- Stocks and bonds finished April strong, rebounding in the final week after losses the prior week. Stronger-than-expected earnings reports helped stocks advance and the biggest weekly drop in Treasury yields since mid-March helped bonds rise.
- Recession risks are rising but the U.S. economy was able to eke out another gain in the first quarter. Still, real Gross Domestic Product (GDP) expanded at a lackluster +1.1% annual rate in the first quarter, well below expectations for +2.0% growth and Q4’s +2.6% pace.
- Several stronger-than-expected inflation readings during the week add to evidence of sticky inflation and solidifies the case for a 25-basis-point Fed hike on May 3rd. The stubbornly high inflation data may also add pressure on the Fed to remain hawkish beyond this week’s interest rate decision.
Stocks and bonds finish April strong, up for the final week
Stronger-than-expected earnings reports helped the broad S&P 500 Index and the tech-heavy Nasdaq Composite Index rebound from losses last week. The S&P gained +0.9% and the Nasdaq was up +1.3% to reach its highest level since September. The markets applauded earnings reports from several big tech companies including Alphabet, Microsoft, and Meta Platforms (Facebook). However, despite better than expected quarterly results Amazon fell -4% on Friday after downbeat forecasts and warning that growth in its cloud computing services would slow further. Small cap stocks weren’t as fortunate though, with the Russell 2000 Index falling -1.3% for the week. The financial sector also had some turmoil with First Republic Bank shares losing almost half of their value on Tuesday and continuing to slide most of the week after the bank reported that customers pulled about $100 billion in deposits from the bank last month, reviving fears that the worst of the banking crisis isn’t over. On Friday, the shares dropped another -43%, bringing losses for the year to -97%.
Bonds also rallied for the week as yields dropped. The 10-year Treasury yield slipped -15 basis points (bps) to 3.42% and the 2-year Treasury yield dropped -18bps to end the week at 4.01%. That helped the Bloomberg US Aggregate Bond Index rise +0.8% for the week and the Bloomberg Global Aggregate ex US Bond Index (non-US bonds) was up +0.7%.
The drop in yields, and gains in bonds, came despite reports showing inflationary pressures remain a challenge for the Fed. The U.S. Employment Cost Index, the broadest measure of U.S. labor costs, came in stronger than expected, as did the Fed’s preferred inflation gauge, the Core PCE Price Index. The University of Michigan’s Consumer Sentiment report also showed 5-10 year inflation expectations rise from March’s level. Combined the inflation readings add to evidence of sticky inflation and solidify the case for a 25-basis-point Fed hike on May 3rd. The Federal Open Market Committee (FOMC) is expected to raise interest rates by 25 basis points, and now economists and investors will watch to see if the FOMC statement, and Powell’s post decision press conference language, will change references from “some additional policy firming” and the “extent of future increases in the target range” to something more hawkish.
Chart of the Week
Recession risks are rising but the U.S. economy was able to eke out another gain in the first quarter. But economic growth did cool more than expected in Q1 amid stubbornly high inflation and rising interest rates. Real Gross Domestic Product (GDP), a measure of the value of all the goods and services produced in the U.S., expanded at a lackluster +1.1% annual rate in the first quarter according to the BEA’s initial estimate (first of three). That was below expectations of +2.0% growth and the prior quarter’s +2.6% pace. Declining business investment offset strong consumer spending and pointed to slowing growth. Spending on services such as travel, recreation, and health care grew at a modest +2.3% pace. Meanwhile, government spending rose +4.7%, following a +3.8% gain in the fourth quarter. In fact, it was the third consecutive quarterly increase in government spending, which added a full 0.81 percentage points to the Q1 top line growth. The biggest drag on GDP was from slower growth in inventories. The growth in inventories shrank by a whopping -$138 billion, the sharpest reversal in two years. The GDP Price Deflator increased to +4.0% from +3.9%. Overall, the report showed a continued deceleration in economic growth, but it was inventories—not a drop in personal consumption—that drove the slowdown.
The U.S. Economy Is Slowing
Rate of growth in Gross Domestic Product (GDP)
Source: Commerce Department, Haver Analytics, MarketWatch.
- The University of Michigan consumer sentiment index remains deeply in recessionary territory in April, with the final reading unchanged from the initial estimate in early April at 63.5, and up from 62 in March. A year ago, the index stood at 65.2. The Current Economic Conditions component dipped to 68.2 from the preliminary reading of 68.6 but is up from 66.3 in March. In the same period a year ago, the index stood at 69.4. The Consumer Expectations component improved to 60.5 from the preliminary reading of 60.3 and from 59.2 in March. A year ago, the index was at 62.5. One-year inflation expectations held steady at +4.6%, while five-year inflation expectations bumped up to +3.0% from the preliminary reading of +2.9%.
- According to the Conference Board’s Consumer Confidence Index, confidence weakened in April, falling to 101.3 from a downwardly revised 104 (previously 104.2). That was far below expectations for 104 and marks a 9-month low. The Present Situation index rose to 151.1 from 148.9 in March, but the Expectations index — which reflects consumers’ six-month outlook — fell to 68.1 from 74 in March, as consumers felt that current business and labor market conditions improved, but their outlook for the economy was negatively impacted by the recent bank failures and concerns about a recession.
- Consumer Spending was flat in March, a bit above Wall Street expectations which had forecasted a -0.1% dip but down from February’s negatively revised +0.1% (originally +0.2%). The increase in spending was supported in part by an increase in wages and salaries as Personal Income rose by +0.3% in March, which matched February’s level and was just above expectations of +0.2%. Americans spent more on services (+0.4%), and less on goods (-0.6%). Consumption of fuel and new vehicles fell while spending rose on housing, healthcare, and utilities. Real Disposable Income, which heavily influences consumer spending, increased by +0.3%, a slight pickup from the +0.2% pace in February thanks to moderating inflation. The Personal Savings Rate (as a % of real disposable income) increased for the sixth month in a row, to +5.1% from +4.8% in February. Savings had fallen late last year to the lowest level since 2005. The Personal Consumption Expenditures (PCE) Price Index increased +0.1% in March, in line with expectations but down from +0.3% in February. Year-over-year, the PCE Price Index was up +4.2%, just above expectations for +4.1% but down from an upwardly revised 5.1% (originally 5.0%) the prior month. The Core-PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.3% month-over-month, in line with expectations and February’s level. Year-over-year, the Core-PCE Price Index is up +4.6%, matching expectations and slightly below February’s positively revised +4.7% (originally +4.6%). The key takeaway from the report is that inflation remains at persistently high levels and the stickiness of Core PCE should keep the Fed sticking to its rate-hike ways.
- The Employment Cost Index increased a seasonally adjusted +1.2% in the first quarter, slightly above consensus expectations for +1.1%, and the positively revised +1.1% (from +1.0%) for the three-month period ending in December 2022. Wages and salaries, which account for about 70% of compensation costs, increased +1.2% following a positively revised +1.2% increase last quarter (from +1.0%). Year-over-year the ECI was up +4.8%, down from +5.1% for the year ended December 2022. Wages and salaries increased +5.0% for the 12-month period ending March 2023, down slightly from +5.1% for the fourth quarter. The ECI is the last report on wages that the Fed will see before the conclusion of its two-day meeting on May 3 and costs didn’t show any meaningful signs of deceleration, and much higher than Fed policymakers think is consistent with their 2% inflation goal.
- The Commerce Department reported March New Home Sales shot up +9.6% to a seasonally adjusted annual rate of 683,000 units, well ahead of expectations for 634,000 units and February’s downwardly revised 623,000 units (originally 640,000). That’s at the highest monthly level since last August. Nevertheless, year-over-year, sales are down -3.4%, from 707,000 units in March of last year when the housing market was still booming with super-low interest rates. March’s inventory of new homes for sale remained steady from the previous month at 432,000, which represents 7.6 months’ supply at the current rate of sales. The Median New Home Price was up roughly +2% from a year earlier to $449,800 versus the $438,200 reported last month. Sales were most prominent in the Northeast, while only the South saw new home sales fall.
- The National Association of Realtors reported that March Pending Home Sales fell for the first time since November, dropping -5.2%, far below the +0.8% rise expected and February’s +0.8% gain. Regionally, only the South saw a rise in pending sales. Compared to a year earlier, transactions were down by -23.2%; below expectations for -20.7% and -21.1% the prior month. Year-over-year pending sales have been negative since December 2021. All regions experienced year-over-year decreases. Affordability and a lack of inventory are still weighing on sales.
- U.S. home prices rise for the first time in 8 months, according to the Case-Shiller S&P CoreLogic Case-Shiller National Home Price Index. Low inventory and high demand from home-buyers pushed up U.S. home prices +0.2% in February, the first monthly increase since June of last year. Regionally, the sharpest declines continue to be concentrated in the West, with Las Vegas leading the monthly decline in prices. On a year-over-year (YoY) basis, the pace of home price declined to +2.0%, down from +3.7% in January, marking the slowest annual increase since July 2012. The Southeast (+7.8% YoY) remains the country’s strongest region, while the West (-4.2% YoY) continues as the weakest.
- U.S. house prices rose +0.5% in February, according to the seasonally adjusted monthly Federal Housing Finance Agency (FHFA) House Price Index (HPI), up from +0.1% in January, beating expectations for -0.1%, and the biggest monthly increase since May of last year. Dr. Nataliya Polkovnichenko, Supervisory Economist at FHFA said the increase was “in part, due to a decline in mortgage rates by more than half a percentage point from the peak reached in early November as well as historically low housing inventory.” Year-over-year, the FHFA HPI was up +4.0%, down from +5.3% the prior month, matching the slowest annual increase last seen in September 2014.
- Stress in the U.S. economy persisted last month, according to the Chicago Fed National Activity Index (CFNAI) – a composite of 85 indicators of national economic activity. The headline index was unchanged at -0.19 for March, slightly better than expectations for -0.20. A reading below zero indicates below-trend growth in the national economy. Three of the four broad categories of indicators used to construct the index were negative, and two categories deteriorated from February. Overall, 43 of the 85 monthly individual indicators made positive contributions while 42 made negative contributions. The biggest drag came from personal consumption and housing indicators. Employment returned above zero. New orders improved +0.07 but remain negative. During the last 20 years, there has been a 74% correlation between the index and the quarter-over-quarter change in real GDP.
- The Commerce Department reported Durable Goods Orders jumped +3.2% in March, beating expectations for a +0.5% rise, and far ahead of February’s -1.2% decline. But the details of the report were far less impressive as durable goods excluding transportation, which saw a surge in new orders of defense and nondefense aircraft in March, increased just +0.3%. The transportation segment is a large and volatile category that often exaggerates the ups and downs in industrial production, which was the case in March from heavy orders for planes from Boeing. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, fell -0.4% which follows a downwardly revised -0.7% drop in February.
- Perceptions of Texas business conditions worsened notably in April, according to the Texas Manufacturing Outlook Survey. The headline general business activity index dropped -8 points to -23.4, below expectations for -12, and its lowest reading in nine months. It has been negative since last May. The production index, a key measure of state manufacturing conditions, fell to +0.9 from 2.5, with the near-zero reading suggestive of no change in output from last month. The new orders index rose +5 points to -9.6 but has been negative for 11 straight months. Only the labor market is still strong, with employment and wages rising. Indicators of conditions six months from now remain uncharacteristically weak.
- The Richmond Fed Manufacturing index fell -5 points to -10, below expectations for -8. Two of its three component indexes—shipments and new orders—declined. The shipments index dropped from 2 in March to -7 in April, while the new orders index fell from -11 to -20. The employment index, however, rose slightly from -5 in March to 0 in April. The number of employees improved rising 5 to 0, but the work week dropped 13 to -1, while wages dropped 2 to 25. Prices paid and received rose marginally.
- The Kansas City Fed Manufacturing Survey showed April factory activity declined moderately to -10 from 0.0 in March and February, missing expectations for -2. New orders, production, exports, and shipments are all contracted. Prices paid went up and employment (-1) dropped into contraction for the first time since June 2020. The production index plunged to -21 from +3 in March.
- The weekly MBA Mortgage Application Index rose +3.7% for the week ended April 21, following the biggest decline in two months (-8.8%) the previous week. The index has now oscillated between positive and negative readings for five straight weeks. The Purchase Index was up +4.6% compared to a -10.0% drop the prior week and the Refinance Index rose +1.7% following a -5.8% decline the prior week. The increase came as the average 30-Year Mortgage Rate rose 12 basis points to 6.55% and put the 30-year fixed rate up 1.18 percentage points versus a year ago.
- Weekly Initial Jobless Claims fell by -16,000 to 230,000 for the week ended April 22, almost wiping out the last two week’s gains, and far below expectations for 246,000. The prior week was positively revised to 246,000 from the originally reported 245,000. The number of people already collecting unemployment claims (i.e. Continuing Claims) fell by -3,000 to 1,858,000 in the week ended April 15. That’s slightly off the highest level of Continuing Claims since November 2021 reached last week.
The Week Ahead
The economic calendar is lighter this week but will be in the spotlight particularly the Federal Reserve’s policy-making interest rate decision on Wednesday and the April Employment Report on Friday. PMIs from ISM and S&P Global will also be in focus, as well as construction spending, factory orders, and consumer credit. The big economic reports may lead to another volatile week for the Treasury yields. Next week will also be a busy one for earnings, with over 2,600 companies scheduled to report results, including heavyweights like Apple, Ford, Pfizer, and Starbucks.
Did You Know?
SELL IN MAY? – Since WWII, the S&P 500’s median performance during the six-month period from May through October has been a gain of +3% with positive returns 65.4% of the time. That’s less than half of the +6.2% median gain (positive 76% of the time) in the six-month period from November through April (source: Bespoke Investment Group).
BIRD IN THE HAND – US corporations (public and private) paid out a net $1.65 trillion in dividends in 2022 according to the US Federal Reserve’s quarterly Financial Accounts of the United States (Z.1) release. That’s down from a record $1.73 trillion in dividend payments in 2021, but net dividend payments have still increased 6.9% annually over the last 20 years (source: Federal Reserve, MFS).
WHERE THERE’S A WILL – 61% of US households have either received, expect to receive, or plan to leave an inheritance, which is up from just 46% in 2015. The biggest increase came from households expecting to leave an inheritance, as that percentage increased from 27.2% in 2015 up to 38.2% in 2022 (source: Hearts & Wallets, MFS).
This Week in History
CUTTING THE CORD – On April 25, 1874, Guglielmo Marconi, son of an aristocratic Italian father and an Irish mother, was born in Bologna, Italy. In 1901 he sent the first radio signals across the Atlantic, ushering in the era of wireless communication (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.