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Weekly Economic and Stock Market Commentary – May 30, 2023


Weekly Economic and Stock Market Commentary – May 30, 2023

As for the stock market specifically:

If you owned only a select few stocks, it was a spectacular week for you last week. But, if you owned a broad swath of stocks, your returns were muted. And, if you owned mainly value stocks, well, you’ll wish you owned those few select growth stocks.

Last week the Dow Jones Industrial Average fell back into negative territory as a result of the week’s trading. This is a bit of an exaggeration, but approximately 10 stocks are contributing to the gains in the Nasdaq Composite and S&P 500 so far this year. I have a great chart showing this, however, it’s not suited for this venue. If you’d like to see it, just let me know and I’ll send it to you.

With that, let’s go more in-depth as to the composition of the major indices in detail and portfolios in general.

The Dow Jones Industrial Average is a price-weighted index, where the movement of the highest price stock has the largest impact on the overall return of the index. Conversely, the S&P 500 is a capitalization-weighted index, where capitalization is the number of shares multiplied by the share price at a given time (i.e. this is the ‘size’ of the company). The larger the capitalization, the more it impacts the results of the S&P 500. The Nasdaq Composite follows the same weighting as the S&P.

For individual accounts, it works the same way – the more shares of a holding you have, the larger its impact on your results.

Let me put it a different way.

Your hypothetical portfolio has 20 percent of its value in 1 company. If that company moves 5%, and all else remains unmoved, your portfolio will move 1% in the direction of the 5% change. This is calculated by multiplying the 5% change by 0.2, which is the total portfolio allocation to that stock.

Now, let’s say your portfolio has 50 holdings, each of which comprised 2% of the value. If one holding moves 5%, the value of the portfolio barely budges.

For this year, we are seeing only a few stocks make large moves, and they are weighted heavily in the S&P 500 and Nasdaq Composite.

Our Friends in Washington

By this time, I may have lost more than half the readers, so let’s go on to the next topic that annoys nearly all of us – “our friends in Washington.”

Once again “our friends in Washington” found a way to avert disaster – for now. The President and Speaker of the House made a deal to keep the Treasury from breaking the limit on the nation’s credit card – they agreed to say there is not going to be a limit until January 2025. The deal purports to restrict spending at lower levels for some programs until that time.

Sure, we have groups of “friends” on each side of the aisle saying how bad the deal will be, but they have all the credibility of the cast of a middle school drama club. These people grabbed their scripts and said their lines while the main characters laughed at them knowing the votes are there in favor of the deal.

As a professional cynic, I am ready to start a pool to see when “our friends in Washington” come up with reasons as to why we need to ignore the deal just made for some (likely exaggerated) “emergency.”

I will finish the first part of the commentary in the spirit of the opening section of this week’s commentary– how few stocks are supporting the load. Ladies and gentlemen, this is important, to make sell signals… stocks MUST GO DOWN. Stocks making sell signals lower the bullish percent indicators. Overall, the NYSE and Optionable Bullish Percent Indicators declined significantly, while the OTC moved an insignificant amount.

If I’m going too long here, I apologize. However this needs to be said: We have a handful of very large stocks pulling the indexes higher. However, we see below in the Bullish Percent Indicators, that less than one-half of all stocks are on buy-signals. Unfortunately this reminds me of the late ‘90’s where again just a handful of stocks pulled the indexes ever higher. One of my friends likened the situation then as: the Generals remain on the battlefield, while the Privates have fled. I hope this ends better than the late ‘90’s. Be careful. The recommendation of WEALTH PRESERVATION remains in effect.

Remember, X’s mean OFFENSE or wealth accumulation, while O’s mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of May 26, 2023 (Courtesy Dorsey, Wright, and Associates).

On a general note:

The Department of Commerce reported the American consumer was alive and well during April. Consumer spending rose 0.8% during the month compared to gains of 0.1% during both February and March. When adjusted for inflation, consumer spending rose 0.5%. Much of the spending was on our cars and the various insurance premiums we pay.

As always, please contact me if you have any questions or would like more information.