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

Quick Takes

  • It was a give-and-take week for U.S. stocks as the S&P 500 and Nasdaq opened the week with two days of fresh record highs, then dropped the final two days of the week with losses. Still, the S&P was able to keep a three-week win streak, but the Nasdaq was flat.
  • Treasury yields crept up a bit for the week, with both the 10-year U.S. Treasury yield and 2-year U.S. Treasury yield each up +3 basis to close at 4.26% and 4.73%, respectively. With yields up, the Bloomberg U.S. Aggregate Bond Index dipped -0.2% for the week, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) slipped -0.4%. 
  • Economic data sent mixed messages over the week, with Tuesday’s U.S. Retail Sales report missing expectations and barely rising in May, but data from S&P Global on Friday showing preliminary U.S. manufacturing and services PMIs for June exceeding expectations with fast rates of expansion. 
[Market Update] - Market Snapshot 062124 | The Retirement Planning Group

Stocks see modest gains, bonds modest losses in short week

The S&P 500 Index and Nasdaq Composite Index started the week strongly, with record highs on Monday and Tuesday. But markets were closed on Wednesday for Juneteenth, and they couldn’t keep their momentum when trading resumed on Thursday and Friday, with both indexes dropping the last two days. The S&P 500 still closed the week with a +0.6% gain, enough to maintain a three-week win streak. The Nasdaq ended the week exactly flat as Nvidia and artificial intelligence (AI) sold off on Thursday and Friday after weeks of big gains. AI has become the driving force for growth stocks, and any slowdown or pause in that momentum is going to make sustained gains challenging for the broader market. Small cap stocks fared better in the holiday-shortened week as the Russell 2000 Index led the major indexes with a +0.8% advance.  

Overseas, stocks didn’t have Wednesday off but still didn’t have any meaningful gains, as developed market international stocks (as measured by the MSCI EAFE Index) inched up +0.1% for the week. The Bank of England (BoE) stood pat on rates at 5.25% as inflation slowed to their 2% target. The Swiss National Bank lowered rates by a quarter of a percentage for the second consecutive meeting, taking its policy rate to 1.25%. Meanwhile, the MSCI Emerging Markets Index managed to overcome losses in China to post a +0.9% return. The National Bank of Hungary (NBH) reduced its rate by a quarter point from 7.25% to 7.00% at its regularly scheduled meeting on Tuesday. 

For bonds, the week saw yields creep up a bit as the benchmark 10-year U.S. Treasury yield added +3 basis to close at 4.26%. The shorter 2-year U.S. Treasury yield also added +3 basis point on the week to finish at 4.73%. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index finished the week with a modest -0.2% dip, but the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) slipped -0.4% for the week.  

Chart of the Week

The Commerce Department reported that U.S. Retail Sales barely rose in May, inching up just +0.1%, short of expectations for a +0.3% increase. In addition, the prior month was revised lower to -0.2% from a 0.0% flat initial reading. Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Sales of new vehicles and car parts rose +0.8% in the month, while gas receipts fell -0.8%. Sales at online retailers, clothing stores, and big-box electronic stores all rose. One of the surprise detractors in the report was a -0.4% drop in spending at bars and restaurants, which has now fallen in four of the past six months for the first time since the pandemic. Restaurant sales tend to rise when the economy is healthy, and consumers feel secure in their jobs and tend to fall during times of economic stress. Sales also fell at home centers, grocery stores, and furniture and home furnishing stores — likely a result of high mortgage rates and home prices. Sales ex-autos and gas were up +1.0% versus the prior month’s -0.3% decline (revised lower from -0.1%) but fell short of Wall Street expectations for a +0.4% rise. The Control Group, a figure used to calculate GDP, was up +0.4%, below expectations for +0.5%, but up from the -0.5% drop the prior month (which was revised lower from the original -0.3% reading). Sales still indicate steady growth, but they have decelerated, which may lend evidence to the Federal Reserve that inflation will also ease. 

Retail Sales Barely Rise in May and April was Revised Lower

U.S. Retail Sales, Monthly % Change

[Market Update] - Retail Sales Barely Rise in May and April 062124 | The Retirement Planning Group

Note: Seasonally Adjusted
Source: U.S. Census Bureau via St. Louis Fed, The Wall Street Journal.

Economic Review

  • The preliminary “flash” S&P Global U.S. Composite Purchasing Managers Index (PMI) was 54.6 in June, up a tick from 54.5 the prior month to a 26-month high. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI improved to 51.7 in June from 51.3 the prior month, beating expectations of 51.0. The Services PMI jumped to 55.1, also a 26-month high, up from 54.8 the prior month and well ahead of expectations for 54.0. The results show an economy that may be bouncing back from a Spring slowdown. Purchasing managers buy supplies for their companies and buy more when the economy is strong and less when it slows. The S&P Global “flash” PMI surveys are among the first indicators of each month to give a sense of how well the U.S. economy is doing. On the inflation front, the composite of Selling Prices eased to their second-lowest level since 2020. The pace of Prices Paid for the composite also cooled.
  • The Conference Board’s Leading Economic Index (LEI) fell -0.5% in May, below Wall Street estimates for a -0.3% decline but slightly better than the prior month’s unrevised -0.6% drop. The index has declined in 25 of the last 26 months. Breadth of the index was mixed, with five of the ten indicators tracked rising and five negative. The decline was again led by weaker ISM New Orders, as well as negative contributions from Building Permits and Interest Rate Spreads. The biggest positive contributor was an increase in the Average Workweek as well as the Stock Market. The LEI Coincident Index rose +0.4% in May after rising +0.1% in the prior month, while the LEI Lagging Index fell -0.1% in May after rising 0.3% the previous month. The bottom line is that the LEI “isn’t currently signaling a recession,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators, but is indicating a slowing economy. “We project real GDP growth will slow further to under 1% [over the second and third quarters], as elevated inflation and high interest rates continue to weigh on consumer spending,” she said.
  • U.S. Industrial Production was up +0.9% in May, the biggest monthly rise since last July and well ahead of expectations for +0.3%. The jump in production follows two months of weak readings. Manufacturing output also rose +0.9% after a -0.4% drop the prior month. Manufacturing accounts for three-quarters of total industrial production and was helped by an increase in the output of consumer goods, up +1.3%. Capacity Utilization, a measure of potential output, rose to 78.7% from 78.2% the prior month, just above expectations for 78.6%. 
  • The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, rebounded +9.6 points in June but remained in contraction territory for a seventh straight month at -6. Still, that was above expectations to come in at -10.0 (reading below zero indicates deteriorating economic conditions). New Orders jumped +15.5 points to -1, the highest reading in nine months. Shipments improved +4.5 points to +3.3, its highest level in seven months. The Prices Paid and Prices Received component both moderated a bit, as did the Employment index.  Expectations for six months ahead improved +16 points to +30.1.
  • Manufacturing in the Federal Reserve’s Third District fell to 1.3 in June from 4.5 the prior month, according to the Philly Fed Manufacturing Business Outlook Survey. That was far below expectations for 5.0 and the lowest level since January (readings above zero indicates economic expansion). New Orders improved to -2.2 from -7.9 the month before. The Shipments component fell to -7.2 from -1.2. The Employment index improved to -2.5 from -7.9. The Six-Month Business Outlook plunged to +13.8 from +32.4 previously. The Prices Paid index rose to +22.5 from +18.7 the prior month, while Prices Received rose to +13.7 from +6.6.
  • Homebuilder confidence slumped to its lowest level since December, according to the National Association of Home Builders (NAHB) Housing Market Index (HMI), which fell -2 points in June to 43, short of expectations for a reading of 46. The index is based on a 0-to-100 scale, where any number over 50 indicates a good reading, and below 50 is considered negative sentiment. All three subcomponents of the overall index fell, with Current Sales down to 48 from 51, Future Sales (in the next six months) down to 47 from 51, and Traffic of Prospective Buyers down to 28 from 30. High mortgage rates are weighing on builder confidence as home-buying activity slows. Builders are ramping up incentives and cutting prices to keep buyers interested. For the month, 29% of builders reported cutting home prices, the highest level since January. The average price reduction held steady at -6%, where it’s been for a year now. The use of sales incentives beyond price cuts is also rising, with the share of builders offering some form of incentive up to 61% from the previous 59%.  Geographically, the Northeast rose to 62 from 59, and the West inched up to 38 from 37. Meanwhile, the Midwest dropped to 40 from 50, while the South slipped to 43 from 45. 
  • The U.S. housing market remains sluggish as mortgage rates hover near 7%. The National Association of Realtors (NAR) reported that Existing Home Sales fell by -0.7% in May to a seasonally adjusted annual rate of 4.11 million units, slightly above expectations for 4.10 million units, but the slowest and down from an unrevised 4.14 million units the prior month. Year-over-year existing sales are down -2.8% versus the -4.7% annual rate the prior month. The Median Existing Home Price was up +5.8% to $419,300, an all-time high and the eleventh consecutive month of year-over-year increases. That eclipses the prior peak from June 2022, when the median price of a resale home hit $413,800. The Inventory of Homes for Sale was up +6.7% from the prior month and +18.5% from last year, to 1.28 million units, which is the highest level since October 2021. Unsold Inventory is at a 3.7-month supply, which is the highest level since June 2020 and up from 3.5 months the prior month. Homes Listed for Sale remained on the market for 24 days on average, down from 26 days the previous month. First-Time Buyers were 31% of sales in the month, down from 33% the month before. All-Cash Sales held steady at 28% of transactions. Around 30% of properties were sold above list price, receiving an average of 2.8 offers. Million-dollar homes were selling the most briskly, up +22.6% across the U.S. compared with a year ago, while sales of homes priced between $250,000 and $500,000 rose +1%. For the month, sales fell only in the South, down -1.6%, and flat in Northeast, West, and Midwest. Around 30% of properties were sold above list price, the NAR said, with homes receiving an average of 2.8 offers.
  • May Housing Starts fell -5.5% to seasonally adjusted annual rate of 1,277,000 units, a four-year low and far below expectations for a +0.7% increase to 1,370,000 units. That compared to the negatively revised 1,352,000 units or +4.1%, the prior month (originally 1,360,000 and +5.7%). Housing starts peaked at 1,800,000 million in April 2022. Single-family homes sank -5.2% in the month, while multi-family units plunged -10.3%. New construction was slower across most of the country, with the biggest drop in the Midwest, sinking -21.1%, while the Northeast was down -4.9% and the South fell -4.4%. Only and the West saw an increase, up +2.7%). Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, dropped -3.8% to 1,386,000, following the prior month’s unrevised -3.0% decrease to 1,440,000. That was far below expectations for +0.7% increase to 1,450,000. Single-unit permits were down -2.9%, while multi-unit permits for buildings fell -6.1%. Regionally, permits were down everywhere, with the Midwest down -5.0%, the Northeast down -4.9%, the South off -2.7%, and the West slipping -1.4%.
  • Weekly MBA Mortgage Applications edged up +0.9% for the week ended June 14, following the prior week’s +15.6% surge. The Purchase Index was up +1.6% following a +8.6% increase the prior week. The Refinance Index slipped -0.4% following a +28.4% jump the prior week. The average 30-Year Mortgage Rate slipped to 6.94% from 7.02% the week before, its first time below 7% since the end of March.
  • Weekly Initial Jobless Claims fell -5,000 to 238,000 for the week ended June 15, above expectations for 235,000. The prior week was revised up to 243,000 from 242,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,828,000 in the week ended June 8, above consensus estimates for 1,810,000. Last week’s reading of 1,820,000 was revised down to 1,813,000.

The Week Ahead

That calendar gets busier this week with a mix of regional Fed economic surveys (Dallas, Richmond, and Kansas City), national economic reports (CFNAI, GDP, and Durable Goods), housing data (home prices indices, new & pending home sales, and mortgage applications), reports on the consumer (consumer confidence and sentiment), and inflation data (Personal Consumption Expenditures). The Gross Domestic Product (GDP) report on Thursday U.S. economic growth will also be in focus on Thursday, as the final revision for Q1 and isn’t expected to deviate much from the prior estimate of 1.3% growth. The Personal Consumption Expenditures (PCE) for May, which comes on Friday as part of the Personal Income and Spending report, is regarded as the Federal Reserve’s preferred inflation measure. Expectations are for a deceleration from April. 

[Market Update] - Upcoming Economic Calendar 062124 | The Retirement Planning Group

Did You Know?

POWELL PULLS THE PLUGSince 1994, when the Federal Open Market Committee (FOMC) started announcing policy decisions, the last hour of trading on Fed days under Jerome Powell’s tenure has been weaker than for any other Fed chairman, with a median decline of -15 bps and gains just 37% of the time. After last week’s meeting on June 12, the S&P 500 Index fell -19 bps in the last hour of trading (Source: Bespoke).

INNOVATION = INCOMEFrom 1990 through 2015, the ten urban areas with the highest number of U.S. patent filings have seen their share of total filings increase from under 52% to over 58%. Over that same span, the average nominal income in these ten regions increased 36% compared to 25% for the entire country (Source: St. Louis Fed, MFS).

FAVORITE APPSIn Piper Sandler’s Spring 2024 survey of 6,020 teens, teens ranked TikTok as their favorite app (35%), followed by Instagram (30%) and Snapchat (22%). Compared to the fall of 2023, TikTok fell 3 percentage points, Snapchat fell 6, and Instagram gained 7. (Source: Piper Sandler, MFS).

This Week in History

DISNEY’S DOT.COM BUST On June 18, 1998, internet stocks got a boost as Walt Disney agreed to buy 43% of the internet search engine Infoseek for roughly $550 million in cash, stock, and warrants. Infoseek stock shot up to $42. Less than three years later, Disney exchanged the old Infoseek assets for its own shares at an approximate value of only $5 per share (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 062124 | 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.