Wall Street Week Ahead: Recession worries simmer beneath US stock market
rally
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[April 29, 2023] By
Lewis Krauskopf
NEW YORK (Reuters) - Economically sensitive areas of the U.S. stock
market are flashing warnings over growth, even as major equity indexes
edge higher.
The S&P 500 is up 8.6% for the year after gaining 1.5% in April, thanks
to roaring year-to-date rallies in shares of Microsoft, Amazon and
Google-parent Alphabet and other growth and technology stocks that
command heavy weightings in broader indexes.
Beneath the surface, however, areas of the market tied to economic
sentiment such as transports, semiconductors and small-cap stocks
dropped in April, while so-called defensive sectors are outperforming.
Investors cited growing caution among market participants faced with a
thicket of concerns, from fears of a possible U.S. default this summer
to worries that the Federal Reserve’s aggressive monetary tightening
could bring on a recession.
“People are starting to more defensively position themselves,” said
Aaron Dunn, co-head of the value equity team at Eaton Vance. “The
overall signal to me is there is still a lot of fear about recession and
oncoming weakness in the back half of the year.”
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Areas of the market showing cracks include the Russell 2000, an index
populated by smaller, domestically focused companies, which was down
1.9% for the month. The Dow Jones Transportation Average, another
bellwether of economic health, fell 2.9%.
A 7.3% drop in the Philadelphia SE Semiconductor index was a worrying
sign, as chips are ubiquitous in a wide range of products. The index is
still up 18% for the year.
Regional banks are also wobbling, with the KBW Regional Banking index
down 3.5% in April following a rout this week in shares of First
Republic Bank. At the same time, consumer staples and healthcare,
sectors favored by investors during uncertain times, have rallied in the
past month.
Investors will focus on next week's Fed meeting, with the central bank
expected to announce another 25 basis point rate hike on Wednesday. A
bevy of earnings are also on deck, including results from Apple on
Thursday.
Though the S&P 500 has shown resilience, just seven stocks -- Apple,
Microsoft, Alphabet, Amazon, Tesla Meta Platforms and Nvidia -- were
responsible for more than 88% of its year-to-date gain as of Thursday,
according to Mike O'Rourke, chief market strategist at Jones Trading.
“It makes me nervous to be honest,” said James Ragan, director of wealth
management research at D.A. Davidson. “It just seems like the market
gains are being concentrated in fewer and fewer stocks and that is
probably unsustainable for too long.”
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![](../images/042923PIX/busine16.jpg)
Traders work on the floor of the New
York Stock Exchange (NYSE) in New York City, U.S., April 19, 2023.
REUTERS/Brendan McDermid/File Photo
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Ragan is recommending clients overweight defensive sectors such as
healthcare, staples and utilities.
While results from megacaps and strong economic reports buoyed
optimism among some on Wall Street, others focused on downbeat news
from companies in economically sensitive areas.
Shares of United Parcel Service tumbled 10% on Tuesday after the
world's largest parcel delivery firm pegged annual revenue at the
lower end of its forecast and warned of persistent pressure on
volumes. The next day, shares of Old Dominion Freight Line also
dropped 10% after the trucking firm missed quarterly estimates for
profit and revenue.
"They are talking about demand being down and they are ridiculously
important shipping companies,” said Matt Maley, chief market
strategist at Miller Tabak.
Both stocks are part of the closely watched Dow Jones Transport
Average, which was down 2.7% on the week and off 10% from its high
for the year reached in February.
Maley is recommending clients hold higher-than-typical cash levels
because of concerns about a recession and because safer assets now
have higher yields, while favoring energy and defense stocks.
Of course, not all signs have pointed to economic weakness in recent
weeks.
Overall, earnings have come in better than feared for the first
quarter. With just over half of the S&P 500 having reported,
earnings are on pace to have declined 1.9% for the first quarter
from the year earlier period, according to Refinitiv. That is a
smaller decline than the 5.1% drop expected at the start of April.
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Meanwhile, data on Thursday showed an acceleration in consumer
spending in the first quarter as U.S. gross domestic product
increased at a 1.1% annualized rate.
"It's hard to have a recession when consumers' incomes are rising,
and they are spending more on both goods and services," Yardeni
Research said in a note on Friday.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David
Gregorio)
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