- Stocks ended a three-week win streak and bonds marked a three-week win streak. The S&P 500 Index slipped -0.1% and the Bloomberg US Aggregate Bond Index was up +0.5%. The stock market was closed for Good Friday, but the bond market was open for part of the day.
- Good Friday was also the release of the March Employment Report, which was a bit mixed. Nonfarm payrolls rose, but less than expected and at half the rate as the prior month. Wage gains eased and the unemployment rate fell to 3.5% from 3.6%.
- Despite the holiday-shortened week, there were plenty of other economic releases, which for the most part came in under expectations. Job openings fell to a 21-month low, job cuts surged, manufacturing activity fell again, and factory orders fell.
Stocks end three-week win streak, bonds hit three-week streak
The Good Friday holiday-shortened week was choppy and marked the end of a three-week win streak for the S&P 500 and Nasdaq Composite. The S&P 500 slipped -0.1% while the Nasdaq was down -1.1%. Small caps have struggled more since the banking crisis erupted in early March, and the Russell 2000 was down -2.7%. For a short week, the economic calendar was packed and the data, for the most part, was disappointing with increasing evidence that the economy is slowing. The stock market was closed for Good Friday when the March Employment Report was released. It showed the jobs market remains resilient, but hiring is gradually cooling, wage growth is easing, and more Americans are seeking work.
Bonds yields were down for the week but did jump after the jobs report (the bond market was open Friday but closed early). The Bloomberg US Aggregate Bond Index was up +0.5% but was up +1.1% through Thursday before the jobs report. Yields pushed higher on the jobs numbers which suggested that there remains ample demand for workers despite some recent signs of a slowing economy. After the jobs report, CME Group data showed interest-rate futures pricing in a roughly 70% chance that the Fed will raise rates by 0.25 percentage point at its next meeting in May, which was a tossup on Thursday.
Oil was back in the headlines as the week kicked off with a surprise output cut by OPEC+. WTI crude futures surged above $81 per barrel as the week opened and traded at that level for the week, closing at $80.70.
Chart of the Week
According to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) data, job openings fell to a 21-month low in February, dropping to a seasonally adjusted 9.9 million, the first time below 10 million in nearly two years. That was well below the 10.5 million expected and down from January’s downwardly revised 10.6 million. Job openings still far outnumbered the 5.9 million unemployed people seeking work, indicating the labor market remained tight. Job openings peaked at a record 12 million last March, according to revised 2022 data. March was the third straight monthly decline, but openings are still well above the 7 million openings in February 2020 just ahead of the pandemic. The number of people quitting jobs, meanwhile, rose slightly to 4 million, which came as a bit of a surprise. Quits had fallen below 4 million in January for the first time in 19 months.
Job Openings Have Dropped More Than 10% Since the End of Last Year
U.S. Job Openings
Note: Seasonally adjusted.
Source: Labor Department via St. Louis Fed, MarketWatch
- The March Employment Report reflected a labor market that is slowly cooling as Nonfarm Payrolls expanded by 236,000, the smallest monthly rise in more than two years, and below expectations of 238,000 and the prior month’s 246,000. Prior months were minimal with the January and February figures revised lower by a combined 17,000. Construction payrolls declined for the first time since January 2022, and manufacturing, information, and finance continued a string of weak performances. The Unemployment Rate ticked lower to 3.5% after increasing by 0.2 percentage point in February to 3.6% where it was expected to stay. Month-over-month Average Hourly Earnings met expectations at +0.3%, up from +0.2% the prior month. Year-over-year, hourly wages slipped to +4.2%, below expectations for +4.3% and last month’s +4.6%. Labor-Force Participation rose to its highest level since the onset of the coronavirus pandemic, rising to 62.6%.
- The March Challenger Report showed job cut announcements from U.S.-based employers surged again, rising +15% to 89,703, the tenth consecutive monthly rise. In the first quarter of 2023, employers have announced 270,416 job cuts, the highest first-quarter total since 2009, excluding the pandemic. Nearly half of the layoff announcements in March originated from the technology sector, as the industry is reeling from high-interest rates and the recent failure of tech-focused Silicon Valley Bank. Hiring plans also substantially fell across the board in March, indicating that labor demand is cooling.
- The ISM Manufacturing Index contracted for the fifth consecutive month in March, falling to 46.3 from 47.7 in February, and below expectations for 47.5. Readings below 50 indicate contraction. The details weakened across the board. Twelve industries reported contraction while six sectors expanded. New orders and employment declined, though production did tick slightly higher. On a positive note, the prices paid index, a measure of inflation, fell 2.1 points to 49.2%, back into contractionary territory, a welcome sign that consumer price inflation should moderate further.
- The ISM Non-Manufacturing Index for March dropped to 51.2% from 55.1% in February, well below expectations for 54.5%. The line between expansion and contraction is 50.0%, so the March reading reflects continued growth in the services sector, but at a much slower pace than the prior month. New Orders declined to 52.2% from 62.6%. The Prices Index decreased to 59.5% from 65.6%, the lowest reading since July 2020. The Backlog of Orders fell to 48.5% from 52.8%, slipping to contraction levels and the lowest reading since May 2020. The report shows that activity in the services sector, which makes up more than two-thirds of the economy, is slowing noticeably.
- The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index (PMI) rose to 49.2 in March, up from 47.3 in February, and a tick down from the earlier released ‘flash’ estimate of 49.3. The index reading rose for the third month running to a signal indicating a marginal deterioration in the health of the US manufacturing sector. The decline stemmed from a further drop in client demand and only a slight rise in output. In another sign of decelerating inflation, cost burdens rose at the slowest rate since July 2020.
- The seasonally adjusted final S&P Global US Services PMI was 52.6 in March, up from 50.6 in February, the sharpest rise since June 2022. New Order returned to growth, ending five months of contraction. Regarding inflation impact, Input Costs rose at the second-slowest pace since October 2020, but efforts to pass through higher costs to clients resulted in a steep and accelerated increase in Output Prices.
- February Construction Spending fell -0.1% estimated to a seasonally adjusted annualized rate of $1.844 trillion, below expectations to remain unchanged and the upwardly revised +0.4% January estimate (originally -0.1%). Year-over-year construction spending is up +5.2%. Private residential spending fell -0.6% in February, as higher mortgage rates and general affordability concerns have caused builders to scale back. Private spending on nonresidential development increased +0.7%. Meanwhile, public construction spending slid -0.2%, led by large declines in educational- and commercial-related expenditures.
- February Factory Orders fell -0.7%, the third drop in the last four months, below expectations for a -0.6% decline, but better than the -2.1% drop in January. The decline was led by transportation equipment. Excluding transportation, orders were down -0.3%. Nondurable Goods Orders fell -0.4% in the month. Durable Goods fell -1% in February, unrevised from the initial estimate. Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, fell a revised -0.1%, down from the initial reading of +0.2%.
- Consumer Credit outstanding expanded by $15.3 billion in February, falling short of expectations for a $20 billion addition and the prior month’s $19.5 billion. Growth decelerated for revolving credit, which added $5 billion, and picked up for nonrevolving credit, which expanded by 10.3 billion.
- March New-Vehicle Sales came in at a seasonally adjusted 14.8 million, slightly lower than in February. Rising vehicle production is contributing to higher inventory levels at dealerships, though a significant percentage of vehicles are still being pre-sold. Meanwhile, not seasonally adjusted average transaction prices remain near their all-time highs. There has been a consistent increase in vehicle discounts, though they remain below their pre-pandemic average.
- The St. Louis Fed Financial Stress Index showed that U.S. financial market conditions eased significantly last week, falling 67 basis points to -0.33. Equity markets improved for the third consecutive week as energy carried the day and fears of contagion in the banking sector abated. Long-term Treasuries increased as safe haven flows decreased.
- The weekly MBA Mortgage Application Index fell -4.1%, breaking four-week of gains, after the prior week’s +2.9% increase, as the Refinance Index fell -5.4% and the Purchase Index fell -3.5. The increase came as the average 30-year mortgage rate fell -5 basis points to 6.40%, which is up 2.13 percentage points versus a year ago.
- The Department of Labor announced that beginning with the Unemployment Insurance (UI) Weekly Claims release on April 6, 2023, the methodology used to seasonally adjust the national initial claims and continued claims reflects a change in the estimation of the models. With the new methodology, weekly Initial Jobless Claims fell by -18,000 to 228,000 for the week ended April 1, below the upwardly revised 246,000 (originally 198,000) from the prior week. The changed methodology shows a clearer trend with claims rising steadily since February, which aligns more closely with the increase in announced layoffs in recent months. Continuing Claims were also revised higher and now stand at 1.82 million in the week ended March 25, and the insured unemployment rate is 1.3%.
The Week Ahead
The calendar is relatively light this week, with inflation data being a big theme. Wednesday brings the Consumer Price Index (CPI), Thursday the Producer Price Index (PPI), and Import Prices are on Friday. Small Business Optimism (Tuesday) and Consumer Sentiment (Friday) will also be closely watched to see if the recent banking turmoil is having an impact. It’s a busy week for Fed activity: NY Fed President John Williams speaks on Monday; Chicago Fed President Austan Goolsbee, Philadelphia Fed President Patrick Harker, and Minneapolis Fed President Neel Kashkari all speaking on Tuesday; and FOMC Minutes will be released on Wednesday.
Did You Know?
APRIL FLOWERS – Over the last 50 years, April has been the best month of the year for the Dow Jones Industrial Average (DJIA) with the index averaging a gain of +2.1% during the month with positive returns two-thirds of the time. September has been the worst month with an average decline of -1.1% with gains just 38% of the time over the last 50 years (source: Bespoke Investment Group).
LAST SHALL BE FIRST – In 2022, the three worst-performing of the 11 major S&P 500 sectors were Communication Services, Consumer Discretionary, and Technology which were all down more than -28%. In the first quarter of 2023, these sectors were the top three performers rallying more than +15% each. Meanwhile, Energy, the top-performing sector of 2022 with a gain of over +50%, was down more than -5% in Q1-2023 (Source: Bespoke Investment Group).
APARTMENT FREEZE – Sales of rental apartment buildings in the first quarter from the same period a year earlier were down -74%—the largest such drop since the first quarter of 2009. The $14 billion in quarterly sales is a sign that the math for buying an apartment building makes a lot less sense now. The cost to finance building purchases has jumped with the rapid rise in interest rates, and rents are running flat, or are even declining in some major metro areas. The upheaval in banking is also making it more difficult to buy buildings as more lending institutions pull back or lend only at exorbitantly high rates (source: CoStar Group, The Wall Street Journal).
This Week in History
S&L CRISIS – In April 1990, the Savings and Loan (S&L) Crisis was in full swing. The S&L Crisis was the first large-scale banking crisis since the Great Depression. Many investors watching the bank failures last month may not remember, or even been alive, for the S&L Crisis. It was a slow-moving disaster that resulted in the failure of nearly a third of the 3,234 S&L associations between 1986 and 1995. It resulted in the insolvency of the Federal Savings and Loan Insurance Corporation, which cost taxpayers billions of dollars and contributed to the recession of 1990–91. The estimated cost of bailing out failed savings & loan companies—pegged at $158 billion in 1989—was revised just a year later by government forecasters to a minimum of $285 billion to $350 billion (source: The Wall Street Journal).
Asset Class Performance
The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.