- Stocks suffered a third week of losses and are likely to end their two-month winning streak. The S&P 500 slipped -0.2%, the tech-heavy Nasdaq Composite fell -1.9%, and the small cap Russel 2000 dipped -0.4%. Developed international stocks were up +0.4%, but emerging market stocks dipped -0.3%.
- Treasury yields rose during the week, with the 10-year yield up 27 bps to 3.75% and the 2-year yield up 14 bps to 4.32%. The Bloomberg U.S. Aggregate Bond Index fell -1.5% for the week and the Bloomberg Global Aggregate Bond Index ex U.S. was down -0.3%.
- Economic data for the week showed a still robust economy and tight labor market that is just now indicating signs of cooling down. In Washington D.C., Congress avoided a government shutdown with the passage of a $1.7 trillion omnibus spending bill.
The holidays didn’t bring much cheer for stocks and bonds
Stocks posted a loss for the week as recession fears continue to weigh on investors. The week’s economic reports were heavy with housing data and overall pointed to an economy that is still robust with a relatively tight labor market that is only now showing signs of cooling due to the aggressive rate hikes by the Federal Reserve throughout the year. Beyond the economic data, Washington D.C. shaped the headlines, as Congress avoided a government shutdown ahead of the holidays with the House voting to approve a $1.65 trillion omnibus spending bill on Friday, following Senate passage on Thursday. President Biden said he will sign it into law.
In the end, the S&P 500 slipped -0.2% for the week to post its third straight weekly decline. The technology-heavy Nasdaq Composite was hit the hardest, falling -1.9% for the week. The small cap Russell 2000 Index slipped -0.1%. Non-U.S. stocks were mixed as developed international markets gained, with the MSCI EAFE Index up +0.4%, while the MSCI Emerging Markets Index dipped -0.3%.
For December, the S&P 500 has lost -5.8%, while the Nasdaq is down -8.5%, and the Russell 2000 is down -6.7%. International stocks have fared better this month with the MSCI EAFE just barely negative at -0.2% and the MSCI Emerging Markets down -1.8%. Non-U.S. assets have been buoyed by a declining U.S. dollar, down about -1.5% so far in December, which would mark its third straight monthly decline after hitting its highest level since 2002 in September.
U.S. Treasury yields were up for the week following the prior week’s hawkish Fed comments and recent rate hike. The 10-year yield was up 27 basis points to 3.75% and the 2-year yield rose 14 basis points to 4.32%. As a result, the Bloomberg U.S. Aggregate Bond Index fell -1.5% for the week, leaving it barely positive in December with a +0.2% gain. Non-U.S. bonds, again aided by a declining U.S. dollar, were down less, as the Bloomberg Global Aggregate Bond Index ex U.S. dipped -0.3%.
Chart of the Week
November Existing Home Sales fell -7.7% for the month to an annual rate of 4.09 million units, below expectations of 4.20 million units and October’s unadjusted 4.43 million units. Contract closings declined for a record tenth-straight month and remain at the lowest level since May 2020—down -35.4% from last year. Sales in all four major U.S. regions were down for the month and the year. The median existing home price was up +3.5% from a year ago to $370,700—marking the 129th straight month of year-over-year increases—but it was the fifth month in a row that the median sales price decelerated from the record high of $413,800 in June. The number of homes for sale was unchanged month-over-month with the unsold inventory at a 3.3-month’s supply at the current sales pace, but up from the 2.1 months pace in the same period last year. National Association of Realtors Chief Economist Lawrence Yun said, “In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020.”
On the contrary, November New Home Sales rose +5.8% for the month to an annual rate of 640,000 units, beating expectations for a decline to 600,000 units, and above October’s downwardly revised 605,000 units. The median new home price rose +9.5% from a year ago to $471,200. New home inventory declined to 8.6 months from October’s upwardly revised level of 9.3 months of supply at the current sales pace. Sales for the month were up in the Midwest and West but fell in the Northeast and South. Year-over-year sales were noticeably higher in the Northeast, and the Midwest saw a modest rise, while the South and West remained well below year-ago levels.
U.S. Home Sales Post Record 10th Straight Month of Declines
U.S. Existing-Home Sales
Note: Seasonally adjusted annual rate.
Source: National Association of Realtors, The Wall Street Journal.
- The third, and final, report on Q3 Gross Domestic Product (GDP), the broadest measure of U.S. economic output, showed a quarter-over-quarter annualized rate of economic expansion of +3.2%, which was revised up from the second release’s +2.9% gain and handily beat expectations for it to remain unchanged. Q2’s figure was unrevised, remaining at a -0.6% contraction. Personal Consumption Expenditures (PCE) was revised higher to +2.3% for Q3 from the previous estimate of +1.7%, beating expectations to be unrevised, and down from +2.0% in Q2. Regarding inflation, the GDP Price Index was revised upward to a +4.4% gain, versus expectations to remain at +4.3%, and the Core PCE Index, which excludes food and energy, was revised up to a +4.7% advance compared to expectations to unadjusted at +4.6%. The PCE Deflator rose +0.1% for the month, matching expectations, but down from October’s upwardly revised +0.4% gain. The deflator was +5.5% higher than last year, in line with expectations, and below the prior month’s upwardly revised +6.1%. Excluding food and energy, the Core PCE Price Index rose +0.2% for the month, matching expectations, and below October’s upwardly revised +0.3% rise. The index was +4.7% higher compared to last year, in line with expectations, and below October’s unadjusted +5.0% rise.
- The Conference Board’s Consumer Confidence Index unexpectedly jumped to 108.3 in December—the highest since April—from November’s upwardly revised 101.4 level, easily beating expectations of 101.0. The increase came from a boost in the expectations and the present situation components of the survey as both posted solid gains. Regarding employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—increased to 35.8 from the 31.5 level posted in November.
- The Conference Board’s Leading Economic Index (LEI) for November fell -1.0% for the month, far more than the expected -0.4% decline, worse than October’s negatively revised -0.9% drop, and marked the index’s ninth consecutive monthly loss. The Conference Board noted in its report, “Only stock prices contributed positively to the US LEI in November. The labor market, manufacturing, and housing indicators all weakened—reflecting serious headwinds to economic growth.”
- November Personal Income was up +0.4% for the month, far ahead of expectations of -0.3%, while October’s figure was unrevised at +0.7%. Personal Spending gained +0.1%, below the expectations for +0.2% and the prior month’s upwardly revised +0.9%. The September savings rate as a percentage of disposable income was +2.4%, up from October’s downwardly revised +2.2% rate.
- November preliminary Durable Goods Orders fell -2.1%, far more than expectations of -1.0% and the prior month’s downwardly revised +0.7%. Excluding transportation, orders grew +0.2% versus expectations for a flat reading and compared to the prior month’s negatively revised +0.1% increase.
- The December Kansas City Fed Manufacturing Activity Index fell further into contraction territory (a reading below zero) as it dropped to -13 from -10 in November.
- The final December University of Michigan Consumer Sentiment Index was unexpectedly revised higher to 59.7, from the preliminary 59.1 figure, where it was expected to remain. The upward revision came as a downward adjustment to the current conditions portion of the index was more than offset by an upward revision to the expectation component of the survey. The 1-year inflation forecast was adjusted lower to 4.4% from the preliminary estimate of 4.6%, where it was expected to remain, and down from November’s 4.9% rate. The 5-10 year inflation forecast was adjusted lower to 2.9% versus forecasts for it to remain at November’s rate of 3.0%.
- Homebuilder sentiment unexpectedly declined in December as the National Association of Home Builders (NAHB) Housing Market Index (HMI) fell to 31 from an unrevised November in 33, which was well below expectations for an increase to 34. This was the fifth-straight month that homebuilder sentiment was below 50—the level that suggests poor conditions—after deteriorating every month this year. The depressed homebuilder sentiment has come amid the backdrop of rising home costs from much higher interest rates, higher labor costs, and higher material costs, which have caused affordability to plunge.
- November Housing Starts declined -0.5% for the month to an annual pace of 1,427,000 units, exceeding expectations for a drop to a 1,400,000-unit pace, but below October’s upwardly revised 1,434,000-unit level. Building Permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell by -11.2% to an annual rate of 1,342,000 units, well below expectations of 1,485,000 units and the downwardly revised 1,512,000-unit pace in October.
- The weekly MBA Mortgage Application Index rose +0.9% from the prior week’s +3.2% gain as the Refinance Index was up +6.0% while the Purchase Index dipped -0.1%. The increase came as the average 30-year mortgage rate fell -8 basis point to 6.34%, which is up 3.07 percentage points versus a year ago.
- Weekly Initial Jobless Claims rose by +2,000 to 216,000 for the week ended December 17, below expectations for 222,000 and the prior week’s upwardly revised 214,000. Continuing Claims for the week ended December 10 fell by -6,000 to 1,672,000, under expectations of 1,675,000.
The Week Ahead
Economic data is light in the holiday-shortened week with a couple of home price indexes, two regional Fed manufacturing indexes, and pending home sales among the key releases.
Did You Know?
WHAT’S YOUR PASSWORD –Netflix says more than 100 million viewers watch the service using passwords they borrow, often from family and friends. The streaming giant has said that it will put an end to that arrangement starting in 2023, asking people who share accounts to pay to do so. The change is likely to alienate some customers (source: The Wall Street Journal).
PRIVACY PENALTY – Facebook parent Meta agreed to pay $725 million, pending court approval, to settle a lawsuit that accused them of allowing Cambridge Analytica and other third parties to access private information about millions of users. It would fund payouts to U.S.-based Facebook users, in what plaintiffs say could be the largest U.S. class-action privacy settlement ever, according to a court filing. Meta said that the agreement is “in the best interest of our community and shareholders” and that the company has changed its approach to privacy (Source: The Wall Street Journal).
TRAVEL ADVISORY – More than 10,000 flights to, from, and within the U.S. were canceled since Wednesday, December 21 according to tracking site FlightAware. Severe winter storms upended travel across much of the U.S. during the busy Christmas season (source: FlightAware, The Wall Street Journal).
This Week in History
FIRST FED DAY — On December 23 in 1913, President Woodrow Wilson signed the Federal Reserve Act, authorizing the creation of the Federal Reserve System to monitor the nation’s banks and modulate the money supply (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.