncertainty. Key data points on the housing market, consumer confidence, and corporate earnings reports will also be in the spotlight. Chipmaker Nvidia’s impressive earnings pushed the company towards a $1 trillion market cap and led to a rise in tech stocks, with the Nasdaq Composite outperforming the S&P 500 and the Dow. The May jobs report is anticipated to show an increase in nonfarm payroll jobs, which will be reviewed by the Federal Reserve ahead of their upcoming meeting. Inflation concerns continue as data shows higher-than-expected inflation rates. Earnings reports from technology and retail companies, including HP, Salesforce, Okta, Dell, Macy’s, and Lululemon, will provide further insights into the consumer landscape. Despite some mixed results, S&P 500 companies have been beating Wall Street estimates. The AI industry remains a focal point, with C3a.i. expected to report earnings, and the hype around AI has contributed to the market’s overall rally. With uncertain macro narratives, investors are finding conviction in the micro narrative of AI.

3. Farmland vs. Inflation

In an era of historic inflation, farmland has emerged as an alternative investment that provides diversification and potential hedging against persistent price pressures. Farmland has shown to be more inflation-linked than gold, outperforming in times of high inflation. It also exhibits low correlation with other asset classes, with an almost zero correlation to the S&P. AcreTrader, a farmland investment company, caters to accredited investors seeking stability and diversification. Farmland investments offer slow and steady compounding returns, typically in the low-double-digit range. The return profile is consistent and less volatile compared to mainstream asset classes. Farmland also exhibits attractive risk-adjusted returns, with a high Sharpe ratio. It has the potential to be inflation-linked and has little correlation with other asset classes. Risk management involves underwriting risk and ensuring the purchase of farmland is well-informed. Farmers tend to be stable partners, and the ecosystem exhibits low default rates. Appreciation of farmland has been relatively muted in the years before the pandemic but has seen catch-up and double-digit growth in recent years. Rents and farm income have also generally increased during the same period.

Summary:

U.S. stock indexes experienced a volatile week with the NASDAQ leading the way with a 2.5% return, while the S&P 500 added 0.3% and the Dow slipped 1.0%. Debt concerns and slow progress on raising the debt ceiling initially weighed on the markets but improved momentum was seen later in the week. Investors can expect debt ceiling concerns to fade as a tentative deal was reached, shifting focus to the Federal Reserve’s rate announcement and the May jobs report. Chipmaker Nvidia’s strong earnings pushed tech stocks higher, while the May jobs report and inflation concerns remain in focus. Key data points on housing, consumer confidence, and corporate earnings will also be watched. Farmland has emerged as an alternative investment providing diversification and a potential hedge against inflation. It has shown to be more inflation-linked than gold and exhibits low correlation with other asset classes. Farmland investments offer stable and consistent returns with low volatility, making them attractive for investors seeking stability and diversification.