Market Commentary — May 22, 2023

Stocks recorded solid gains this week, with the S&P 500 testing the 4,200 level intraday for the first time since late August. But part of what is driving S&P 500 performance is the rally among mega-cap tech stocks such as Alphabet, Meta, and chipmakers Nvidia and AMD in what could be characterized as an “AI” opportunity repricing of these names. The top 5 stocks in the S&P 500 have returned an average of 50% in 2023, accounting for roughly half of the S&P 500’s 8% gain. Regional banks also rallied and recouped losses, with regional bank ETFs recording some of their best daily gains since early 2021.

One market catalyst was progressed on debt ceiling talks, but that reversed on Friday when the Republicans decided to “press pause” on negotiations. Speaking of pause, Fed Chairman Powell stated that tightening credit conditions due to recent bank turmoil meant that the “policy rate may not need to rise as much as it would otherwise to achieve (their) goals.” That being said, he also reiterated the 2% inflation target, which seems like a pipe dream.

In economic news, retail sales came in below consensus in April, at the slowest pace YOY (+1.6%) since early in the pandemic. On an inflation-adjusted basis, this means that consumer spending has fallen sharply. But on the flip side, labor data was positive, with weekly jobless claims coming in at 242k, below the previous week’s reading of 264k and the best level since late 2021. And industrial production rose 0.5% in April, well above expectations for a flat reading, driven in part by increased auto manufacturing. Bond yields pushed slightly higher on the positive economic news as the economy remains more resilient than expected given the headwinds of higher interest rates.

In ETF news, Roundhill launched its Generative AI ETF (CHAT). Weak Chinese industrial production data sent Copper prices and ETFS to new YTD lows, but if you buy into the commodity supercycle thesis, this could create a buying opportunity for Copper ETFs. Metals ETFs tied to the EV supply chain like LIT and BATT have held up better.

And in an interesting turnaround, Grayscale and Bitwise both backed off plans for Ethereum futures-based ETFs, withdrawing their filings last week. Either the SEC gave them some negative feedback, or this was an attempt to demonstrate the SEC’s uneven hand with regard to digital asset filings.

Finally, Vanguard’s 30-year-old ETF patent ran out that permitted them to create ETFs from mutual funds. The firm was given an exemption in 2000 from certain regulations in the Investment Company Act, allowing it to issue ETF shares as a class of shares for its existing mutual funds. Vanguard would go on to patent the structure in 2003 and create dozens of ETFs that hold hundreds of billions of dollars in assets. The news is being greeted tentatively by other companies, unsure over how regulators would view efforts to use the patent’s structure to create new funds today.

Next week, markets will be on edge about debt ceiling limit deadlines as Republicans played a game of chicken over the weekend. Will there be a last-minute deal before June 1? Will negotiations extend beyond that deadline? In that case, the Treasury could exhaust its cash in days or weeks later, impacting government programs like Medicare and Social Security, but with a less severe impact than a debt default. And finally, the armageddon scenario would be no deal, which would almost certainly trigger a severe recession.

The Treasury did have a contingency plan in place back in 2011, the last time this happened that avoids Treasury securities defaults, but it is no panacea. Negotiations are set to resume after this weekend’s stall.

I will be attending the InsideETFs, Wealth Management EDGE conference at the Diplomat Beach Resort in Hollywood, Florida next week. Please reach out to me, if you would like to connect in person! Women in ETFs members can receive 40% discount off the registration fee.

Jane Edmondson
CEO and Co-Founder

About

EQM Indexes LLC is a woman-owned firm dedicated to creating and supporting innovative indexes that track growth industries and emerging investment themes. Co-founded by Jane Edmondson, a former Institutional Portfolio Manager with more than 25 years in the investment industry.

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