Weekly Market Update – December 29, 2023

Quick Takes

• The S&P 500 Index was up +0.3%, marking nine straight weeks of gains. That’s the longest weekly winning streak since 2004 and leaves the index just below its all-time high set on January 3, 2022. For 2023, the S&P gained +24%.
• The 2-year U.S. Treasury yield fell -7 basis points to close at 4.25%, near its lowest point since May. With yields still moving lower, bond indices were higher, with the Bloomberg U.S. Aggregate Bond Index and the Bloomberg Global Aggregate ex U.S. Bond Index both up +0.5% for the week.
• Economic data was light in the holiday-shortened week but mostly disappointing relative to expectations and still indicative of a slowing economy. Regional Fed Indexes were in contraction territory, Pending Home Sales were flat, and Unemployment Claims were up.

Stocks and bonds data

The major U.S. indexes were mixed for the holiday-shortened week. Not surprisingly, trading activity was muted through most of the week, with markets closed Monday and many traders out of the office. The S&P 500 Index was up for its ninth straight weekly gain—its longest stretch since 2004—with a +0.3% gain. At one point, it was within 0.5% of its all-time intraday high, but no matter how hard it tried, it just couldn’t close at a record high in 2023. Still, the week closed out a stellar year for all the major indexes, with the S&P 500 up +23.9%. The Nasdaq Composite, also up for nine consecutive weeks with a +0.1% gain, recorded its sixth-biggest annual gain since the index was launched in 1971, up +43.3%. The small cap Russell 2000 Index fell -0.3% for the week but added +14.8% for the year. Overseas, stocks outperformed the U.S. for the week, with developed market international stocks (as measured by the MSCI EAFE Index) up +1.1% for the week, and the MSCI Emerging Markets Index was up -3.2%. For the year, non-U.S. stocks trailed their U.S. counterparts, with the EAFE Index up +14.4% and the Emerging Markets Index up +6.9%.

Bond traders continue to enjoy declining interest rates. Like the prior week, the benchmark 10-year U.S. Treasury yield shed -2 basis points for the week to close at 3.88%. The shorter end 2-year U.S. Treasury yield fell -7 basis points to close at 4.25%. With yields still moving lower, bond indices were higher as the Bloomberg U.S. Aggregate Bond Index and the Bloomberg Global Aggregate ex U.S. Bond Index both rose +0.5% for the week. For the year, both U.S. and non-U.S. bonds were up more than +5%, at +5.2% and +5.8%, respectively.

The short week was fairly light on economic data with an overall unfavorable bias. Several regional Fed indexes were in contraction territory in December, including the Richmond Fed Manufacturing index, which showed the fastest pace of contraction since February, and the Chicago Business Barometer, that also surprised significantly on the downside. Pending Home Sales were flat in November, under expectations for a modest increase, and Weekly Jobless Claims rose unexpectedly to their highest level since the start of the month.

Chart of the Week

The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), reversed down to 46.9 in December from 55.8 the prior month (that was the highest level in 17 months) and was below expectations of 50.0. Readings below the 50 level indicate contraction, and before the November jump higher, the index had been in contraction since August 2022. New Orders rose into to 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 and is 1.8 points above last year’s December reading. The Chicago PMI is the last of the regional Fed manufacturing indices before the closely watched national ISM Manufacturing PMI for December is released this Wednesday. So far, the regional Federal Reserve manufacturing surveys for December suggest modest slowing for the outlook in manufacturing.

Chicago Business-Activity Index Retreats in December

Chicago Business Barometer

Source: Chicago Business Barometer Report.

Economic Review

• The National Association of Realtors (NAR) reported that Pending Home Sales were unchanged in November, below expectations for a +0.9% gain but an improvement from the prior month’s -1.2% decline (revised up from -1.5%). Still, that represents the lowest level since the index began in 2001. Year-over-year sales were down -5.1%, better than the -6.3% drop the prior month (revised up from -6.6%). From a regional perspective, the South was the only region down, with the Northeast, Midwest, and West all up. Pending home sales tend to lead existing home sales by a month or two. They have been on a downward trend this year.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit an all-time high in October, marking the ninth straight month of increases, as the index increased a seasonally adjusted +0.64%, slightly above expectations for a +0.60% increase but down from the prior month’s +0.67% pace.  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +4.87%, slightly below expectations for +4.99% but above the prior month’s +3.92% annual gain. Detroit was up the most again (+8.1% YoY), with San Diego (+7.2%) and New York (+7.1%) not far behind. Only Portland was down from a year ago, with a slight -0.63% decline. Higher mortgage rates have driven away potential buyers, though an unusually low inventory of homes has prevented prices from falling.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) also showed U.S. home prices on the rise, up a seasonally adjusted +0.3% in October, below expectations for +0.5% but down from the +0.7% past the prior month (revised up from +0.6%). The government data is up +6.3% year-over-year. All census divisions posted gains on a monthly basis except for the Mountain and New England census regions, but all census divisions are up on an annual basis.
• U.S. economic activity picked up in November, according to the Federal Reserve Bank of Chicago. The Chicago Fed National Activity Index (CFNAI) rose +0.03 from -0.66 the prior month (revised down from -0.49). Readings below zero indicates below-trend-growth in national economic activity. All four broad categories of indicators used to construct the index increased for the month. The Production and Income indicators had the biggest improvement. Overall breadth was roughly even, with 43 of the 85 monthly individual indicators making positive contributions, while 41 were positive. 
• Texas factory activity improved to the best reading since January, with the Texas Manufacturing Outlook Survey up to -9.3 in December from -19.9 the prior month. That was better than expectations for -19.0, but still the 20th consecutive negative reading. New Orders fell at a sharply lower rate at -10.9 from -20.5 the prior month. The Production Index rebounded to +1.4 after falling to -7.2 the prior month. Prices Paid for Raw Materials were up to +17.8 from +12.6 the prior month, driving firms to sharply increase their Output Prices to +6.8 from the previous -6.2. 
• The Richmond Fed Manufacturing index sank to -11 in December from an unrevised -5 the previous month, far below expectations for -3. All three component indexes were down, with the Shipments and the New Orders indexes down -9 points to -17 and -14, respectively. The Employment index fell to -1 after spending the last three months at neutral or better.
• Weekly Initial Jobless Claims increased +12,000 to 218,000 for the week ended December 23, above expectations for 210,000 and the prior week’s 206,000 (revised up from 205,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +14,000 to 1,875,000 in the week ended December 16, matching consensus expectations and above the prior week’s reading of 1,861,000 (revised down from 1,865,000).

The Week Ahead

Stock and bond markets were closed on Monday for New Year’s Day, and the week’s biggest release comes on Friday with the December Employment Report with the latest read on nonfarm payrolls and the unemployment rate. Other jobs data includes The Bureau of Labor Statistics release of the Job Openings and Labor Turnover Survey on Wednesday, along with the weekly unemployment claims on Thursday. Other economic data to watch next week will include the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) for December on Wednesday, followed by the Services PMI on Friday. Also, on Wednesday, the Federal Open Market Committee will release the minutes from the Fed’s mid-December monetary policy meeting. The first major companies to report earnings in 2024 will include Walgreens Boots Alliance, Constellation Brands, and Cal-Maine Foods. Tesla will report Q4 deliveries in a report that could impact the electric vehicle sector.

Did You Know?

CARE TO SHARE? – 21% of diners said they split an entree to lower the cost of a meal within the past six months. Due to declining profits, restaurants are reworking their menus, including adding single-bite foods or pricier, splittable items such as selling side dishes separately instead of with entrees (Source: Datassential, The Wall Street Journal).

P.E. DEALS M.I.A. – Private-equity deal activity in 2023 plunged $846 million, a roughly -40% drop from $1.44 trillion in 2022. Every aspect of private equity’s core buyout business has been under strain, as high interest rates put many new deals out of reach, and market conditions made it hard for firms to cash out of current investments (Source: Dealogic, The Wall Street Journal).

EV SALES – In November, U.S. electric vehicle sales were up +40% compared with a year earlier. Sales grew earlier this year but began to stall in recent months. Customers’ hesitation to switch from traditional gas-engine vehicles has some auto companies delaying their EV spending plans. Car executives say they are confident sales will accelerate as additional lower-priced models come out and the availability of public chargers improves (Source: Motor Intelligence, The Wall Street Journal).

This Week in History

OPEC OIL CRISIS – On December 22, 1973, the oil ministers of OPEC’s six Persian Gulf member countries said they would more than double the price of crude oil by January (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 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.