Stocks Gain Despite Weal Economic Data; Bonds Drop Sharply

The Dow (+0.5%), NASADAQ (+3.1%) and S&P 500 (+1.7%) all gained modestly for the week.  Meanwhile taxable bonds fell about 1.4% and tax-free municipal bonds fell about 1.2%.  The poor performance of bonds was a result of the yield on the 10-year Treasury rocketing 0.23% to end the week at a two-month high of 3.69%.

Stocks gained for the week as investors appeared to be bolstered by prospects of a resolution to the debt ceiling standoff in Washington.  Otherwise, economic data last week was pretty weak.  My favorite report – Leading Economic Indicators (LEIs) – fell for the 13th straight month, which is a historically accurate predictor of a forthcoming recession.  See the chart below that shows a recession occurring after the LEIs go negative for an extended period of time.  Additionally, retail sales rose a mere 0.4%, half of what was expected.  Counting inflation, it shows that retail sales have fallen since this time last year.  Conversely, bonds fell for the week, as two of the Fed members made comments suggesting that a pause to the rate hikes may not occur in June as most investors expected.

Here are some (unconfirmed) stats I read this morning about five of the largest stocks in the US – Apple, Microsoft, Google, Amazon, and Nvidia.  These five stocks represent 25% of the market weight of the S&P 500 and have accounted for about 80% of the index return YTD.  These five stocks also represent more than three times the market cap of the entire Russell 2000 index of 2,000 small cap companies.  Lastly, those same five stocks also have an average PE ratio of 31, implying those stocks are almost double the valuation of the remaining S&P 500 index, suggesting those same companies may be overpriced.  This implies that those five giant companies are driving the indices, explaining why the tech-heavy large cap growth index is up 19% YTD while the value index is roughly flat.

^{Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.}

^{The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.}