Weekly Market Update: Market Indicators Rise as Small Business Optimism and Consumer Sentiment Show Mixed Results

• Stock market indicators continue upward trend, benefiting from Federal Reserve’s moderate approach.
• Small business optimism increases slightly, but hiring challenges persist and sales expectations decline.
• Consumer sentiment improves, reflecting higher confidence in current economic conditions and future expectations.

The main stock market indicators continue to rise, benefiting from a more moderate approach by the Federal Reserve, and contributing to the recent upward trend. The S&P 500 recorded its best weekly gain since the end of March. Growth and large-cap continued to dominate the broader-based mid and small-cap indices. The TSX managed a 0.5% gain on the week despite a 2.4% increase in the price of oil. Strong rallies off the bottom for the Nasdaq and the S&P 500 have many debating whether we have entered a new bull market.   

On Tuesday, the National Federation of Independent Business released the latest survey of small-business optimism. Business optimism increased 0.4 points in May to 89.4, which is much lower than the 49-year average of 98. The report outlined three key findings:

1. 44% of business owners reported jobs were hard to fill, down one point since April
2. Owners raising average prices decreased one point to a net 32%, which is still an inflationary level but trending down
3. The percentage of owners anticipating a significant increase in actual sales declined by two points, going from April to a net 21%. Small business owners expecting better economic conditions over the next six months declined one point to a net negative 50%. Twenty-five of owners reported inflation was their single most crucial problem.¹ On Tuesday, the U.S. Department of Labor reported that the headline Consumer Price Index rose 0.1% in May. Over the last 12 months, the index increased 4% compared to 4.9% in April. Shelter, used car and truck prices significantly contributed to the index. Core inflation, excluding food and energy, rose 0.4% in May, and for the 12 months ending in May, rose 5.3% overall. As seen below, if the monthly inflation rate is less than 0.2% in June, the 12-month inflation will decrease for the 12 months from 4% to 3%.²

On Wednesday, in another sign that inflation is ebbing, the U.S. Department of Labor reported that the Producer Price Index for final demand declined 0.3% in May – the third decline in the last four months. In the previous 12 months, the increase in wholesale prices slowed to 1.1% compared to April’s 2.3%. The core Producer Price Index (PPI), excluding food and energy, was flat in July 2022. Prices for final demand foods fell 1.3% and energy 6.8% compared to the index less food and energy increasing 0.1%. Final service demand increased by 0.2%, followed by a 0.3% jump in April.³ 

On Thursday, the U.S. Labor Department reported that initial unemployment jobless claims for June 10 were 262,000, unchanged from the previous week. Claims for all benefit programs ending May 27 were 1,619,334, a decrease from the prior week of 15,556.⁴ In another sign of economic resilience, retail sales increased by 0.3% in May. Sales for new autos and auto parts increased by 1.4%, offset by gas receipts falling 2.6% on lower gas prices. Consumers continued to shift spending patterns to services over goods.⁵    

Also on Thursday, two indicators of regional measures of manufacturing sentiment were conflicted. The Philadelphia Federal Reserve’s Manufacturing Index fell to a negative 13.7 in June – down from the previous month of 10.4. The New York Empire State Index jumped to 6.6 in June from a negative 31.8 in May, which indicates significantly improving economic conditions.^6&7

On Thursday afternoon, the much-anticipated Federal Open Market Committee meeting concluded with the announcement that they opted to hold the benchmark interest rates steady. The current federal funds rate target remains at 5-5.25%, but most of the members of the FOMC expect rates to rise further by year-end. In the press conference following the rate announcement, Chairman Powell mentioned that, while the economy had slowed, the committee members thought the full impact of the previous hikes had yet to work through the economy.⁸   

On Friday, the University of Michigan surveys of consumers reported that the Index of Consumer Sentiment improved to 63.9 from May’s reading of 59.2, the Survey of Current Economic Conditions improved to 68.0 from 64.9 and the Index of Consumer Expectations ended higher at 61.3 from 55.4.⁹ 

While the U.S. Fed’s pause provided optimism that the end is near for rate increases, much work still needs to be done to achieve the long-term goals. However, the market reaction reflects an interpretation that the Fed may not have to raise rates any further, as the economy gradually slows. In the past, markets have performed well once the Fed pauses. 

Sources:

¹https://www.nfib.com/surveys/small-business-economic-trends/

²https://www.bls.gov/news.release/pdf/cpi.pdf

³https://www.bls.gov/news.release/pdf/ppi.pdf

⁴https://www.dol.gov/ui/data.pdf

⁵https://www.census.gov/retail/marts/www/marts_current.pdf

⁶https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis/mbos-2023-06

7https://www.newyorkfed.org/survey/empire/empiresurvey_overview

⁸https://www.federalreserve.gov/newsevents/pressreleases/monetary20230614a1.htm

⁹http://www.sca.isr.umich.edu/

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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