Weekly Market Update – December 01, 2023

Quick Takes

• The S&P 500 Index gained +0.8% for the week, its fifth straight weekly gain. The Nasdaq is also on a five-week win streak after gaining +0.4% last week. The small-cap Russell 2000 Index jumped +3.1% for a three-week win streak. The MSCI EAFE Index was up +0.4%.
• Global yields fell last week. In the U.S., the yield on the benchmark 10-year U.S. Treasury note dropped -27 basis points over the week, ending at 4.20%, its lowest level since early September. The Bloomberg U.S. Aggregate Bond Index gained +2.0% for the week.
• Data in the U.S. and overseas showed cooling inflation, and central bank policymakers made statements that were largely interpreted as dovish by investors. Markets are now pricing in 4 to 5 rate cuts by the Federal Reserve and European Central Bank next year.

Tough talk by Powell can’t slow down stocks and bonds

Most major global stock and bond indexes ended higher for the week as investors around the world celebrated cooling inflation. In the U.S., the S&P 500 Index gained +0.8% for the week – its fifth straight weekly gain, matching a streak last achieved in June. The index hasn’t been up for six consecutive weeks in more than a decade. The Nasdaq is also on a five-week win streak after gaining +0.4% last week. The small-cap Russell 2000 Index jumped +3.1% for a three-week win streak. Marks were buoyed by good news on the inflation front. On Tuesday, Federal Reserve Board Member Christopher Waller surprised investors by telling a Washington conference that “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.” Then, on Thursday, the Commerce Department released its Personal Consumption Expenditures (PCE) Price Index. That report includes the Fed’s preferred inflation measure, which is the Core version of the PCE Index that strips out food and energy, which rose just 0.2% in October, a slowdown from September. This brought the year-over-year increase down to +3.5%. That’s still considerably higher than the Fed’s 2% inflation target but marks the lowest level since April 2021. In a speech on Friday, Fed Chair Jerome Powell was much more hawkish, saying that talks of cutting interest rates was “premature”, adding that the central bank is prepared to tighten more if it becomes appropriate. But investors instead chose to focus on his remarks that “tight monetary policy” was slowing economic activity, which they interpreted as a signal that the Fed likely is done with rate hikes.

Investors overseas also received good inflation news. Eurozone annual consumer price growth slowed more than expected in November to +2.4%, down from +2.9% in October. In Germany, the jobless rate hit +5.8%, the highest level since 2021, easing wage pressures. Bank of Japan board members lightened expectations that the central bank would pivot away from its dovish monetary policy. With that dovish background, developed market international stocks (as measured by the MSCI EAFE Index) were up +0.4%, while the MSCI Emerging Markets Index was up +0.2%. 

Of course, all the news of waning inflation is a big positive for bonds. Yields around the globe declined. In the U.S., the yield on the benchmark 10-year U.S. Treasury note dropped -27 basis points over the week, ending at 4.20%, its lowest level since early September. The shorter end 2-year U.S. Treasury note yield fell even more, plunging -41 basis points to close at 4.54%, its lowest level since June. The Bloomberg U.S. Aggregate Bond Index gained +2.0% for the week, its biggest weekly gain since November 2022. Non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) also advanced over the week, adding +1.1%. 

Looking forward to the next couple of weeks, it will get tougher to study the Fed’s intentions. The Fed’s blackout period begins in advance of its December 13 rate decision meeting, so Powell and the other Fed policymakers won’t be making any more public statements. Despite Powell pushing back against the notion that he will begin cutting rates any time soon, markets continue to price in multiple rate cuts by the Fed next year. Futures markets are now fully pricing in a quarter-point Fed cut no later than May 1 and a total of five 0.25% cuts by January 2025. Another soft employment report on Friday could embolden even higher odds of rate cuts and help fuel the rally that has been underway since the end of October.  

Chart of the Week

The Conference Board’s Consumer Confidence Index rebounded to 102 in November, a slight beat of the 101 expected. October was revised sharply down from the originally reported 102.6 to 99.1, the lowest level since July 2022. A year ago, the index stood at 102.2. The Present Situation gauge fell to 138.2 from 138.6 the prior month (revised down from 143.1). The Expectations gauge — which reflects consumers’ six-month outlook — ticked up to 77.8 from 72.7 (revised down from 75.6). Below the 80 mark on the expectations index often signals a recession within the next year. In good times, the index can top 120 or more. About two-thirds of consumers say a recession is “somewhat” or “very likely” in the next 12 months, the survey found. The survey also suggests the labor market has gone from red hot to very warm. The share of Americans saying jobs are plentiful is still historically strong but is now well below both pre-pandemic and post-pandemic peaks.

Consumers grew more confident, but they’re not exactly optimistic

The Conference Board’s Consumer Confidence Index

Note: Seasonally adjusted, 1985 = 100
Source: The Conference Board, The Wall Street Journal.

Economic Review

• U.S. economic growth for the third quarter was hotter than initially reported in the advanced estimate. Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was up a +5.2% annual rate, up from the advance estimate of +4.9% and the +2.1% reading in the second quarter. The GDP increase marked the biggest gain since the fourth quarter of 2021 and the biggest increase in a decade if the pandemic years are excluded. Personal Spending was revised down from +4.0% to +3.6%, but still up materially from the +0.8% in Q2. On the other hand, Government Spending was revised higher from the +4.6% originally reported to +5.5%, making up the largest chunk of GDP growth. Business Investment was also revised up to +2.4% from +0.8% in the advanced estimate but is down from +5.2% in Q2. Inventories were stronger than initially reported, up 1.4% from the prior estimate of +1.1% and 0.0% in Q2. Corporate Profits increased for the second quarter in a row, rising +3.3% to mark the largest gain in five quarters. The GDP Price Deflator ticked up +3.6%, from +3.5% in the advanced estimate and +1.7% last quarter. The third and final update for the third quarter is due in one month.
• The Institute for Supply Management’s (ISM) Manufacturing PMI was unchanged at 46.7% for November, remaining at its lowest level since July, below expectations for 47.8. The manufacturing PMI has remained in contraction territory for 13 months in row (levels below 50 indicate contracting economic activity), which is the longest monthly contraction streak since the 2007-2009 Great Recession, although that period saw levels drop below 40. Like the overall index, New Orders remained in contraction–for 15 months straight now, the longest streak since 1981–but improved 2.8 points to 48.3%. The Production component declined 1.9 points to 48.5%. The Employment component fell 1.9 points to 45.8%. The Prices Paid index, a measure of inflation, rose 4.8 points to 49.9%. Overall, 4 of 10 component indexes advanced in the month, and only one is in expansion. In terms of industries, 14 reported contraction, up from 13 the prior month. The bottom line is that the ISM manufacturing activity is yet more evidence showing that the economy is weakening.
• Personal Spending rose a modest +0.2% in October, matching expectations, but down from the prior month’s unrevised +0.7%. After adjusting for inflation, Real Personal Spending was also up +0.2%, below last month’s increase of +0.3%. Spending was up on necessities such as Healthcare, Housing, and Utilities. Personal Income rose +0.2%, also matching expectations and down from the prior month’s +0.4%. The Personal Savings Rate was up a tick to 3.8% from 3.4% the prior month. The savings rate has fallen since the end of the pandemic, leaving households with less financial cushion. The burst of growth in the third quarter appears to have faded. Higher interest rates have sapped spending on big-ticket items such as cars and discouraged business investment.
• The cost of goods and services was flat in October, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) unchanged, below expectations of +0.1%. On a year-over-year basis, the PCE Price Index was up +3.0%, a tick below expectations of +3.1% and down from +3.4% the prior month. That’s the lowest level since February 2021. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.2%, matching expectations and down from the prior month’s +0.3%. Year-over-year, the Core-PCE Price Index is up +3.5%, also matching expectations and down from +3.7% the prior month. The key takeaway is that inflation continues to moderate, taking pressure off the Federal Reserve to remain hawkish.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), jumped to 55.8 in November from 44.0 the prior month, far above expectations of 46.0. It was the largest monthly gain since September 2020. New Orders rose into expansion territory while Prices Paid rose at a slower pace. Production rose and also crossed over to expansion. Employment continued higher into expansionary territory, rising at a faster pace.  The index peaked at 71.3 in May 2021.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices rose for a seventh straight month in September to a new all-time high, as the index increased a seasonally adjusted +0.65%, short of expectations for a +0.80% increase and the prior month’s +0.82% pace (revised down from +1.01%).  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +3.92%, slightly above expectations for +3.90% and the prior month’s +2.14% annual gain (revised up slightly from +2.16%). Detroit was up the most (+6.7% YoY), with San Diego (+6.5%) and New York (+6.3%) close behind. Three of the 20 major metros posted declines in home prices compared to a year ago: Portland, Phoenix, and Las Vegas. Higher mortgage rates have driven away potential buyers, though an unusually low inventory of homes has prevented prices from falling. 
• The Commerce Department reported Construction Spending rose for the tenth month in a row, up +0.6% in October to a seasonally adjusted annual rate just over $2 trillion, above expectations for +0.3% and the negatively revised +0.2% the prior month (originally reported as +0.4%). Year-over-year (YoY), total construction spending was up +11.0%, compared to +8.8% the prior month. Total Private Construction was up +0.7% month-over-month, and total Public Construction was up +0.2%. Total Residential Spending increased +1.2% month-over-month while total Nonresidential Spending rose +0.1% month-over-month. Single-Family construction rose +1.1%, while Multi-Family construction slipped -0.2%.
• The Commerce Department reported New Home Sales fell -5.6% in October to a seasonally adjusted annual rate of 679,000 units, below expectations for 721,000 units and the prior month’s 719,000 units (revised down sharply from the originally reported 759,000). Sales fell in the Midwest to the lowest in nearly a year and declined in the West as well. The Median New Home Price fell to $409,300 from $422,300 the prior month and is down -17.6% from the prior year. That’s the lowest level since August 2021. The inventory of new homes for sale rose for the third month, up +1.4%, which represents 7.8 months of supply at the current rate of sales, up from 7.2 months the prior month. 
• The National Association of Realtors (NAR) reported that Pending Home Sales fell -1.5% in October, better than expectations for a -2.0% drop but down from the prior month’s +1.0% gain (revised down from +1.1%). Still, that represents the lowest level since the index began in 2001. Year-over-year sales were down -6.6%, better than the expected -8.8% drop and the prior month’s -13.3% plunge. From a regional perspective, the Midwest, South, and West were down, while the Northeast was up. All four regions have fallen significantly from September 2022.
• Weekly MBA Mortgage Applications rose +0.3% for the week ended November 24, following the prior week’s +3.0% gain. The Purchase Index was up +4.7% following a +3.9% advance the prior week, and the Refinance Index plunged -8.9% following a +1.6% increase the prior week. The average 30-Year Mortgage Rate slipped to 7.37% from the prior week, which is +0.88 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims rose +7,000 to 218,000 for the week ended November 25, in line with expectations. The prior week was revised up to 211,000 from 209,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) jumped +86,000 to 1,927,000 in the week ended November 18, above consensus for 1,865,000, and last week’s reading of 1,841,000 (revised up from 1,840,000).

The Week Ahead

The upcoming week’s economic data will be focused on the health of the labor market ahead of the following week’s Federal Reserve’s December (13th) meeting. The Job Openings and Labor Turnover Survey (JOLTS) report is on Tuesday, weekly jobless claims on Thursday, and then the headline event, the November employment report, on Friday. Wall Street consensus estimates are for 180,000 new Nonfarm Payrolls in November, after a gain of 150,000 in October. The Unemployment Rate is forecast to hold steady at 3.9%. Tuesday’s JOLTS report for October is expected to show 9.3 million open positions, down slightly from September’s 9.6 million. Other economic data out next week will include Monday’s Factory, Durable Goods, and Capital Goods Orders. Tuesday brings U.S. Services PMIs for November by the Institute for Supply Management (ISM) and S&P Global. Friday is also the release of the University of Michigan’s Consumer Sentiment Index for December.

Did You Know?

55: I CAN DRIVE – Through 11/21/23, the national average price of a gallon of gas declined for 55 straight days in the longest streak of daily declines since September 2022 and just the fifth streak where prices declined for at least 50 days in a row. At $3.295 per gallon, the national average price is down -15.5% from its mid-September high and at the lowest Thanksgiving level since 2020 (Source: AAA, The Wall Street Journal).

STUCK IN PARK – Even after a +17% rally off the October low, the S&P 500 Auto Index is still down over -20% from its summer high, and a big culprit is tighter credit. According to a New York Fed survey, the average rejection rate of 11% for auto loans was the highest rate since the start of the series in 2013 (Source: The New York Federal Reserve).

1099-K DELAY – The IRS has delayed, again, until 2024, the requirement that 1099-Ks be issued for anyone receiving more than $600 over a full calendar year on digital wallet apps like Venmo or Cash App. Prior to the delay, an estimated 30+ million new 1099-Ks would have had to have been issued to US taxpayers this year to help narrow the $7 trillion “tax gap” owed to the U.S. government in uncollected taxes (Source: The New York Times).

This Week in History

START YOUR ENGINES – On November 28, 1895, the first automobile race in U.S. history was held in Chicago. It took the winner, Frank Duryea, more than 10 hours to complete the 54-mile course, traveling at around 7 miles per hour through a snowstorm. The race helped set the stage for the era of the automobile, which would reshape the American economy in the 20th century (Source: The Wall Street Journal).

Asset Class Performance

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 than 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.

* 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.