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Mixed Messages?

Equites were again mixed as all were parsing comments about the prospects of a debt deal and latest Fed speak.

FRB Chair Powell stated that interest rates may not need to rise as high given credit stress but noted that failure to tame inflation will prolong the pain, reiterating the Fed is strongly committed to returning to the 2% target.  Primarily based on this comment, swaps have reduced the odds of another interest hike at the June meeting to 25%, down from 40% yesterday.

President Biden urged negotiators to keep pursuing a debt limit deal after Speaker McCarthy indicated that both sides may reach an agreement very soon.  However, pessimism returned following headlines the Republican negotiators abruptly left a closed-door meeting, reminding all that debt ceiling risk continues to loom.  As noted last week, high stakes political drama could return at moment’s instance.

Returning to FRB Chair Powell’s remarks, Powell stated the positive supply shock from globalization was halted and reversed by the pandemic and the positive experience of the pre pandemic decades may not be repeated.

Powell said if this indeed the case, this would “argue for a higher trend level of inflation and arguably the neutral interest rate.” 

The relative resilience of the hard economic data in the face of elevated rates suggests that the current neutral rate is above the 2.5% threshold that the Fed first estimated in 2019.

Writing it differently, availability is now the primary determinant of a purchasing decision, not price as trade has been weaponized.  Reliability has replaced efficiency.

Many times, the narrowness of 2023 markets have been discussed.  Bloomberg writes five names are responsible for almost 80% of this year’s advance and 7 names 90% of the gains.

Here is another milestone according to the Newswire.  Apple, the most valuable company comprising 7.4% of the S & P 500 capitalization is worth more than the entire Russell 2000 index of small caps. [Microsoft is 6.6% of the S & P 500]

Wow!  Just as an aside, according to the Investment Company Act of 1940, a diversified mutual fund is partially  defined as not having any one company comprised of more than 5% of its assets.  Can it be suggested the S & P 500 is no longer diversified based upon this definition?

The economic calendar is comprised of several housing statistics, manufacturing surveys and revised GDP data and ancillary inflation data points.

Last night the foreign markets were mixed.  London was down 0.01%, Paris down 0.33% and Frankfurt down 0.29%.   China was up 0.39%, Japan up 0.90% and Hang Seng up 1.17%. Futures are flat ahead of high profile debt ceiling negotiations between the President and the Speaker.   The 10-year is up 2/32 to yield 3.70%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.