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

Quick Takes

  • Global stocks snapped a string of weekly losses, but bonds continued their decline. Stocks seemed buoyed by upbeat earnings and were able to shrug off stubbornly high inflation data. However, bonds couldn’t ignore the hot inflation data and slower economic growth.
  • The S&P 500 had its best week since October, rising +2.7%, while the small cap Russell 2000 gained +2.8%, and the tech-heavy Nasdaq jumped +4.2%. Meanwhile, the 10-year U.S. Treasury yield rose +4 basis points to 4.7%, to its highest level since November.
  • The advanced estimate for Q1 real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was just +1.6%, far below consensus forecasts for a +2.5% reading and down from the fourth quarter’s +3.4% annual rate of growth.  
[Market Update] - Market Snapshot 042624 | The Retirement Planning Group

Stocks break losing streak, but bonds aren’t as fortunate

Most major global stock benchmarks broke a string of weekly losses as investors turned their attention to first quarter earnings and shrugged off stubbornly high inflation data. A week after posting its worst weekly performance in over a year, the S&P 500 Index rebounded last week with its best performance since October 2023, advancing +2.7% for the week. The Technology sector led the rally, jumping +3.8% for the week, but gains were robust, with all 11 S&P sectors positive for the week. The Technology strength helped the Nasdaq Composite Index to a +4.2% gain, helping to offset the prior week’s -5.5% drop. The small cap Russell 2000 Index rebounded +2.8% after a -2.8% decline the prior week. The S&P, Russell, and Nasdaq all snapped three-week losing streaks. The tech rally was primarily driven by upbeat quarterly earnings reports from Tesla, Microsoft, and Alphabet (Google). However, fellow “Magnificent 7” member Meta (Facebook) was a conspicuous disappointment. Economic data wasn’t nearly as supportive of a rally, with the first quarter Gross Domestic Product (GDP) report showing an undesirable combination of slowing growth with accelerating inflation. Consumer Sentiment also unexpectedly declined but showed higher consumer inflation expectations. S&P Global reported that its gauge of U.S. manufacturing activity unexpectedly fell back into contraction territory in April. Investors may be interpreting the poor economic data as “bad news is good news,” thinking the worse-than-expected results may cajole the Fed to keep to its forecasted three rate cuts this year. 

Overseas equities also rallied, likely buoyed by an easing of Middle East tensions and some encouraging corporate earnings results. Developed market international stocks (as measured by the MSCI EAFE Index) were up +1.7%, while the MSCI Emerging Markets Index jumped +3.7%. April business activity in the U.K. and the eurozone grew at the fastest pace in nearly a year, consumer confidence in Germany rose to its highest level in two years, South Korea’s economy expanded at a greater-than-expected 3.4% annual rate, and China’s GDP grew at a stronger-than-expected +5.3%.

Bond yields increased over the week as several inflation gauges were reported higher than expected. On Thursday, the Core PCE Price Index, which is used to calculate GDP, was hotter than expected, and on Friday, the Core PCE Deflator measure was higher than expected year-over-year. January and February Core PCE readings were also revised up. For the week, the yield on the 2-year U.S. Treasury yield was up +1 basis point to finish the week at 4.99%, while the 10-year U.S. Treasury yield was up +4 basis points, ending the week at 4.66%. Both are at their highest weekly closes since mid-November. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index slipped -0.1% for the week while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was down -0.5% for the second straight week, marking a four-week week losing streak for international bonds. 

Chart of the Week

U.S. economic growth for the first quarter slowed considerably from the fourth quarter’s +3.4% annual pace. The advanced estimate for Q1 real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was just +1.6%, far below consensus forecasts for a +2.5% reading. Personal Consumption Expenditure (PCE) growth was just +2.5%, weaker than the expected +3.0% and the prior quarter’s +3.3% annual rate. Consumer spending accounts for about 70% of the U.S. economy, so the slowdown is a concerning signal for future growth. Government Spending was up just +1.2% versus +4.6% the prior quarter. The government expenditures had been up considerably from the 10-year average of about +1.8%. Business Investment, the second largest component of GDP, grew at a rate of +2.9%, down from +3.7% the prior quarter. Exports increased just +0.9%, down from +5.1% in the prior quarter, while Imports rose +7.2% versus +2.2% in the previous quarter. Meanwhile, inflation indicators in the report were far higher than expected. The GDP Price Deflator, a gauge of inflation, unexpectedly increased to +3.1% from the unrevised +1.6% annual rate the previous quarter. The PCE Price Index increased +3.4% versus +1.8% in the fourth quarter, and the Core PCE Price Index, which excludes food and energy and is a closely watched measure of underlying inflation, increased +3.7% versus +2.0% in the fourth quarter. The disappointing combination of weaker economic growth, primarily from slower personal spending, with higher inflation is troublesome for the soft-landing scenario that had become the consensus expectation.

GDP Growth Slowed to a +1.6% Rate in Q1, Well Below Expectations

U.S. Real Gross Domestic Product, % change from previous quarter

[Market Update] - GDP Growth Slowed to a... 042624 | The Retirement Planning Group

Source: Seasonally adjusted annual rate

Economic Review

  • Personal Spending accelerated by +0.8% for the second straight month in March, beating expectations for a +0.6% rise and matching the largest increase in 13 months set the prior month. After adjusting for inflation, Real Personal Spending was up +0.5%, also matching the previous month (revised up from +0.4%). Spending appears to be holding up despite higher interest rates. Meanwhile, Personal Income rose +0.5%, in line with expectations, and up from the prior month’s unrevised +0.3%. Once again, the concern was another drop in the Personal Savings Rate, which fell to 3.2% from 3.6% the prior month, the lowest level in years. 
  • The final reading of the March University of Michigan Consumer Sentiment Index weakened to 77.2 from 77.9 in the initial reading, where it was expected to stay. That is well below the pre-pandemic peak of 101. The Current Economic Conditions component was revised down to 79.0 from the preliminary estimate of 79.1. The Consumer Expectations component was also revised down to 76.0 from the initial estimate of 77.1. One-year inflation expectations ticked up to +3.2%, above expectations to stay at the preliminary estimate of +3.1%. The five-year inflation expectations came in at +3.0%, as expected.  
  • The Federal Reserve Bank of Chicago reported that U.S. economic activity picked up again in March, as the Chicago Fed National Activity Index (CFNAI) moved up to +0.15 from +0.09 the prior month (which was revised higher from +0.5). Readings below zero indicate below-trend-growth in the national economic activity. Only one of the four broad categories of indicators used to construct the index was negative for the month, and two advanced from the month. The Production and Income category contributed positively, at +0.11, but that was down from +0.13 the prior month. The Employment, Unemployment, and Hours category was a positive contributor at +0.04, up from -0.01 the prior month. The Personal Consumption and Housing category was a negative contributor at -0.01, down from +0.02 the prior month. The Sales, Orders, and Inventories category was a neutral contributor, up from –0.05 the prior month. Overall breadth was constructive, with 50 of the 85 monthly individual indicators making positive contributions, while just 35 were negative.
  • The preliminary “flash” composite S&P Global U.S. Purchasing Managers Index (PMI) slipped to 50.9 in April, down from 52.1 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI fell to a four-month low of 49.9 from 51.9 the prior month, far behind expectations for 52.0. The Services PMI slipped to a five-month low of 50.9 from 51.7 the prior month, and light of expectations for 52.0. High interest rates and elevated inflation put a dent in customer demand, S&P said. New Orders, a sign of future sales, fell for the first time in six months, leading businesses to be more pessimistic.
  • The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment rose +2.6% in March from +0.7% the prior month (revised down from +1.3%), beating expectations for +2.5%. Durable Goods Orders Excluding Transportation, were up +0.2% versus the prior month’s +0.1% level (revised down from the originally reported +0.3%), which was in line with expectations. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.2% following a +0.4 rise the prior month (revised down from +0.7%), in line with expectations.
  • The Richmond Fed Manufacturing index improved to -7 from an unrevised -11 the previous month, slightly better than expectations of -8. Of its three component indexes, the Shipments component increased to -10 from −14 the previous month, and the Capacity Utilization component improved to -5 from -21. Meanwhile, the Employment component fell to -2 from 0. The New Orders index, part of the Shipments component, rebounded to -9 from -17. The Prices Paid trend fell to its lowest level since December 2020, while Prices Received bounced a bit higher.
  • The Kansas City Fed Manufacturing Survey fell to -8 in April from -7 the month before and was below expectations for -5. The New Orders index rebounded to -6 from -17, while the Production index dropped to -13 from -9. The Employment index went into negative territory, falling to -2 from +6. The Prices Paid ticked up to +18 from +17 the prior month, while Prices Received fell to 0.0 from +5. The Kansas City Fed Service Sector Outlook Survey fell to +7 from +9 the prior month. 
  • The Commerce Department reported New Home Sales surged +8.8% in March, the most since December 2022. That was far above expectations for +0.9% and far higher than the -5.1% drop the prior month (which was revised down from -0.3%). That equates to 693,000 units versus the prior month’s 637,000 units (revised down from the originally reported 662,000). New Home Sales data tend to be volatile month-on-month and are often revised. New-home sales remain far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes are up +8.3% compared to the +1.9% annual pace the prior month.  By region, month-over-month sales were strongest in the Northeast, up +28%, but also rose in the other three regions, with West up +8.6%, the South up +7.7%, and the Midwest up +5.3%. The Median New Home Price rose to $430,700 from $400,500 the prior month. The inventory of new homes for sale was down a tick to 8.3 months of supply at the current rate of sales from 8.8 months the prior month.
  • The National Association of Realtors (NAR) reported that Pending Home Sales jumped +3.4% in February, well ahead of expectations for a +0.4% increase and up from the prior month’s unrevised +1.6% drop. Year-over-year sales were down -4.5%, down from the -2.2% slide the prior month. From a regional perspective, the South and West drove the rebound, at +7% or better. The South–the country’s largest housing market–was up +1.1%. The Northeast and West were little changed. The Midwest was the only region to see sales fall. Pending home sales tend to lead existing home sales by a month or two.
  • Weekly MBA Mortgage Applications fell -2.7% for the week ended April 19, following the prior week’s +3.3% rise. The Purchase Index was down -0.96% following a +4.98% rise the prior week. The Refinance Index sank -5.59% following a +0.5% increase the prior week. The average 30-Year Mortgage Rate increased to 7.24%, the highest level since late November, and up from 7.13% the prior week. 
  • Weekly Initial Jobless Claims fell by -5,000 to 207,000 for the week ended April 20, below expectations for 215,000. The prior week was unrevised at 212,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell by -15,000 to 1,781,000 in the week ended April 13, below consensus estimates for 1,814,000 and last week’s reading of 1,796,000 (revised down from 1,812,000).

The Week Ahead

Employment will be the big focus of economic data this week, culminating in Friday’s release of the April Employment Situation Report, in which 210,000 nonfarm payrolls are expected to have been added in April, which is down from the 303,000 added in February. Before that, the Employment Cost Index is reported on Tuesday, JOLTS job openings are due Wednesday, and weekly Jobless Claims are Thursday. Beyond the employment data, the Federal Reserve’s policy Committee is expected to keep the federal-funds rate unchanged on Wednesday afternoon, which will be followed by the customary post-meeting press conference by Fed Chairman Jerome Powell. Other data during the week include Consumer Confidence, House Price Indices (HPIs) by S&P CoreLogic and the Federal Housing Finance Agency (FHFA), and Purchasing Manager Indices (PMIs) from ISM and S&P Global.

It will be the busiest week of first-quarter earnings season, with more than 150 S&P 500 companies scheduled to report results. Among companies reporting are Domino’s Pizza and Paramount Global on Monday; Advanced Micro Devices, Amazon.com, Eli Lilly, and Super Micro Computer on Tuesday; CVS Health, Etsy, Mastercard, Pfizer, and Qualcomm on Wednesday; and Apple, Booking Holdings, ConocoPhillips, Moderna, and Monster Beverage report on Thursday.

[Market Update] - Upcoming Economic Calendar 042624 | The Retirement Planning Group

Did You Know?

RECORD ETF ASSETSNet inflows into Exchange-traded funds (ETFs) in the first quarter totaled $232.2 billion, which was the second highest Q1 total on record, trailing only the $252.2 billion level from Q1-2021. Total assets invested in ETFs are at a record $8.87 trillion, as the number of ETF and Exchange-traded products (ETP) has more than doubled since 2014 to 3,457 from 1,660 (Source: NASDAQ).
PUT IT ON PLASTIC – Nominal credit card balances hit a record high in Q4 2023 as credit card performance deteriorated. 30, 60, and 90+ day past due accounts all rose to their highest levels since at least 2012. On a combined basis, 4.1% of all accounts were at least 30 days past due (Source: The Philadelphia Fed).
A TAXING DAYOn April 15, the S&P 500, Nasdaq Composite, S&P 400 (mid cap stocks), and Russell 2000 (small cap stocks) all closed below their 50-day moving averages (DMAs) for the first time in 110 trading days (11/2/23). Following the end of the 17 prior streaks, where all four indices closed above their 50-DMA for at least 100 straight trading days, the S&P 500’s median one-year gain was +9.9%, with gains 77% of the time (Source: Bespoke Investment Group).

This Week in History

OPTIONALITY On April 26, 1973, the Chicago Board Options Exchange opened, becoming the first marketplace for trading listed options—on 16 stocks (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 042624 | 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.