Market Commentary — March 6, 2023

Stocks regained some positive ground last week following their worst decline in months. Energy and materials shares were particularly strong. Our NDIV index gained 3.6% last week. The S&P 500 stayed above the 200-day moving average which was a boost to investor sentiment in a low-volume week.

Economic data for the week was a mixed bag. On a positive note, the Commerce Department reported that orders for non-defense capital goods ex-aircraft, often used as an indicator of business investment, rose 0.8% in January. However, on the downside, overall durable goods orders posted their steepest decline since the height of the pandemic-related shutdowns in April 2020. Similarly, wholesale inventories fell for the first time since July 2020, but retail inventories (excluding autos) rose slightly.

In the mixed category, there was also evidence that the manufacturing sector, while weakening, was contracting at a slower pace. The Institute for Supply Management’s manufacturing Purchasing Managers’ Index (PMI) saw an uptick in February for the first time since May, although it still remains in contraction territory at 47.7, below 50.

But the week’s biggest surprise was housing, with an 8.1% jump in pending home sales. Could some of this be the result of a secular shift, as millennials get into their first homes in the face of higher mortgage rates? Sorry, Fed – you can’t control the millennials.

So what does all this bode for the next Fed meeting this month? The odds are still in favor of a 25 bps hike despite some hot inflation data. And there was a comment by Atlanta Fed President Raphael Bostic that the Fed could be in a position to pause by summer. For those of us in rainy California, that seems a long way away.

In ETF news, Morningstar reports that US ETFs shed an estimated $1.8 billion in their first month of outflows since April 2022. There was a big shift to international, as investors pulled more than $8 billion from U.S. stock funds, and piled nearly $9 billion into international funds. Active ETFs bucked these flow trends and brought in $9 billion in new flows.

Investors also de-risked and shortened their duration in fixed income, favoring investment-grade credit over high-yield and short-term treasuries instead of long-term. Senior loans demonstrated their flexibility in February amid rate increases and remained a nice option, yielding as much as 7.5%.

Harbor just completed the first ever Mutual Fund to ETF merger, folding its Harbor High Yield Bond mutual fund into the Harbor Scientific Alpha High Yield ETF. Expect to see more such mergers in addition to conversions as issuers try to retain mutual fund assets, using the ETF structure to prop up struggling funds or create new wrappers for others.

Finally, I am going to get on my soapbox about copycat ETFS. One was launched this week, the First Trust Bloomberg Emerging Market Democracies ETF (a weak imitation of Perth Tolle’s $FRDM ETF), and iShares filed for another clean-energy metals product, the iShares Transition-Enabling Metals ETF. I continue to believe that INNOVATION and not IMITATION is what moves the ETF industry forward. I am all for competition (bring it on!) just not lazy versions of the same products.

There you go! That rant should get me some emails this week and needle some ETF issuers! This is the week for all important employment data – hold onto your seats.

Jane Edmondson
CEO and Co-Founder

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