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

Quick Takes

  • After starting on a down note in the first week of the year, U.S. stocks rallied for a second straight week, propelling the S&P 500 Index up +1.2% to a new all-time high. The tech-heavy Nasdaq Composite was up +2.3%, but small caps lagged again as the Russell 2000 Index slipped -0.3%. 
  • Bonds weren’t able to extend their rally from last week like their equity counterparts. Yields popped up for the week, particularly for the short end of the curve. As a result, the Bloomberg U.S. Aggregate Bond Index fell -1.1% for the week.
  • The U.S. dollar also rebounded last week, which was a headwind for non-U.S. assets. The MSCI EAFE and MSCI Emerging Market indexes were both down more than -2%, and the Bloomberg Global Aggregate ex-U.S. Bond Index was down -1.7%.
    [Market Update] - Market Snapshot 011924 | The Retirement Planning Group

    The S&P 500 rallies for a second straight week to a record high

    It was another holiday-shortened week, but for stocks, it was a mostly positive rally, with the S&P 500 Index finishing at a new record high. Following the 2023 trend, the technology sector led the gains, particularly the semiconductor industry and the artificial intelligence stocks. The S&P 500 rose +1.2% for the week and marked its first record since January 3, 2022. The Nasdaq Composite advanced +2.3% for the week, but the small cap Russell 2000 Index slipped -0.3%. 

    The rally came despite a slow start to the fourth-quarter earnings season. Investors were encouraged by the University of Michigan’s Consumer Sentiment survey, that showed its strongest improvement in January since summer 2021. That overshadowed poor Existing Home Sales and a slowdown in Housing Starts. Midweek, the Fed’s Beige Book, which is a collection of business anecdotes from the 12 Federal Reserve districts used by policymakers to prepare for their next monetary policy decision, found signs of a cooling labor market across most of the country. Cooling wages would help keep inflation on a downward path. The business contacts in the survey seemed optimistic about future growth and had mostly positive expectations, the survey found. Consumer spending was also reported to be solid across the country, with most contacts noting that holiday-related activity had met their expectations. 

    The market action overseas wasn’t nearly as positive as the U.S. developed market international stocks (as measured by the MSCI EAFE Index) fell -2.1%, while the MSCI Emerging Markets Index dropped -2.6%. 

    Fixed-income investors appeared concerned about lower odds of the Fed cutting rates in March. The 10-year U.S. Treasury yield rose +18 basis points to close at 4.12%. The shorter 2-year U.S. Treasury yield rose even more by +24 basis points, offsetting the prior week’s drop and closing at 4.38%. As a result, the Bloomberg U.S. Aggregate Bond Index declined -1.1% for the week. Like non-U.S. equities, non-U.S. bonds also fell, with the Bloomberg Global Aggregate ex-U.S. Bond Index dropping -1.7%.

    Chart of the Week

    The S&P 500 Index closed at an all-time high on Friday for the first time since January 3, 2022. At 512 trading days, the streak that just ended was the longest since the 1,375 trading days coming out of the Financial Crisis and the seventh longest streak without a record high on record, according to analysis from Bespoke Investment Group. But like much of the gains in 2023, the market leadership continues to be narrow. The 2,000 smaller capitalization stocks that comprise the Russell 2000 Index are still in a bear market, defined as being down -20% or worse from its all-time high. The Russell 2000 is down -20.5% from its all-time high set more than two years ago. These are unchartered waters; the S&P has never made an all-time high while the Russell 2000 was still in bear market territory.

    The S&P 500 closed at an all-time high Friday

    But the Russell 2000 is still in a bear market (more than -20% from its high)

    [Market Update] - The SP 500 closed at an all time high 011924 | The Retirement Planning Group

    Source: Bloomberg.

    Economic Review

    • According to the University of Michigan, the preliminary January Consumer Sentiment Index surged to 78.8 from 69.4 the prior month. That is the highest level since July 2021 and well above expectations for a reading of 70.1. The Current Economic Conditions component jumped to 83.3 from 74 the prior month. The Consumer Expectations component improved to 75.9 from 66.4 the prior month. One-year inflation expectations slipped to +2.9% from +3.1% the prior month, which is the lowest level since January 2021. The five-year inflation expectations also edged lower, to +2.8% from +2.9% the month before.
    • The Commerce Department reported that November U.S. Retail Sales rose +0.6%, above expectations for a +0.4% gain and the prior month’s +0.3% rise. Spending surged at internet retailers at the expense of brick and mortar stores, which were on the weak end. Sales of Health and Personal-care items declined -1.4%, and Gas Stations saw a -1.3% drop as fuel prices eased. Furniture and Home Furnishing stores sales also fell -1%. Sales ex-autos and gas were also up +0.6%, outpacing the +0.3% gain expected and matching the prior month’s unrevised level. The Control Group, a figure used to calculate GDP, jumped +0.8%, far ahead of expectations for +0.2% and up from +0.5% the prior month (revised up from +0.4%). 
    • December Import Prices were unchanged from the prior month, compared to expectations for -0.5% and the prior month’s -0.5% decline (revised down from -0.4%). Year-over-year, import prices were down -1.6%, higher than expectations for -2.0% and versus the prior month’s -1.5% drop (revised down from -1.4%). Imported fuel prices slid -0.3%, following the prior month’s -5.9% drop. Nonfuel import prices were also unchanged. Export Prices fell -0.9%, matching the decline the prior two months. Export prices are down -3.2% over the past year.
    • December Industrial Production improved +0.1%, slightly ahead of expectations for a -0.1% decline and ahead of the prior month’s flat reading (revised down from +0.2%).  Manufacturing rose +0.1%, following the prior month’s +0.2% gain. Capacity Utilization, a measure of potential output, held steady at 78.6%, in line with expectations. The current level is about 1 point below the historic average. 
    • The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, plunged to its lowest level since the pandemic and second-lowest level ever, sinking to -43.7 from -14.5 the prior month and sharply below the expectations for an improvement to -5.0. Over the past two months, the index has plummeted -58.2 points. Reading below zero indicates worsening conditions. New Orders sank -38.1 points to -49.4. Shipments also declined -24.9 points to -31.3. Expectations for six months ahead improved +7 points to +18.8. 
    • Manufacturing in the Federal Reserve’s Third District improved slightly in December, with the Philly Fed Manufacturing Business Outlook Survey rising to -10.6 from -12.8 the prior month (revised down from the original -10.5) but remaining in economic contraction territory for the 5th straight month and the 18th in the past 20 months. That was worse than expectations of -6.5 (readings below zero indicates contracting economic conditions). New Orders rose to -17.9 from 22.1 the prior month. The Shipments component rose to -6.2, up from -11.2 the prior month. The Six-Month Business Outlook plunged to -4.0 from +12.6, which is the first negative reading since May.
    • December Housing Starts fell after three straight months of advances, down -4.3% to a seasonally adjusted annual rate of 1,460,000 units, up from a negatively revised 1,525,000 units the prior month (originally 1,560,000) and above expectations for 1,425,000 units. Housing starts peaked at 1,800,000 million in April 2022. Single-family homes sank -8.6% in the month, but multi-family units were up +7.5%. Housing starts only rose most in the West while dropping in the Northeast, Midwest, and South. Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, were up +1.9% after the prior month’s -2.1% drop (revised up from -2.5%) and beat expectations for +0.9%. Single-unit permits were up +1.9%, while multi-unit permits for buildings rose +1.4%.
    • The National Association of Realtors (NAR) reported that Existing Home Sales sank in December to the lowest level since August 2010. A -1% monthly decline dropped the number of units sold to 3.78 million, down from an unrevised 3.82 million units the prior month and below expectations for 3.83 million units. Year-over-year existing sales are down -6.2%. The Median Existing Home Price was $382,600, down from $387.7 the prior month, but is up +4.4% from a year ago. Home prices peaked in June 2022, when the median price of a resale home hit $413,800.  Homes for sale were up +4.2% from last year to 1.0 million. Homes listed for sale remained on the market for 29 days on average, up from 25 days the previous month. Last November, homes were only on the market for 24 days. Sales only rose in the West, were flat in the Northeast, and declined in the South and Midwest. 
    • Homebuilder confidence improved for a second straight month, with the National Association of Home Builders (NAHB) Housing Market Index (HMI) jumping +7 points to 44, well ahead of expectations for 39 and the biggest rise in nearly a year. A year ago, the index stood at 31. Builders are still offering sales incentives to boost demand, with the share of builders cutting home prices at 31%, down from 36% the prior month and the smallest share since August. At the same time, many are offering incentives to prospective buyers. Some 62% indicated they provided some form of incentive, in line with the share in recent months. The three subcomponents were mixed, with Current Sales up +7 to 48, Sales Expectations (in the next six months) up +12 points to 57, and Traffic of Prospective Buyers up +5 points to 29.
    • Weekly MBA Mortgage Applications rose sharply for the second week in a row, jumping +10.4% for the week ended January 12, following the prior week’s +9.9% jump. The Purchase Index was up +9.2% following a +5.6% gain the prior week, and the Refinance Index rose +10.8% following a +18.7% surge the prior week. The average 30-Year Mortgage Rate fell to 6.75%, down from 6.81% a week ago but up from 6.23% a year ago.
    • Weekly Initial Jobless Claims fell -16,000 to 187,000 for the week ended January 13, below expectations for 205,000 and the prior week’s 203,000 (revised up from 202,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell by -54,000 to 1,806,000 in the week ended January 6, below consensus expectations for 1,840,000 and the prior week’s reading of 1,832,000 (revised down from 1,834,000).

    The Week Ahead

    On Friday, the Bureau of Economic Analysis (BEA) will release the Personal Consumption Expenditures (PCE) Price Index for December, which will be heavily watched. The Core PCE measure, which excludes volatile food and energy prices, is the Federal Reserve’s preferred inflation measure and is expected to rise +3%, slightly less than in November. Anything on the high side could be trouble for the markets because it would be even more evidence to keep the Fed from cutting rates in March. Other data out next week will include the Conference Board’s Leading Economic Index for December on Monday, S&P Global’s Manufacturing and Services Purchasing Managers’ Indexes (PMIs) for January on Wednesday, and the BEA’s advance estimate of fourth-quarter Gross Domestic Product (GDP) growth on Thursday. Fourth-quarter earnings season heats up with more than 70 S&P 500 firms reporting their results.

    [Market Update] - Upcoming Economic Calendar 011924 | The Retirement Planning Group

    Did You Know?

    VACANCY! According to Moody’s Analytics, the U.S. office vacancy rate increased to a record of 19.6% in Q4 2023, surpassing the prior peaks of 19.3% seen in 1986 and 1991. Remote work has been a major contributor to the high vacancy rates, but most of the vacant spaces are in older offices built prior to 1990 as companies seek more modern buildings with open floor plans (Source: The Wall Street Journal).

    TAKE THIS JOB AND… KEEP IT Wage growth for ‘job-switchers’ in the U.S. has almost always been higher than ‘job-stayers,’ and the gap between the two widened to a record of 2.8 percentage points (ppts) in August 2022 as employers scrambled to fill open positions coming out of Covid. Since that peak, the spread has narrowed down to 0.8 ppts, which is only 0.05 ppts above the historical average (Source: Atlanta Fed).

    THE ETF GRAVEYARD – The Exchange Traded Fund (ETF) industry saw inflows of $598 billion in 2023, along with roughly 520 new ETF launches during the year. But there were also a record 244 ETF closures with an average age of 5.4 years that collectively averaged a decline of 4.9% in the year leading up to their demise (Source: Morningstar, MFS).

    This Week in History

    Ford Goes Public – On January 18, 1956, Ford Motor went public after more than a half-century as a private company. The Ford Foundation sold 10.2 million shares at $64.50 (Source: History.com).

    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 011924 | 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.