- Stocks were mixed for the week with the S&P 500 and Russell 2000 both posting their first weekly losses of the year. However, the tech-heavy Nasdaq Composite was able to stay positive for a third straight week. Losses were minimal though thanks to a big rally Friday.
- Treasury yields fell for a third straight week with the benchmark 10-year U.S. Treasury yield dropping -2 basis points (bps) to 3.48% and the 2-year UST yield fell -6 bps to 4.17%. The Bloomberg U.S. Aggregate Bond Index was up +0.2% for the week while the Bloomberg Global Aggregate Bond Index ex U.S. slipped -0.1%.
- Economic data was mostly worse than expected, as retail sales, building permits, industrial production, regional Fed manufacturing activity, and existing home sales all disappointed and overshadowed a softer-than-expected Producer Price Index (PPI).
Stocks big rally on Friday mitigates the first weekly loss of 2023
The momentum that defined the first two weeks of the year waned in the third week. Most major equity indices were down for the holiday-shortened week going into the final session, but stocks clawed back much of those losses throughout Friday to finish the week on an upbeat note. The S&P 500 rose 1.9% on Friday to finish the week ‘only’ down -0.7%. The small-cap Russell 2000 Index was up +1.7% on Friday to end the week down -1.0. The tech-heavy Nasdaq Composite jumped +2.7% Friday, its best single day of 2023, to push it to a positive +0.6% weekly gain. Overseas developed market stocks treaded water for the week, ending unchanged (MSCI EAFE Index, +0.0% for the week) while the MSCI Emerging Market Index gained +0.6% for the week, the best weekly gain among the major equity indices, and put them at the top for the year with an +8.3% gain.
U.S. Treasury yields also rose Friday, with two- and 10-year bond yields extending a rise from four-month lows at mid-week, but still posted a third straight weekly. The Bloomberg U.S. Aggregate Bond Index gained +0.2% for the week, putting it up +2.9% in 2023. Non-U.S. bonds slipped -0.1% for the week but are up +3.7% for the year.
Worries over economic growth appeared to be the main culprit for the weakness early in the week. Worse-than-expected retail sales, building permits, industrial production, and regional Fed manufacturing activity, as well as the eleventh-straight monthly decline in existing home sales, overshadowed softer-than-expected wholesale inflation as the Producer Price Index (PPI) declined further from their March high. Investors seemed to instead focus more on earning news.
Tech-related stocks led Friday’s rally, with Netflix the big catalyst, surging +8.5% on the day after gaining more subscribers than expected in its latest quarter – despite missing earnings estimates. Google parent Alphabet was up +5% after announcing plans to cut 12,000 employees, joining fellow big tech firms like Meta Platforms (Facebook parent), Microsoft, Amazon, and Salesforce in announcing broad layoffs in recent months. Tech heavyweights will remain in the spotlight in a busy earnings week. Microsoft, IBM, Intel, and Tesla are among the companies reporting earnings this week. In fact, more than 90 of the S&P 500 companies are set to report earnings in the coming week, including other household names like AT&T, Verizon, Visa, Mastercard, American Express, Southwest Airlines, Colgate-Palmolive, and Johnson & Johnson. The reports will help show how companies are weathering a slowing economy with high inflation. The fourth-quarter earnings season is off to a weak start, according to FactSet, who points out that with 11% of S&P 500 companies having reported, earnings are on track to drop -4.6% from a year earlier, the first annual decline since the third quarter of 2020.
Chart of the Week
U.S. retail spending fell in December at the sharpest pace of 2022, marking a dismal end to the holiday shopping season as rising interest rates, still-high inflation, and concerns about a slowing economy pinched U.S. consumers. December advance Retail Sales fell -1.1% for the month, below expectations for a -0.9% decline and lower than November’s downwardly revised +1.0%. Sales ex-autos also dropped -1.1%, below expectations of a -0.5% decline, and November’s downwardly revised -0.6%. Sales ex-autos and gas fell -0.7%, under expectations for an unchanged reading, and compared to November’s downwardly revised -0.5% decline. The Control Group, a figure used to calculate GDP, was down -0.7%, below expectations for -0.3%, and the prior month’s unrevised -0.2%. Sales have fallen in three of the past four months. The decline in retail spending adds to signs that the U.S. economy is slowing as the Federal Reserve pushes up interest rates to combat inflation.
U.S. retail and food service sales change from the prior month
Note: Seasonally adjusted.
Source: Commerce Department, The Wall Street Journal.
- The December Producer Price Index (PPI) showed wholesale prices decline -0.5% for the month, falling more than the expected -0.1% and November’s downwardly revised +0.2% increase. Year-over-year the headline PPI was up +6.2%, below expectations of +6.8%, and the prior month’s downwardly revised +7.3%. Core PPI, which excludes the food and energy components, was up +0.1%, in line with estimates, and just under the prior month’s downwardly revised +0.2%. Year-over-year Core PPI was up +5.5%, below the expected +5.6% rise and November’s unrevised +6.2%.
- December Industrial Production declined -0.7% for the month, below expectations of -0.1%, and November’s negatively revised -0.6%. Manufacturing and mining output both fell, more than offsetting a rise in utility consumption. Capacity Utilization declined to 78.8%, versus estimates of a slight uptick to 79.5% from the prior month’s downwardly revised 79.4% rate.
- The January National Association of Home Builders (NAHB) Housing Market Index (HMI) unexpectedly improved, rising to 35 from December’s unrevised 31, where it was expected to remain. This was the sixth-straight month that homebuilder sentiment was below 50—which suggests poor conditions. The NAHB noted that “It appears the low point for builder sentiment in this cycle was registered in December… The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”
- December Housing Starts declined -1.4% for the month to an annual pace of 1,382,000 units, beating expectations for a drop to 1,358,000 units, but down from November’s downwardly revised 1,401,000 units. Building Permits, one of the leading indicators tracked by the Conference Board, fell -1.6% for the month to an annual rate of 1,330,000, below expectations for an increase to 1,365,000 units, and November’s upwardly revised 1,351,000 units.
- December Existing Home Sales fell -1.5% for the month to an annual rate of 4.02 million units, above expectations for 3.96 million units, below November’s downwardly revised 4.08 million units. Contract closings declined for the eleventh-straight month, marking the lowest level since November 2010, and were down -34.0% year-over-year. Sales were down month-over-month in all regions except for the West, which was unchanged. The median existing home price was up +2.3% from a year ago at $366,900—marking the 130th straight annual gain and the longest-running streak on record—but the sixth 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 declined -13.4% for the month, with the unsold inventory at a 2.9-month supply at the current sales pace, up from the 1.7 monthly pace in the same period last year. National Association of Realtors Chief Economist Lawrence Yun said, “December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates. However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.”
- The January Empire Manufacturing Index, a measure of activity in the New York region, unexpectedly fell further into contraction territory (a reading below zero), dropping to -32.9 from -11.2 in December, below expectations of -8.6. The contraction in new orders accelerated noticeably, shipments dropped into contraction territory, and employment growth slowed solidly. However, prices paid and received both decelerated but continued to expand.
- The January Philly Fed Manufacturing Business Outlook Index improved but remained in contraction territory (a reading below zero), rising to -8.9 from -13.7 in December, and better than expectations of -11.0. New orders improved but continued to be negative, while shipments and employment both jumped into expansion territory. Prices paid slowed further but remained elevated and prices received accelerated.
- The weekly MBA Mortgage Application Index rose +27.9% from the prior week’s +1.2% gain as the Refinance Index surged +34.2% and the Purchase Index jumped +24.7%. The rise came as the average 30-year mortgage rate fell 19 basis points to 6.23%, which is up 2.59 percentage points versus a year ago.
- Weekly Initial Jobless Claims fell by -15,000 to 190,000 for the week ended January 14, below expectations for 214,000 and the prior week’s unrevised 205,000. Continuing Claims for the week ended January 7 rose by -17,000 to 1,647,000, under expectations of 1,655,000.
The Week Ahead
Next week, Q4 earnings season shifts into a higher gear with nearly 20% of S&P 500 companies reporting results. Still, the economic calendar will be the busiest of the year so far with several high-profile reports that could make headlines. New Home Sales and Pending Home Sales for December come late in the week, while the first look (of three) at Q4 Gross Domestic Product (GDP) is also on tap mid-week. The week kicks off with the December Leading Economic Index (LEI) on Monday. Several regional Fed economic activity surveys are also due during the week.
Did You Know?
RETIRE THIS – France’s proposed new retirement age is 64, starting in 2030. The government’s plan to raise it from 62 prompted more than one million people to take to the streets and workers to strike in protest. Schools and nurseries shut down and mass transit was curtailed (source: The Wall Street Journal).
DOWN BUT NOT OUT – The total amount of Americans’ excess savings midway through 2022 stood at approximately $1.7 trillion, down from $2.3 trillion in the third quarter of 2021. Pay increases were less than the inflation rate in 2022 for the second year in a row, leaving households worse off despite historically strong pay gains (Source: Federal Reserve, The Wall Street Journal).
NO DIP IN CHIPS – There are an average of 1,200 computer chips in a car in 2021, twice as many as in 2010. Recent shortages and fears of China’s ambitions to dominate the industry have led to a frenetic effort to rev up U.S. production of these essential semiconductors (source: The Wall Street Journal).
This Week in History
HAVE YOU DRIVEN A FORD LATELY? – On January 18, 1956, after more than a half-century as a private company, the Ford Motor Co. went public when the Ford Foundation sold 10.2 million shares at $64.50 (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.