Weekly Commentary | May 26, 2024 | Distributions Increased Massively At Blackrock and Invesco

Summary

Markets took a break after a four-week rally, with the S&P 500 slightly down and the Dow Jones down the most since April.

Treasury rates increased after a stronger PMI report and drop in jobless claims, causing concern about inflation.

Nvidia's post-earnings bounce boosted the Nasdaq, but did not translate to the broader market.

Macro Picture

After a four week rally markets took a small break this week with the S&P 500 down slightly but the Dow Jones down the most since early April (-2.3%), while the Nasdaq was actually up, thanks to Nvidia's post-earnings bounce.

Treasury rates were up about 7 bps to 4.47% after a stronger PMI report and large drop in jobless claims.  In the PMI report, the inflation data appeared to especially concern investors.  Quoting directly from the release:

Selling price inflation has meanwhile ticked higher and continues to signal modestly above-target inflation. What’s interesting is that the main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated…[suggesting] that the final mile down to the Fed’s 2% target still seems elusive.

On Friday, durables goods orders came in above expectations causing further concern that the economy is not slowing down fast enough to bring inflation to target.  As such, the rate futures market began pricing in only a 40% chance of two cuts this year, down from 57.3% at the end of last week.

During its fiscal first quarter, AI bellwether Nvidia more than tripled its revenues and earned $6.12 a share, excluding items. The company announced a 10-for-1 stock split and increased its dividend by 150%.  The rise in the shares of more than 8% didn't translate to the broader market, however. 

The US Securities and Exchange Commission on Thursday approved the listing of spot Ether ETFs.

For the full year, the S&P 500 is still up by about 10%, and I think some lengthy period of consolidation could be in order after a strong move over the past month back to record highs.

I still think inflation will moderate in the coming months and that we won't enter a period of stagflation.  Wages are cooling, which has correlated almost perfectly with Core CPI and PCE.  Additionally, a potential end to the war in Ukraine could reduce oil prices further pressuring prices.  Lastly, we could see some period of 'austerity' enter the fiscal side which has been the leading driver of inflation post-November elections.

CEF Market Review

Discounts remain in an uptrend with taxable gaining another 5 bps this week to -3.25 on average and muni CEFs gaining 50 bps to -9.50%.  The muni CEF value remains but we are finally starting to reap gains and see the tailwind from the discount tightening.  

Muni CEF discounts are now in the 93rd percentile having moved more than 3 points since the start of the year and 5 points since the lows back at the end of October.  

I think it will be a slow slog but that we will eventually get another 5 points over the course of the remainder of this year and early next.  That's 5 points of tailwind return on top of the ~4% tax-free yields (5.7% tax equivalent for the 24% bracket) for a total return of over 10% in muni bonds....