Diamond Capital Management's Market Commentary
May 2023
Jeff Mantock, CFA, Vice President, Senior Research & Portfolio Manager
Executive Summary:
- Expect Washington to reach an agreement on the debt ceiling. No plans for extension.
- Fed likely done hiking short-term rates, but tight monetary conditions problematic for equities.
- Recommend a neutral duration and favor quality investment-grade corporate bonds and government debt.
President Biden and House Speaker McCarthy are meeting for an agreement to raise the $31.4 trillion U.S. debt ceiling. This would allow the government to pay its bills and avoid the first-ever default on its debt obligations. Although unlikely, if the two sides cannot find a compromise, Congress may decide to extend the matter until its fiscal year end in September. Either way, despite the political posturing, both sides want to avert a global financial crisis that could cause unprecedented ramifications.
While the immediate concern has been the debt ceiling, investors' primary focus is determining the health of the U.S. economy. The odds of a recession remain elevated given the Fed's tight monetary policy. The Fed seems ready to pause after increasing its federal funds target rate ten consecutive meetings to 5.25%. “We're getting close or maybe even there,” remarked Chairman Powell. We take them at their word when they say rates are going to stay higher for longer. Equity investors may be disappointed if the possibility of a rate cut in 2H 2023 or early 2024 gets diminished. But the rate of inflation is a long way from the Fed's 2% target.
The S&P 500 Index is up more than 16 percent from its lows in October 2022, rewarding patient investors who were willing to tolerate the risk. We continue to be slightly cautious on stocks and believe they are vulnerable for a pullback as tight monetary conditions could be problematic. We would like to see the breadth of market participation in the current rally improve. The YTD total return for the S&P 500 Index is only 1.2% when calculated on an equal-weighted basis compared to 7.9% on a market-cap weighted basis. In addition, more than half of the constituents within the S&P 500 benchmark are below their 200-day moving averages.
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