- Inflation concerns, bank stress, and odds for a deep recession all faded during the week which helped stocks get back in the winning column. For the week the S&P 500 gained +0.8%, the small cap Russell 2000 rose +1.5%, and the Nasdaq Composite added +0.3%.
- The Consumer Price Index (CPI), the Producer Price Index (PPI), and Import Prices all came in under Wall Street expectations and are well off their recent peaks. Despite those inflation gauges falling markets are betting that the Fed will hike another 25 basis points in May.
- Since late March, economic data has disappointed relative to expectations and clearly shows the U.S. economy losing momentum. This has been reflected in the Atlanta Fed’s GDPNow model, which is currently forecasting 1Q-2023 GDP growth of +1.5%, down from its peak estimate of +3.5% in March.
Stocks get back to their winning ways, while bonds slip
Inflation concerns, bank stress, and odds for a deep recession all faded during the week which helped stocks get back in the winning column. It was a big week for inflation data, and the data unambiguously showed inflation pressures easing. The Consumer Price Index (CPI), the Producer Price Index (PPI), and Import Prices all came in under Wall Street expectations. Though the absolute levels of these inflation gauges remain historically high, they are well off their recent peaks. Meanwhile, the largest U.S. banks kicked off the first quarter earnings season on Friday and they largely came in better than expected. That doesn’t mean the banking sector’s troubles are over, but it does suggest that the quick action by the FDIC and Federal Reserve in the wake of Silicon Valley Bank’s failure has prevented broader damage. Credit quality didn’t deteriorate much in the quarter, and the banks have plenty of reserves relative to recent history. The decent earning by banks so far, with the easing of inflation pressures, helps decrease the odds of stagflation or a deep recession. Stocks liked that and for the week the S&P 500 gained +0.8%, the small cap Russell 2000 rose +1.5%, and the Nasdaq Composite added +0.3%.
The market consensus is that the Fed still has more work to do on the inflation front despite the week’s dovish inflation data. U.S. Treasury yields jumped with the 10-year U.S. Treasury yield and 30-year U.S. Treasury yield making their biggest weekly gains in two months, up +12 and +13 basis points respectively. Federal Reserve minutes from the March FOMC meeting that were released Wednesday showed policymakers projected a “mild recession” starting later in 2023. But they concluded that the banking sector was on firm ground and could withstand further tightening of monetary policy. The FOMC raised the Fed Funds Rate by 25 basis points. Markets are betting that the central bank will go for another 25 basis points hike on May 3, bringing the Fed Funds Rate above 5% for the first time since the lead-up to the Global Financial Crisis. The Bloomberg US Aggregate Bond Index and the Bloomberg Global Aggregate ex US Bond Index (non-US bonds) both fell -0.5% for the week.
Though the Fed stated its determination to fight inflation, economic data continues to weaken. March Retail Sales came in well below Wall Street expectations. Only five of the thirteen retail categories showed growth. Small Business Optimism also continued to slide in March, with only three of the index components rising, three flat, and the remaining twelve declining. The “Now a Good Time to Expand” category tied for a record low with only 2% of respondents in the affirmative. Consumer Sentiment, as measured by the University of Michigan monthly survey, also remains low in April, though it did bounce a bit from March. As reported here weekly, since late March, the economic data have disappointed relative to expectations and have shown declining momentum in the U.S. economy. This has been reflected in the Atlanta Fed’s GDPNow model, which is currently forecasting 1Q-2023 GDP growth of +1.5%, down from its peak estimate of +3.5% in March.
Chart of the Week
In March, for the second straight month, and the fourth month in the last five, Retail Sales fell. Sales at retailers dropped -1.0% in the month, the biggest decline in four months. The decline was largely driven by lower auto and gasoline sales. Economists point out that a late Easter holiday might have shifted some sales into April that normally would have taken place in March. The drop was more than twice the expected -0.4% decline, as well as the -0.2% fall in February (revised up from -0.4%) and +3.1% gain in January (revised down from +3.2%). Internet retailers were the lone bright spot with a +1.9% jump. Year-over-year growth fell -2.9% from a tough comparison with strong sales in March 2022.
Retail Sales Soften Again
U.S. consumers are cutting back on spending
Note: Seasonally adjusted.
Source: U.S. Census Bureau via St. Louis Fed, MarketWatch
- The Consumer Price Index (CPI) rose just +0.1% in March, below expectations for a +0.2% rise and below the +0.5% and +0.4% gains in January and February, respectively. Lower energy costs drove the decline in CPI with the energy component dropping -3.5% after falling -0.6% in February. Food prices were unchanged. On a year-over-year basis, CPI was +5.0% higher, down from +6.0% in February, and the smallest 12-month increase since May 2021. Core CPI, which excludes food and energy, was up +0.4%, above expectations for +0.3%, but below February’s +0.5. Within the Core CPI, used-vehicle prices fell -0.9% after declining -2.8% in the preceding month, but prices for new vehicles, transportation services, and medical care commodities accelerated. Core-CPI was up +5.6% year-over-year, slightly higher than +5.5% in February.
- The Producer Price Index (PPI) decreased -0.5% in March, much weaker than expectations for a +0.1% gain, and February’s upwardly revised 0.0% reading (originally -0.1%). March was the biggest decline in almost three years. A -1% decline in goods prices drove the index lower, particularly energy which plunged -6.4%. Foods rose +0.6% after falling -2.2% in February. Year-over-year PPI was also down, dropping to +2.7% from +4.9% in the prior month. That’s the lowest annual reading since January 2021. Core PPI, which strips out volatile food and energy costs, was up just +0.1% for the month, also below expectations of +0.2% which is where it was last month after being revised up from 0.0%. Year-over-year PPI was also down, dropping to +3.4% from +4.8% in the prior month.
- March Import Prices produced yet another downside surprise on the inflation front, decreasing -0.6% for the month, well below expectations for a -0.1 decline, and the prior month’s downwardly revised -0.2% (originally -0.1%). It was the eighth decline in the last nine months. Import fuel prices fell -2.9%, marking the ninth consecutive month of declines. Nonfuel import prices fell -0.5%, the first decline since November. Year-over-year, import prices were down -4.6%.
- March Industrial Production grew +0.4% from February, twice the expectations for a +0.2% increase. Revisions to both January and February’s figures were positive. January was revised up to +0.9% in January (previously +0.3%) and February was revised to +0.2% (previously flat). Manufacturing output fell 0.5%, but February’s figure was revised upward from 0.1% to 0.6%. Capacity Utilization ticked up from 79.6% in February to 79.8% in March.
- Preliminary data from the University of Michigan shows that Consumer Sentiment remained low in April but did rebound to 63.5 from 62 in March. Current conditions led to the rebound, rising +2.3 points. The expectations component rose +1.1 points. Short-term inflation expectations jumped, as 12-month inflation expectations rose to 4.6% from 3.6%, the highest since last November. 5-year expectations held at 2.9% for the fifth straight month.
- The NFIB Small Business Optimism Index fell in March to 90.1 from 90.9 in February, but that was ahead of expectations for 89.0. The March reading marks the 15th consecutive month in which the index sits below the 49-year average of 98. Small businesses continue to struggle with high inflation and labor shortages, though recent turmoil in the banking system has also shaken their confidence. As a result, the percentage of owners expecting business conditions to improve over the next six months remains soundly negative. Plans for capital expenditures were unchanged from the prior month but remains well in positive territory. This may fall going forward as new loans are reportedly more difficult to get.
- February Wholesale Inventories rose +0.1%, under expectations for +0.3% but above the prior month’s downwardly revised -0.6% contraction (originally -0.4%). Across categories, durable goods led the way. Automotive, electrical, and machinery stockpiles posted solid gains. Nondurable goods inventories fell -0.5% from January’s level. Wholesale sales have expanded +0.4% for two consecutive months and were up +1.3% year-over-year. The inventory-to-sales ratio fell a tick to 1.37 months from 1.38. A year ago the ratio stood at a much lower 1.24. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves. Higher inventory levels reflect softer sales as the economy slows.
- The weekly MBA Mortgage Application Index rebounded +5.3% in the week ended April 7, after the prior week’s -4.1% drop, as the Refinance Index ticked up +0.1% and the Purchase Index was up +7.8%. The increase came as the average 30-year mortgage rate fell -10 basis points to 6.30%, which is up 2.03 percentage points versus a year ago.
- Weekly Initial Jobless Claims rose by +11,000 to 239,000 for the week ended April 8, above expectations for 235,000. Most of the new jobless claims were filed in California, where a flurry of layoffs at high-tech companies has taken place. Continuing Claims fell by 13,000 to 1.81 million in the week ended April 1.
The Week Ahead
The calendar is busier this week, especially with Fed speakers making appearances ahead of its blackout period, which begins on Saturday, as well as the first full week of the first quarter earnings reports. On the economic front, housing data will be heavy with the NAHB Housing Index data, housing starts, existing home sales, and weekly mortgage applications all on the docket. Outside of housing, S&P Global’s U.S. Purchase Managers Indices (PMIs) will be released on Friday.
Did You Know?
THE OLD COLLEGE TRY – 56% of Americans polled by the WSJ said that a four-year college degree was not worth the cost, a record high. Over the last 30 years college tuition has more than quadrupled, while overall inflation has a little more than doubled (source: The Wall Street Journal).
MILLENNIALS FLOCK TO CASH – Millennial workers (aged 27-42) expect they will need $1.3 million in savings to retire, and only 29% believe they will be able to save $1 million. When it comes to the allocation of their retirement savings, millennials are most heavily weighted in cash (33%) and equities (31%) (source: Schroder’s 2023 Retirement Survey).
SMALLER REFUNDS – Of the 71.5 million Federal tax returns processed through 3/17/23, 53.9 million received a refund, which was up +4.1% from a year earlier. The average IRS tax refund issued for 2022 returns declined -11.3% from a year earlier to $2,933 (source: IRS, MFS).
This Week in History
NASDAQ 500 – On April 12, 1991, the Nasdaq Composite Index broke the 500 level for the first time, closing at 501.62. On Friday (April 14, 2023) the technology-heavy index closed at 12,123.47. Over the 32 years from 4/12/91 to 4/14/23, the Nasdaq had a total return of 2,992.35% (with dividends reinvested), or 11.31% annualized (source: The Wall Street Journal, Bloomberg).
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.