Stock Market This Week

The post Stock Market This Week – 05/27/23 appeared first on Dividend Power.

Stock Market This Week – 05/27/23

Negotiations continue between the administration and Congress in the United States about the debt ceiling limit. Likely a compromise will be reached because neither side wants to be held responsible for default. Moreover, both sides seemingly got serious once two credit rating agencies put the U.S. triple-A rating under review with negative sentiment. Ultimately, no one wants a credit downgrade under their watch.

Besides the debt ceiling, the American economy displays strength and growth. Unemployment is at a record low across almost all demographics. Twenty states reported unemployment rates below 3%, while South Dakota had the lowest percentage at 1.9%. The bottom line is anyone who wants a job can find one. But the flip side is that labor costs will continue to increase for companies. Whether the American economy enters a recession or not is unknown. However, it would take a significant economic shock to cause a major recession at this point.

Stock Market This Week – 05/27/23

Stock Market Overview

The stock market put in a mixed week, with mega-cap tech stocks continuing their upward climb.

Positive statements late in the week and outstanding results and outlook from Nvidia (NVDA) caused the Nasdaq and, eventually, the broader market to surge. The FANG stocks dominated social media and streaming. But the next big thing is seemingly Artificial Intelligence (AI). The software and AI models are important, but Nvidia and a few other chip makers are well-positioned to provide hardware. Nvidia pays a small dividend but is not a dividend growth stock. But the price-to-earnings ratio (P/E ratio) has spiked to nearly 50X, making it overvalued.

As shown by data from Stock Rover*, all the major indices increased this week except the Dow Jones Industrial Average (DJIA). The Nasdaq performed best, followed by the S&P 500 Index and the Russell 2000.

Two of the 11 sectors had positive returns for the week. Technology, Communication Services, and Consumer Cyclical were the top three sectors for the week. But the Healthcare, Consumer Defensive, and Basic Materials sectors performed worst.

Oil prices rose to nearly $73 per barrel. The VIX spiked almost 16% but is still at its long-term average. Gold continued to fall and is below $1,950 per ounce.

The U.S. stock market is closed on Monday, May 29th. Also, the bond market and banks are closed.

Source: Stock Rover*

Year-to-Date

The Nasdaq is performing the best for the year, followed by the S&P 500 Index, Russell 2000, and the Dow 30. Notably, the Nasdaq is in a bull market. In addition, 5 of the 11 sectors are up year-to-date. The three best-performing sectors are Technology, Communication Services, and Consumer Cyclical. But the worst-performing sectors are Financial Services, Utilities, and Energy.

Source: Stock Rover*

The dividend growth investing strategy is struggling year-to-date because the market favors tech stocks that do not pay dividends. The table below shows their performance by category. But passive income streams continue to rise.

CategoryYTD Return (%)Dividend Kings(-2.7%)Dividend Aristocrats(-0.7%)Dividend Champions(-3.9%)Dividend Contenders+5.3%Dividend Challengers(-4.9%)Source: Stock Rover*

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 24.34X, and the Schiller P/E Ratio is about 29.48X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively.

The market is still overvalued despite the recent correction and a bear market and rebound. Earnings multiples of more than 30X are overvalued based on historical data.

Economic News This Week

Provided by Stock Rover*.

Home Construction

The U.S. Census Bureau reported that sales of newly built homes increased (+4.1%) in April from a downwardly revised March rate of 656,000. The report is the strongest reading since March 2022. However, the headline numbers show that prices fell while new home sales jumped. The April seasonally adjusted annual rate of 683,000 is down (-11.8%) from a year earlier—the South lead sales (+17.8%), followed by the Midwest (+11.8%). New home sales plummeted in the Northeast (-58.6%), followed by the West (-9.1%).

The average sale price for a new home sold in April was $501,000, down from $559,200 the previous month. The median new home sales price dropped from $455,800 in March to $420,800 in April. There were 433,000 new homes for sale as of the end of April, the vast majority of which were either under construction (263,000) or not yet started (100,000). The supply of new homes for sale decreased to a 7.6-month supply in April, compared to 7.9 months in March. The supply of new homes for sale in April 2022 was 8.5 months.

U.S. Federal Reserve

The minutes from the May FOMC meeting showed that the decision to raise the benchmark federal funds rate by 25 basis points was not unanimous. Some members commented, “that progress in returning inflation to 2% could continue to be unacceptably slow”. At the same time, other participants noted that “if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.” The economic forecast was somewhat muted, as it assumed “that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery.”

Almost all participants noted that the downside risks to growth and the upside risks to unemployment had increased as recent banking sector developments could lead to a tightening of credit. Almost all participants stated, “with inflation still well above the Committee’s longer-run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook.” A few participants commented that “they also saw some downside risks to inflation.”

Gross Domestic Product

The Bureau of Economic Analysis’ second estimate on the first-quarter gross domestic product (GDP) growth reported an economy expanding at a seasonally adjusted annual growth rate of 1.3%, a deceleration from the 2.6% pace set in the fourth quarter, and up slightly from the first estimate of 1.1%. A revision in inventories was a primary contributor to the upward revision, as the growth in inventories contracted by $129.6B instead of the originally reported $138.0B. The inventory slowdown took 2.10 percentage points off the headline number instead of the initially reported 2.26 percentage points. In addition, business investment increased an upwardly revised (+1.4%) and followed a (+4.0%) reading in the prior quarter. As a result, business investment added 0.18 percentage points to the headline number.

As measured by personal consumption expenditures, consumer spending was strong, increasing an upwardly revised (+3.8%), up from (+1.0%) in the previous quarter. Thus, government consumption expenditures were upwardly revised to (+5.2%) and added 0.89 percentage points to the headline number. The personal consumption expenditures price index, a closely watched measure of inflation by the Federal Reserve, was unrevised (+4.2%), as compared to (+3.7%), (+4.3%), (+7.3%), and (+7.5%) over the previous four quarters. Core personal consumption expenditures, which strips out food and energy, increased an upwardly revised (+5.0%), as compared to (+4.4%), (+4.7%), (+4.7), and (+5.6%) over the four previous quarters.