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

Quick Takes

  • Nvidia Corporation reported strong quarterly revenue and earnings that topped Wall Street estimates after Wednesday’s trading session and carried markets to their best day in a long time on Thursday, essentially delivering gains for the headline stock indexes for the week.  
  • The January Federal Open Market Committee (FOMC) meeting minutes were released Wednesday afternoon and showed Fed policymakers expressing caution about lowering rates too quickly and remaining “highly attentive” to inflation risks. 
  • The S&P 500 was up +1.7% for the week, while the Nasdaq gained +1.4%. Overseas, the MSCI EAFE Index was up +1.4%, while the MSCI Emerging Markets Index advanced +1.2%. For bonds, the Bloomberg U.S. Aggregate Bond Index was up +0.3%, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) rose +0.6%.
[Market Update] - Market Snapshot 022324 | The Retirement Planning Group

Odds for Fed rate cuts fall, but stocks and bonds rise

Artificial Intelligence (AI) continues to dominate financial headlines, with chipmaker Nvidia Corporation being the center of the AI universe. The company reported strong quarterly revenue and earnings that topped Wall Street estimates after Wednesday’s trading session and carried markets to their best day in a long time on Thursday, which essentially was responsible for the week’s gains for the S&P 500 and Nasdaq Composite indexes. The S&P 500 was up +2.1% on Thursday, which ensured the +1.7% gain for the week, while the Nasdaq jumped +3.0% on Thursday to deliver a +1.4% gain for the week. However, the Nasdaq actually lost ground on Friday, leaving it -0.4% short of an all-time high. Unlike other large cap indices like the S&P 500 and Dow Jones Industrial index, the tech-heavy Nasdaq has yet to make a new all-time high, which it last set in November 2021. One area that wasn’t lifted by the “insatiable demand” for Nvidia’s AI chips were small cap companies. The Russell 2000 Index returned to its lagging ways, trailing the other U.S. indices and slipping -0.8% for the week. 

Stock markets outside the U.S. also participated in the upswing with Europe and Japan also joining the record high club last week. For Japan, it was the first all-time high for the Nikkei 225 index in 30 years!  That helped developed market international stocks (as measured by the MSCI EAFE Index) to gain +1.4%, while the MSCI Emerging Markets Index was up +1.2%. After falling to five-year lows this year, Chinese stocks were up for nine straight days after the government there enacted a number of stimulus measures including forbidding institutions to be net sellers of stocks in the first and last 30 minutes of market trading. Also helping non-U.S. stocks was the first weekly decline for the U.S. dollar in 2024, albeit a relatively mild -0.3% dip.

Importantly, the Nvidia frenzy last week helped distract investors from the diminishing hopes for Federal Reserve rate cuts, which had been souring sentiment before Nvidia pushed it into the background. On Wednesday afternoon the Fed released the minutes from the January Federal Open Market Committee (FOMC) meeting in which they expressed caution about lowering rates too quickly and remain “highly attentive” to inflation risks. According to the CME FedWatch tool, the odds of a 25 basis point rate cut by the Fed in March is now only 2.5%, down from over 60% just a month ago. Looking ahead to the May Fed meeting, the probability of holding rates steady is 78.4% and June is now the earliest the market is pricing in a 25 basis point cut. That has resulted in markets trimming the number of cuts expected in 2024 from nearly seven in mid-January to just over three currently, which is in line with the Fed’s own forecasts.

Yields were little changed over the week, with the U.S. 10-year Treasury yield slipping -3 basis points to yield 4.25% and the shorter 2-year U.S. Treasury yield up +5 basis points to finish the week at 4.64%. The Bloomberg U.S. Aggregate Bond Index was up +0.3% for the week, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was up +0.6%.

Chart of the Week

Investment in China by companies based abroad has sunk to the lowest level in 30 years, according to official data. In a sign that foreign corporations are leaving China due to tougher crackdowns on spying, U.S. sanctions, and the slow recovery from Covid lockdowns in 2022. Foreign Direct Investment (FDI) into China in 2023 was the lowest since 1993. The measure of new foreign investment into China — which records monetary flows connected to foreign-owned entities in the country — was -82% lower than the 2022 level. China’s State Administration of Foreign Exchange (SAFE) data can reflect trends in foreign company profits, as well as changes in the size of their operations in China, according to economists. Profits of foreign industrial firms in China dropped -6.7% last year from the prior year, according to National Bureau of Statistics data. In a first since 1998, investment fell in the third quarter of 2023 before recovering a bit to post growth in the final quarter. The trend wasn’t universal, though FDI into China by German companies reached a record of nearly $13 billion last year, according to a German Economic Institute report based on data from the Bundesbank. Investment in China as a share of Germany’s total direct investment abroad expanded to 10.3% last year — the highest since 2014. The report showed investment in China as a share of Germany’s total direct investment abroad expanded to 10.3% last year — the highest since 2014.

Foreign Direct Investment (FDI) into China Tanks

FDI rises by the lowest amount since 1993

[Market Update] - Foreign Direct Investment into China Tanks 022324 | The Retirement Planning Group

Note: FDI figures are investments minus outflows.
Source: China’s State Administration of Foreign Exchange, Bloomberg.

Economic Review

  • The Conference Board’s Leading Economic Index (LEI) fell for the 22nd month in a row in January — the third-longest losing streak ever. It fell -0.4% for the month, more than the expected -0.3% drop and more than the prior month’s -0.2% decline (revised lower from the original -0.1%). At 102.7, the LEI is at the lowest level since May 2020. The last time the index fell so many times in a row was during the Great Recession from the end of 2007 through 2009. Breadth of the index was negative, with five of the ten indicators tracked falling, one unchanged, and four improving. However, six of the ten index components have shown positive results over the past six months, the first time that’s happened in two years. “As a result, the leading index currently does not signal recession ahead” said Justyna Zabinska-La Monica, senior manager of business cycle indicators, adding, “While no longer forecasting a recession in 2024, we do expect real GDP growth to slow to near zero percent over Q2 and Q3.” Average Workweek (weekly hours worked in manufacturing) continued to decline, and the Interest Rate Spread (yield curve inversion) remained negative, leading to the decline. Stock Prices and Leading Credit conditions improving contributed the most to the upside.
  • The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) slipped to 51.4 in February, down from 52.0 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI climbed to a 17-month high of 51.5 from 50.7 the prior month, handily beating expectations of 50.7. The Services PMI slipped to a three-month low of 51.3 from 52.5 the prior month and shy of expectations for 52.3. The results show an economy that is still healthy with little indication of recession. New Orders, a sign of future sales, rose for manufacturing and held steady for services. Employment was modest for the month. On the inflation front, the Input Prices component rose at the slowest pace since 2020 in February. “The early PMI data for February indicate that the U.S. economy continued to expand midway through the first quarter, pointing to annualized GDP growth in the region of 2%,” said S&P business economist Chris Williamson.
  • US economic activity picked up in January, according to the Federal Reserve Bank of Chicago. The Chicago Fed National Activity Index (CFNAI) decelerated to -0.03 from +0.2 the prior month (revised sharply higher from -0.15). Readings below zero indicate below-trend growth in national economic activity. Three of the four broad categories of indicators used to construct the index decreased for the month, and three remain in negative territory. The Employment-related indicators were unchanged for the month. Overall breadth was poor, with just 26 of the 85 monthly individual indicators making positive contributions, while 59 were negative. 
  • The National Association of Realtors (NAR) reported that Existing Home Sales rose in January, up +3.1% to a seasonally adjusted annual rate of 4.00 million units, above expectations for 3.97 million units and up from 3.88 million units the prior month (revised up from 3.78 million). Year-over-year existing sales are down -1.7%. The Median Existing Home Price was $379,100, down from $381.4 the prior month, but is up +5.1% from a year ago. It was the seventh consecutive month of price declines. Home prices peaked in June 2022, when the median price of a resale home hit $413,800.  Homes for sale were up +2.0% from last year to 1.01 million. Homes listed for sale remained on the market for 36 days on average, up from 29 days the previous month. Last November, homes were only on the market for 24 days. First-time buyers were 28% of sales in the month, down from 29% the month before and 31% one year ago. All-cash sales comprised 32% of transactions, up from 29% the prior month and one year ago. Sales rose in the West, Midwest, and South but were flat in Northeast. 
  • Weekly MBA Mortgage Applications tanked -10.6% for the week ended February 16, following the prior week’s -3.3% drop, which was revised down from -2.3%. The Purchase Index fell -10.1% following a -3.2% decline the prior week and the Refinance Index sank -11.4% following a -3.6% drop the prior week. The average 30-Year Mortgage Rate rose to 7.06% versus 6.87% the prior week, the fifth straight weekly increase and the highest level since December 6.
  • Weekly Initial Jobless Claims slipped by -12,000 to a five-week low of 201,000 for the week ended February 17, below expectations for 216,000 and the prior week’s 213,000 (revised up from 212,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -27,000 to 1,862,000 in the week ended February 10, well below consensus estimates for 1,884,000 and last week’s reading of 1,889,000 (revised down from 1,895,000).

The Week Ahead

The earnings season is just about over, but the economic calendar is chock full this week. Housing data, regional Fed surveys, and Gross Domestic Product (GDP) fill the docket. On the housing front, New Home Sales, Pending Home Sales, Home Prices Indexes, Construction Spending, and weekly Mortgage Applications will all be released throughout the week. Lots of manufacturing data will be reported, including durable and capital goods, the S&P Global U.S. Manufacturing PMI, and regional Fed manufacturing surveys from the Dallas, Richmond, and Kansas City, as well as the Chicago PMI. More reads on the consumer will come with both Consumer Confidence and Consumer Sentiment reports, as well as Personal Consumption and Personal Income and Spending.  The dysfunctional U.S. Congress may also be in the spotlight. If Democrat and Republican leaders can’t agree on spending, a partial government shutdown is set to begin on Friday, March 1, with a broader shutdown to start March 8. Recall that Moody’s — the only major agency that still has a AAA rating for the U.S. government — placed the U.S. on negative credit watch last fall, partly because of the intense political polarization. While a shutdown could have a short-term impact on the U.S. economy, the bigger blow would be the loss of the AAA rating from Moody’s, which could raise the long-term cost of financing and likely dampen economic growth. 

[Market Update] - Upcoming Economic Calendar 022324 | The Retirement Planning Group

Did You Know?

SUPER SALES The Super Bowl’s total revenue impact on Las Vegas’s short-term rental market was estimated to be $5.73 million, according to vacation rental analytics firm AirDNA. That compares to $1.6 million from Taylor Swift’s two-night “Eras Tour” stop. The pop star’s attendance at the big game to cheer for her boyfriend, Kansas City Chiefs tight end Travis Kelce, could have increased people’s interest in Super Bowl trips, AirDNA said, but it can’t tell with its data (Source: The Wall Street Journal).

SECURITY SPENDING The amount the Biden administration officials say the U.S. plans to spend on maritime cybersecurity, including the domestic manufacturing of cargo cranes, is more than $20 billion. The prevalent use of China-built machines with advanced software at many U.S. ports has raised fears of potential economic or military-logistics risks, such as if cranes were encrypted in a criminal attack or if an enemy operated them. Either could hurt the national economy or the military’s ability to move goods (Source: The Wall Street Journal).

GERMAN ECONOMIC GLOOM The German government will revise down its forecast for growth in 2024 to just +0.2%, down sharply from the +1.3% estimate published in October. The German economy has lurched between stagnation and recession in recent quarters. The disappointing annual economic report for Europe’s largest economy underscores a dearth of economic activity across the continent (Source: Bloomberg). 

This Week in History

PICTURE THIS – On February 21, 1947, Edwin H. Land, founder of Polaroid Corp., demonstrated the instant camera to 650 scientists assembled at the annual meeting of the Optical Society of America. Never before had it been possible to develop a snapshot within a single minute. Polaroid went on to become one of the great growth stocks of postwar America (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 022324 | 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.