[Market Update] - Market Snapshot 060923 | The Retirement Planning Group

Quick Takes

  • Stocks and bonds continued to decline for a third straight week, as inflationary economic data, concerns over tensions in the Middle East, and poor earnings from chipmaker stocks weighed on investor sentiment.
  • The S&P 500 fell -3.1%, the Nasdaq dropped -5.5% and the Russell 2000 was down -2.8%. The 10-year U.S. Treasury yield rose +10 basis points to 4.62%, its third consecutive week higher, which helped push the Bloomberg U.S. Aggregate Bond Index lower by -0.5%.
  • Strong economic data appeared to increase concerns that the Federal Reserve would delay interest rate cuts to the fall, if not to 2025. For example, Retail Sales rose +0.7% in March, well above consensus expectations of around +0.3%.
[Market Update] - Market Snapshot 041924 | The Retirement Planning Group

Stocks and bonds retreat for a third straight week

Concerns over tensions in the Middle East and the possibility of U.S. interest rates remaining “higher for longer” continue to weigh on investors as stocks and bonds recorded their third consecutive week of broad-based losses. Unlike previous pullbacks, this past week’s decline was led by a sharp decline in mega-cap technology stocks, particularly chipmakers and other artificial intelligence (AI) related names. The so-called “Magnificent 7” stocks lost a staggering $950 billion in market cap this week. Those stocks have rallied for nearly 18 months and were due for a pause but the swiftness of the declines during the week caught most investors by surprise. It sent the tech-heavy Nasdaq Composite Index down -5.5% for the week, its worst weekly showing since November 2022, and fourth consecutive week of losses. The S&P 500 Index fell -3.1% for the week, its worst weekly performance since early March 2023. The decline saw the index slip below the key 5,000-point level for the first time since late February. The CBOE Market Volatility Index, commonly referred to as the VIX Index or “Fear Index,” ended the week up another +8% at 18.7, its highest weekly close since October. The small cap Russell 2000 Index fell -2.8% for the week, pushing it further into negative territory for the year-to-date period. For the S&P and the Russell it was the third consecutive week of declines. Stocks overseas didn’t perform much differently from their U.S. counterparts. Developed market international stocks (as measured by the MSCI EAFE Index) fell -2.3% while the MSCI Emerging Markets Index dropped -3.6%.

Rates continued to rise as Federal Reserve (Fed) officials continued to express concern over stronger-than-expected economic data. On Tuesday, Fed Chairman Jerome Powell stated at an economic conference that “recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” On Thursday, New York Fed President John Williams warned that a rate hike is not the baseline, but that one is possible if the data warrants. Atlanta Fed President Raphael Bostic said that policymakers would not be in a position to cut rates until the end of the year. The U.S. 10-year Treasury yield was up +10 basis points, ending the week at 4.62%. Meanwhile, the 2-year U.S. Treasury yield was up +9 basis points to finish the week at 4.99%. Both are at their highest weekly closes since mid-November. With yields marching higher, the Bloomberg U.S. Aggregate Bond Index fell -0.6% for the week while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was down -0.5%. It was the third straight week of losses for global bonds.

Chart of the Week

The U.S. housing market is under renewed pressure as mortgage rates have surged past 7%. The National Association of Realtors (NAR) reported that March Existing Home Sales fell by the most since November 2022, dropping -4.3% to a seasonally adjusted annual rate of 4.19 million units, below expectations for 4.20 million units and an unrevised 4.38 million units the prior month. Year-over-year existing sales are down -3.7% versus the -3.3% annual rate the prior month. The Median Existing Home Price was $393,500, up from $384,500 the prior month, and up +4.8% from a year ago. That was the ninth consecutive month of year-over-year increases and the highest ever price for the month of March. Home prices peaked in June 2022, when the median price of a resale home hit $413,800. Homes for sale were up +4.7% for the month and +14.4% from last year to 1.11 million units. Homes listed for sale remained on the market for 33 days on average, down from 38 days the previous month. Last November, homes were only on the market for 24 days. First-time buyers were 32% of sales in the month, up from 26% the month before. All-cash sales made up 28% of transactions, down from 33% the prior month. For the month, sales only rose in the Northeast (4.2%), while falling in the West (-8.2%), South (-5.9%), and Midwest (-1.9%).

Home Sales Are Getting Hurt by High Mortgage Rates

U.S. Existing Home Sales, change from a month earlier

[Market Update] - U.S. Existing Home Sales, change from a month earlier 041924  | The Retirement Planning Group

Source: National Association of Realtors, The Wall Street Journal.

Economic Review

  • The Commerce Department reported that the advance estimate of U.S. Retail Sales rose +0.7% in March, following the prior month’s +0.9% gain which was revised up from +0.6%, but above expectations for a +0.4% gain. Sales rose +2.7% at internet retailers, driving much of the increase in March. Sales also rose at grocery stores, gas stations, home centers and general stores. Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Sales at restaurants also rose +0.4% and are up +6.5% in the past year. Sales fell at auto dealers, clothing outlets and stores that sell furniture, appliances and consumer electronics. Sales ex-autos and gas were up +1.0% versus the prior month’s +0.5% gain, which was revised up from +0.3%. The Control Group, a figure used to calculate GDP, was up +1.1%, far above expectations for +0.4%, and up from the +0.3% the prior month. The strong showing in February and March could help boost Gross Domestic Product (GDP) in the first quarter. GDP will be released Thursday and is forecast to increase about +2% in the first three months of the year.
  • The Conference Board’s Leading Economic Index (LEI) couldn’t rise for a second straight month after its first increase in two years the prior month. The LEI fell in March, decreasing -0.3%, worse than expectations for -0.1% and down from +0.2% the prior month (revised up from +0.1%). Breadth of the index was mixed with five of the ten indicators tracked rising and five negative. The decline was mainly because of weaker business orders, lower consumer confidence and fewer building permits, but wider interest rates spreads, and somewhat higher jobless claims also contributed. “Overall, the index points to a fragile — even if not recessionary — outlook for the U.S. economy,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators.
  • March Industrial Production rose +0.4%, in line with expectations and the prior month. That was revised up from +0.1% and was the second straight month of improvement.  Manufacturing rose +0.5% after a +1.2% gain the prior month, led by motor vehicles and parts. Capacity Utilization, a measure of potential output, rebounded to 78.4% from 78.2% the prior month, short of expectations for 78.5%. It’s the fourth straight month production has been weak.
  • The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, rose +6.6 points in April to -14.3, well above expectations to come in at -5.2, and its fifth straight month in contraction territory (reading below zero indicates deteriorating economic conditions). New Orders rose +1.0 point to -16.2. Shipments fell -7.5 points to -14.4. Expectations for six months ahead fell to +16.7 from +21.6.  The Prices Paid component rose again, up +5 points to +33.7 as inflation pressures remain stubborn.
  • Manufacturing in the Federal Reserve’s Third District in April jumped to the highest level since April 2022. The Philly Fed Manufacturing Business Outlook Survey rose to +15.5 for the month from +3.2 the previous month, easily beating expectations for +2.0. It was the third consecutive monthly improvement (readings above zero indicates economic expansion). New Orders rose to +12.2 from +5.4 the prior month. The Shipments component rose to +19.1 from +11.4. The Employment index slipped down -1 point to -10.7, the 12th negative reading in the past 14 months. The Six-Month Business Outlook fell to +34.3 from +38.6 previously, which was the highest since July 2021. The Prices Paid index jumped to +23.0 from +3.7 in the prior month. That’s the highest reading since December 2023.
  • Homebuilder confidence was unchanged in April according to the National Association of Home Builders (NAHB) Housing Market Index (HMI) which remained at 51 as it was expected to do. It is the second straight month the index has been above the 50 breakeven level distinguishing between builders thinking conditions are good versus poor. According to NAHB, “April’s flat reading suggests potential for demand growth is there, but buyers are hesitating until they can better gauge where interest rates are headed.” For the month, 22% of builders reported cutting home prices, down from 24% the prior month. However, the average price reduction in March held steady at 6% for the tenth straight month. Meanwhile, the use of sales incentives fell as well, with the share of builders offering some form of incentive down to 57% from the previous 60%. Three of four regions reported gains, with the Northeast and West both up +4 points to 65 and 49, respectively. The Midwest was up +1 point to 50, while the South slipped -1 point to 50.
  • March Housing Starts plunged -14.7% to a seasonally adjusted annual rate of 1,321,000 units, far below expectations for 1,485,000 units and the positively revised 1,549,000 units the prior month (originally 1,521,000). That was the largest drop since April 2020, in the thick of the pandemic when starts dropped by -27%. Outside of the pandemic, it was the biggest drop in housing starts since February 2015. Housing starts peaked at 1,800,000 million in April 2022. Single-family homes sank -12.4%in the month while multi-family units were down -20.8%. New construction fell across most of the nation, with the biggest drops in the Northeast. The West was the only region which saw new construction increase. Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, dropped -4.3% after the prior month’s +2.3% increase (revised up from +1.9%), and was far below expectations for -0.9. Single-unit permits were down -5.7%, while multi-unit permits for buildings were flat.
  • Weekly MBA Mortgage Applications rose +3.3% for the week ended April 12, following the prior week’s +0.1% rise. The Purchase Index was up +4.97% following a -4.7% drop the prior week. The Refinance Index inched up +0.5% following a +9.9% jump the prior week. The average 30-Year Mortgage Rate increased to 7.13%, the highest level since early December and up from 7.01% the prior week. 
  • Weekly Initial Jobless Claims were unchanged at 212,000 for the week ended April 13, below expectations for 215,000. The prior week was revised up +1,000 to 212,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +2,000 to 1,812,000 in the week ended April 6, below consensus estimates for 1,818,000, and last week’s reading of 1,810,000 (revised down from 1,817,000).

    The Week Ahead

    The highlight of next week’s economic data will be from the Bureau of Economic Analysis (BEA) on Thursday when they release the advance estimate of first-quarter Gross Domestic Product (GDP). Wall Street consensus forecasts are that real GDP grew at an annual rate of +2.2% in the first three months of the year. Other important data will include the BEA’s U.S. personal income and outlays report for March on Friday which includes the Federal Reserve’s preferred measure of inflation, Core Personal Consumption Expenditures (PCE). The Core PCE Price Index is expected to be up +2.7% from a year earlier. Housing data will be prominent as well with New and Pending Home Sale due. After last week’s plunge in Existing Home Sales, these will be closely monitored. 

    It will be a packed week of first-quarter earnings, with around 150 S&P 500 companies scheduled to report, including Nucor, SAP, and Verizon Communications on Monday, followed by a big Tuesday with Freeport-McMoRan, GE Aerospace, General Motors, Halliburton, Lockheed Martin, PepsiCo, Spotify Technology, Tesla, United Parcel Service, and Visa all release earnings. Wednesday brings, among others, AT&T, Boeing, Chipotle Mexican Grill, and Meta Platforms. Alphabet, Caterpillar, Comcast, GE Vernova, Intel, Microsoft, Newmont, Southwest Airlines, and T-Mobile US report on Thursday, and then Chevron and Exxon Mobil close the week on Friday. Four of those are part of the “Magnificent 7″(Microsoft, Alphabet, Meta Platforms and Tesla). 

    All will be quiet on the Fed front. Fed policymakers are in a media blackout period for the week, ahead of their May FOMC meeting the following week.

    [Market Update] - Upcoming Economic Calendar 041924 | The Retirement Planning Group

    Did You Know?

    NAME, IMAGE, AND SNEAKERS – The potential value of an eight-year deal that Caitlin Clark is set to sign with Nike is reportedly $28 million, according to people familiar with the situation, after some of the world’s biggest shoe brands made a run at the Iowa basketball superstar (Source: The Wall Street Journal).

    SPARE SOME CHANGE? – The high-end estimate of how much change Americans throw out each year is approximately $68 million, according to the sustainable-waste processing business Reworld. The company, which recovers 550,000 tons of metals annually, started collecting coins in 2017 after noticing more of them in the trash. Since then, Reworld said it has found about $6 million in usable condition (Source: Reworld, The Wall Street Journal).

    RIP BUY THE DIP? – It was only a few weeks ago that investors couldn’t get enough of Buy-The-Dip (BTD), but now it may be SAR… Sell Any Rally. From November through the end of March, the S&P 500’s average closing level versus its intraday high was muted at less than +0.3%, and there were only 4 days when the S&P closed more than 1% from an intraday high. But over the last 3 weeks, the S&P has closed an average of -0.72% below its intraday high, and there have already been 4 days when it closed down more than -1% from its intraday high. Not only that, but Friday was the fifth straight day that the S&P closed down on the day after trading in positive territory at some point in the session. The last time that happened was on 10/12/22, which was the day of the bear market low (Source: Bespoke Investment Group).

    This Week in History

    THE GREAT QUAKE – On April 18, 1906, the Great Quake leveled San Francisco, wreaking $500 million in damage. One banker, A.P. Giannini, hastily drove a horse-drawn wagon to the ruined headquarters of his company, Bank of Italy, where he rummaged through the rubble, retrieving $2 million in gold, coins, and securities (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.
    [Market Update] - Asset Class Performance 041924 | The Retirement Planning Group

    Source: Bloomberg.

    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 from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US 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 US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US 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.