Weekly Commentary: 13 February 2023 – 19 February 2023
The major benchmarks ended lower in a week with relatively few important economic releases or other concrete drivers of sentiment. The S&P 500 squeezed out a small gain on Friday but still suffered its worst weekly loss in nearly 2 months as market action was dominated by concerns about the Federal Reserve. Corporate earnings seem to be coming in a bit on the light side, as the number of companies beating Wall Street estimates is lagging behind the historical average. Yields on the 10-year U.S. Treasury note rose to their highest in more than a month. Investors have also pulled a net $31 billion from U.S. equity mutual funds and exchange-traded funds in the past six weeks. The 2023 rebound has been driven in part by hopes that the Federal Reserve will cut interest rates later this year as inflation moderates even though central bank officials have repeatedly mentioned that it will be higher rates for a longer period of time to try to ease price pressures.
Stock returns were lover over the week as observed across the following three indices, with the Dow Jones Industrial Average (-0.11%), S&P 500 Index (-1.07%), and NASDAQ Composite Index (-2.37%). All of the major key market indices were in negative territory last week. Three S&P 500 sectors registered losses this week – Communication Services (-6.59%), Consumer Discretionary (-2.18%), and Real Estate (-1.99%). The main outperformers for the week were from subsectors such as Energy (+5.05%) only. For 2022 as a whole, index returns were negative for the Dow Jones Industrial Average (-8.78%), S&P 500 (-19.44%), and the NASDAQ Composite (-33.10%).
The yield-curve remains inverted as the 10Y-2Y US Treasury spread widened 2bps to -0.78%, driven by U.S 2-year and 10-year Treasury yields rising 23 bps to 4.51% and 21 bps to 3.74% respectively. Market sentiment also became more risk-on as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened 26bps to 2.96% while the CBOE Volatility Index (VIX) has jumped by 220bps to 20.53%.
The week ahead will be dominated by talk of inflation and interest rates with the consumer price index and producer price index reports due out. The Consumer Price Index report for January is forecast to show a 0.5% month-over-month rise with energy prices higher again. The headline year-over-year inflation reading is expected to drop to +6.2% from +6.5% in December. Companies including Coca-Cola Co., Paramount Global, and Applied Materials Inc. are set to report quarterly results as investors continue to parse earnings for insights about the outlook for corporate profits.
Most of the global REIT markets delivered negative weekly returns. Closer to home, the iEdge S-REIT Index (-3.75%) and all of its subsectors generated negative weekly returns. Office (-6.68%) and Hotel and Resort (-4.66) were the subsectors that fell more than the rest of the sub-sectors. REITs generally have been affected by decreasing yield spread as interest rates surged and investors price in the possibility of reduced distributions stemming from higher financing costs. However, we do expect inflows to return to the sector given the existing attractive valuations on offer and resilience offered by the REIT asset class in light of the waning global growth outlook.
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