Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. :)

Here is everything you need to know to get you ready for the trading week beginning May 22nd, 2023.

Stocks end Friday lower as GOP negotiators halt debt ceiling talks, S&P 500 notches best week since March: Live updates - (Source)

Stocks fell Friday as GOP negotiators halted ongoing debt ceiling negotiations, stoking doubt of a deal being reached soon. However, the S&P 500 notched its best week since March.

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The Dow Jones Industrial Average dropped 109.28 points, or 0.33%, to 33,426.63. The S&P 500 slipped 0.14% to 4,191.98. The Nasdaq Composite slid 0.24% to 12,657.90.

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All three major averages capped the week with gains. The S&P 500 rose 1.65%, and the Nasdaq Composite gained 3.04%. It was the best weekly performance since March for both indexes. The Dow added 0.38%.

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A chunk of those gains came Thursday, as traders mounted bets that a U.S. debt ceiling deal could be reached. Comments from House Speaker Kevin McCarthy Thursday seemed to suggest a potential deal could come as soon as next week.

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However, stocks turned lower Friday after GOP negotiators walked out of a debt ceiling meeting, with Rep. Garret Graves saying the White House team is “unreasonable,” according to NBC News. “We’re not going to sit here and talk to ourselves,” he said.

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Friday’s losses were kept in check, however, after Federal Reserve Chairman Jerome Powell said interest rates may not have to rise as much as expected to quell inflation.

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“Markets have had a fairly constructive week, and were trading better as in the early hours of today’s trading day, in large part due to a more constructive or positive sentiment around the debt ceiling negotiations. And that took a little bit of a bump in the road [today] as the negotiations have taken a pause,” said B. Riley Financial’s Art Hogan.

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“I don’t think that is the end. But I certainly think that going into the weekend, with any uncertainty about the debt ceiling, it’s going to cause a bit of a sell off,” he added.

This past week saw the following moves in the S&P:

(CLICK HERE FOR THE FULL S&P TREE MAP FOR THE PAST WEEK!)

S&P Sectors for this past week:

(CLICK HERE FOR THE S&P SECTORS FOR THE PAST WEEK!)

Major Indices for this past week:

(CLICK HERE FOR THE MAJOR INDICES FOR THE PAST WEEK!)

Major Futures Markets as of Friday's close:

(CLICK HERE FOR THE MAJOR FUTURES INDICES AS OF FRIDAY!)

Economic Calendar for the Week Ahead:

(CLICK HERE FOR THE FULL ECONOMIC CALENDAR FOR THE WEEK AHEAD!)

Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday's close:

(CLICK HERE FOR THE CHART!)

S&P Sectors for the Past Week:

(CLICK HERE FOR THE CHART!)

Major Indices Pullback/Correction Levels as of Friday's close:

(CLICK HERE FOR THE CHART!)

Major Indices Rally Levels as of Friday's close:

(CLICK HERE FOR THE CHART!)

Most Anticipated Earnings Releases for this week:

(CLICK HERE FOR THE CHART!)

Here are the upcoming IPO's for this week:

(CLICK HERE FOR THE CHART!)

Friday's Stock Analyst Upgrades & Downgrades:

(CLICK HERE FOR THE CHART LINK #1!)

(CLICK HERE FOR THE CHART LINK #2!)

The Leading Indicator That’s Pointing Away From a Recession

It’s hard to get away from continued recession calls, even as several data points suggest the opposite. For example:

• Employment: running strong
• Retail sales: rebounded in April
• Manufacturing: signs point to a turnaround, especially vehicle production
• Housing: a turnaround seems to be happening

I want to focus on housing in this blog.

Residential investment makes up under 5% of the economy, but it’s been a drag on economic growth for eight straight quarters.

(CLICK HERE FOR THE CHART!)

Over the four quarters through Q1 2023, real GDP grew about 1.6%. But that’s after accounting for a 0.6-0.7%-point drag from residential investment. That’s a lot!

The cause shouldn’t be a surprise. The Federal Reserve (Fed) began its most aggressive policy tightening cycle in 40+ years as they looked to get on top of inflation. That sent mortgage rates from 3% to 7% in less than a year, freezing the housing market. Affordability collapsed due to higher rates and elevated home prices.

Amid decreasing demand, builders reduced their involvement in new construction projects. As a result, there was a notable 27% decline in single-family construction, which comprises approximately 40% of residential investment in GDP. Brokers’ commissions, accounting for just over 20% of residential investment, experienced a 28% decrease due to a significant drop in sales activity. Home improvements also fell, primarily because many households had already completed their projects during the 2020-2021 pandemic period. The sole positive aspect within the housing sector was the continued strength in multi-family construction.

(CLICK HERE FOR THE CHART!)

Declining housing activity has foreshadowed past recessions

Between 1980 and 2010, we had five recessions, and each one was preceded by a huge decline in single-family housing starts.

Housing starts measure the start of construction on a new residential unit. This precedes sales of new homes as well as spending on appliances, furniture, and other home goods. It tells you a lot about builders’ sentiment for investing in new projects and how consumers view their personal financial situation (since buying a house is a big deal).

You can see why it’s an important metric for gauging where the economy is going.

I looked at single-family housing starts across the five recessions that preceded the pandemic-led 2020 recession, including 1980, 1981-’82, 1990-’91, 2001, and 2007-’09. As you can see in the chart below, single-family starts declined significantly prior to each of those recessions. And these were typically preceded by aggressive Fed tightening.

The mildest decline was in 2000 when starts declined “only” 17%. The 1999-2000 period saw the Fed raise the federal funds rate by about 1.75%-points. The other periods saw rates go up by 4.0%-points or more.

(CLICK HERE FOR THE CHART!)

Here’s what’s interesting, however. The chart also shows that housing historically bottomed prior to the end of a recession and has typically led the economy out of one. It typically coincided with the Fed reducing interest rates in response to a slowing economy.

This brings us to the current cycle.

A turnaround begins

The chart below shows single-family housing starts and permits. Permits count authorized permits to build new housing units and are a leading indicator of future supply.

Thanks to aggressive Fed rate hikes, single-family starts crashed 35% over the 12 months through November 2022. Permits plunged 40% over the 11 months through December 2022. No wonder residential investment was such a big drag on economic growth. However, unlike what we saw in the past, the economy was able to avoid a recession.

And now there’s good news. Starts and permits appear to be turning around. Starts are up 5% since November 2022, while permits have already increased 14% over the three months through April.

(CLICK HERE FOR THE CHART!)

Builders are feeling a lot better about the housing market

Builders’ confidence in the housing market is growing. Since the start of 2023, the NAHB Housing Market Index, a gauge of builders’ confidence, has been steadily recovering. It’s still got a long way to go to get back to pre-crash levels, but the upward trend is encouraging.

(CLICK HERE FOR THE CHART!)

In fact, earnings and revenues for the nation’s largest builders have been beating estimates by a big margin in the most recent quarter. More importantly, they’ve been very positive about what lies ahead. This comment from the Chairman of D.R. Horton, the nation’s largest homebuilder, best captures it:

”Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.”

Here’s a summary of what’s happening:

• Due to high mortgage rates, most homeowners (who probably bought their homes or refinanced at low rates) are “locked in.”
• So, there’s not much inventory in the existing home sales market.
• However, there’s a lot of pent-up demand due to a record number of people in the 25-34 year age cohort, which is the prime home-buying age.
• These potential homebuyers are being pushed into the new homes market.
• That is very positive for builders and the economy since new home demand matters a lot for economic growth.

The final chart to underline all this: the SPDR S&P Homebuilders ETF, which is a basket of homebuilder stocks, just hit a new 52-week high, and is at the highest level since February 2022. The ETF is up more than 21% this year through May 18th.

(CLICK HERE FOR THE CHART!)

Investors are starting to treat the housing market as an early cycle recovery story, even as several commentators call for a cycle-ending recession. Not us, though. We’ve been saying the economy can avoid a recession since last year.

Russell 2000 Best Week Before Memorial Day, Up 75% of the Time

In the table we went back to 1971, the year the Uniform Monday Holiday Act took effect, moving Memorial Day and most other federal holidays to Monday. The Friday before Memorial has become getaway day on The Street and volume can be diminished and trading uninspired. However, this has not stopped the market from making some sizable moves for the week. Last year, DJIA, S&P 500, NASDAQ, and Russell 2000 all jumped over 6%.

DJIA is the weakest in the week before Memorial Day up 27 of the past 52 years and a paltry 0.13% average gain. S&P is a bit better, up 63.5% of the time with an average gain of 0.32%. NASDAQ is up 65.4% of the time, averaging a gain of 0.41%. But the Russell 2000 small cap index takes the lead ahead of the official kick-off to summer up 75.0% of the time with an average gain of 0.73%.

(CLICK HERE FOR THE CHART!)

Stocks and Bonds Part Ways

Ever since the Federal Reserve started talking about hiking rates at the start of 2022, stocks and bonds have been joined at the hip. Using the iShares 20+ Year Treasury ETF (TLT) as a proxy for the bond market, the correlation between its closing prices and the S&P 500 (using SPY) has been +0.79, implying a very strong correlation. Visually, it’s also easy to see the relationship as the two sold off throughout most of 2022 and then bottomed out early in the fourth quarter. From those lows through early April, the positive correlation between the two continued, but ever since then, the paths of the two ETFs have diverged. Since April 6th, TLT is down 6.8% while the S&P 500 is up 2.7%. As the sell-off in Treasuries has picked up steam in recent days, market watchers have been expecting stocks to start following suit. Bulls, on the other hand, are hoping that this is the start of an amicable separation between the two.

(CLICK HERE FOR THE CHART!)

Nasdaq Outperforms The DJIA By a Bull Market

Every day it seems the gap just keeps getting wider, and today the YTD performance spread between the Nasdaq and the DJIA widened out to over 20 percentage points - or the equivalent of the traditional threshold for a bull market. As of Thursday afternoon, the Nasdaq was up 20.4% YTD while the DJIA was barely hanging above the unchanged line with a gain of 0.3%. Since the Nasdaq launched in early 1972, there have only been three other years where the index outperformed the DJIA by more than 15 percentage points YTD through 5/18, but 2023 is on pace to go down as the only year where the performance gap exceeded 20 percentage points.

(CLICK HERE FOR THE CHART!)

The question going forward is, will the Nasdaq continue its outperformance for the remainder of the year, or will the DJIA step up and play catch up? There have only been three other years where the Nasdaq even outperformed by 15 percentage points at this point in the year, but below we have provided a snapshot of both indices during those three years. For each set of charts, we show the performance of each index in the top charts where the gray shading shows the period from the start of the year through 5/18. Underneath each of those charts, we also show the relative strength of the Nasdaq versus the DJIA where a rising line indicates outperformance on the part of the Nasdaq and vice versa.

Of the three years shown, the Nasdaq continued to outperform the DJIA by a wide margin for the remainder of the year in two of them (1991 and 2020). In 1983, on the other hand, the Nasdaq actually declined 8.2% for the remainder of the year giving up all of its prior outperformance as the DJIA rallied 4.6%.

(CLICK HERE FOR THE CHART!)

(CLICK HERE FOR THE CHART!)

Four More Reasons the Bulls Are Smiling

Last month, I wrote about some bullish events taking place in Three More Bullish Signals The Bears Don’t Want To See, and it was a very popular blog. Well, today, I’ll take it one more step and list four new reasons the bulls will continue to smile.

We think the Fed is likely done hiking With inflation coming down quickly, we are in the camp that the Fed is likely done hiking rates. You can read more about what Sonu had to say about the recent inflation data here.

One clear sign the Fed is indeed done is that the upper limit of the Fed Funds rate is now up to 5.25%, which is finally more than year-over-year CPI, which is 4.9%. As you can see below, the previous eight hiking cycles needed this ingredient before the Fed was done, and we are now there.

(CLICK HERE FOR THE CHART!)

What if they are indeed done? I wrote about this in The Last Hike?, but the bottom line is stocks tend to do quite well, higher a year later eight out of 10 times and up a very impressive 14.3% on average. I keep hearing on tv how it is bearish once they stop hiking, but the data just doesn’t show that.

(CLICK HERE FOR THE CHART!)

Stocks aren’t loved We’ve noted many times in the past six months that one reason to expect higher equity prices was that the masses keep betting on lower prices. This matters as the crowd is rarely right looking back at history. I wrote about this more in Is Anyone Bullish Part 2.

Well, we have more data to support this in the form of a recent Gallup poll that asked what the best long-term investment would be. Wouldn’t you know it, stocks/mutual funds came in at the lowest level since 2011! Given how poorly stocks did last year and the constant barrage of negative news, maybe this isn’t a surprise, but from a contrarian point of view, this is another reason to think the path is higher for stocks.

(CLICK HERE FOR THE CHART!)

Now is weak, but the future looks better Some of the business and economic surveys we’ve seen lately have been weak, that is true, but what has our attention is that the future is looking better.

The New York Fed does some great work here, and a recent survey of Business Leaders showed that expectations for business activity six months from now were at the highest level since September 2022.

I find this worthwhile, as they focus on the New York and New Jersey area, in other words, the heart of the banking world. If most of these business leaders see better times coming, that is something the bulls should embrace.

(CLICK HERE FOR THE CHART!)

Positive year-over-year … finally

Here’s a big one that just happened, and it has many bulls smiling.

The S&P 500 was negative year-over-year on a monthly basis for 12 c