SPY SPDR S&P 500

WeU+02019re approaching a significant milestone next week - the concluding trading week of not just the month and quarter, but also the first half of 2023. The S&ampP 500 has shown a stellar performance, boasting an increase of 13.8% so far this year. 

Delving into history, when the S&ampP 500 has ascended by at least 10% by the end of June, it has climbed higher 82% of the time by year-end, averaging an additional gain of 7.7%. These statistics come courtesy of research conducted by the Carson Group.

Interest rate hikes might lead to corporate defaults

The Federal ReserveU+02019s commitment to raising interest rates to curb inflation could trigger a surge in corporate default rates in the upcoming months. In May, the corporate default rate climbed, highlighting the challenges that U.S. companies face in dealing with rising interest rates, which complicate debt refinancing and pose an uncertain economic future.

A striking 41 defaults have occurred in the U.S., along with one in Canada this year, marking the highest in any global region and over double compared to the same timeframe in 2022, as per Moody’s Investors Service.

Federal Reserve Chairman Jerome Powell recently suggested more interest rate hikes are on the horizon this year, although at a subdued pace until significant strides are made to curb inflation.

Financial experts point to high interest rates as the primary stress inducers. Companies requiring liquidity or those burdened with significant debt and in need of refinancing face an escalated cost of new debt.

Distressed exchanges often emerge as a go-to solution. This involves companies exchanging their debt for a different form of debt or repurchasing the debt. In extreme cases, restructuring in or outside court becomes necessary.

In an interview with CNBC, Mohsin Meghji, founding partner of M3 Partners, illustrates the point of higher debt costs by citing how average financing rates of 4% to 6% over the past 15 years have now soared to 9% to 13%.

Despite recently affected companies being the most troubled, Meghji predicts that even financially stable firms will face refinancing issues due to high interest rates.

As of June 22, 324 bankruptcy filings were reported, nearing the 374 total in 2022, according to S&ampP Global Market Intelligence. Over 230 bankruptcy filings occurred by April this year, marking the highest rate since 2010.

The most substantial default in May was Envision Healthcare, an emergency medical services provider with over $7 billion in debt at the time of filing for bankruptcy, according to Moody’s (NYSE: MCO). Other notable bankruptcy filings this year include Monitronics International, Silicon Valley Bank, Bed Bath & Beyond, and Diamond Sports.

Moody’s projects the global default rate to escalate to 4.6% by yearU+02019s end, surpassing the long-term average of 4.1%, and to peak at 5% by April 2024 before beginning to decrease.

U.S. Home Price Overview

On Tuesday, we expect fresh updates on U.S. home prices via the Case-Shiller Home Price Index and the Federal Housing Finance Agency’s (FHFA) House Price Index for April. The Case-Shiller Index likely shows a 0.8% rise in home prices in April, recovering from a 1.5% increase in March. However, these values probably represent a 1.5% decrease on a year-over-year basis. 

March witnessed the first annual fall in prices since the early days of 2012, a stark contrast to the record-high growth rates observed a year earlier before the Federal ReserveU+02019s interest rate hikes began influencing housing demand.

FedU+02019s Favored Inflation Indicator

On Friday, the Bureau of Economic Analysis (BEA) will release the Personal Consumption Expenditures (PCE) Price Index, the FedU+02019s favored inflation measure, for May. The prediction is that prices rose by 0.2% last month, following a 0.4% increase in April. The annual rise is likely to be 4.1%, a deceleration from AprilU+02019s 4.4%.

Core PCE prices, which omit the unstable food and energy costs, likely increased 4.5% year-on-year, slowing from the 4.7% pace observed in April. ItU+02019s worth noting that the Federal Reserve aims for a 2% annual PCE inflation rate as a part of its dual mandate to achieve price stability and full employment.

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