- The threat of rates going “higher for longer” has weighed down stocks and bonds over the last several weeks. And data on Friday showed the crucial U.S. services sector had its strongest activity since the summer, yet rather than fall, the S&P 500 popped +1.6% and finished the week up +1.9%, ending three weeks of losses.
- Bonds also rallied on Friday as U.S. Treasury yields pulled back from their recent highs. The Bloomberg U.S. Aggregate Bond Index rose +0.8%, its best day since January 8th, helping it eke out a +0.1% gain for the week to end its own three-week losing streak.
- The global economy is showing some signs of resiliency, with PMI data during the past week indicating a potential resurgence in economic growth despite persistently high energy and food prices, as well as rising borrowing costs.
Stocks and bonds snap 3-week losing streak
The “higher-for-longer” rates narrative that has weighed down stocks and bonds the last several weeks couldn’t keep the markets down on Thursday and Friday. Investors had grown wary in recent weeks that the Fed might need to push rates higher, and keep them there longer than previously expected due to data showing that the economy is still strong and inflation pressures are reemerging.
But late this past week, especially on Friday, additional evidence to support that thesis not only failed to sink markets, but they also rebounded strongly. Friday brought data showing that the crucial U.S. services sector had its strongest activity since the summer, and rather than falling on the “good news is bad news” trend of the last few weeks, the S&P 500 Index popped +1.6%. That was its best day since January 20th and pushed it to end the week up +1.9%–breaking a string of three losing weeks. The strong economic data somehow outweighed concerns about inflation and tighter Fed monetary policy that prompted selling earlier in the week. Even bonds rallied on the day as U.S. Treasury yields pulled back from their recent highs. The Bloomberg U.S. Aggregate Bond Index rose +0.8%, its best day since January 8th, helping it close up +0.1% for the week to end its own three-week losing streak.
It wasn’t just U.S. stocks and bonds that rallied for the week. Almost every major stock and bond index saw gains for the week. Non-U.S. stocks rose, with the MSCI EAFE Index (developed market international stocks) up +1.7% and the MSCI Emerging Markets Index gained +1.7% (breaking a four-week losing streak). The only exception to the global rally were non-U.S. bonds, as the Bloomberg Global Aggregate Bond ex-U.S. Index slipped -0.05% for the week.
In addition to Friday’s strong U.S. Services PMI data, the highest reading since June, similar data for the eurozone and China also showed expansion with stronger-than-expected results. Overall, the global economy is showing some signs of resiliency, with PMI data during the past week indicating a potential resurgence in growth despite persistently high energy and food prices, as well as rising borrowing costs. Like in the U.S., this could lead other global central banks to reassess the need to tighten monetary policy longer than anticipated to bring inflation under control and could translate into a slowdown later this year.
Chart of the Week
The Conference Board’s Consumer Confidence Index fell for a second straight month to 102.9 in February, its lowest point in three months, and down from 106.0 a month earlier. That was far below consensus expectations which were looking for an increase to 108.5. The movement came as the Present Situation component increased, while the Expectation component moved lower. According to the report, “the Expectations Index is below 80, which often signals a recession within the next year.” On employment, the Labor Differential (consumers’ appraisal of jobs being “plentiful” minus being “hard to get”) increased to 41.5 from the 37.0 level posted in January.
Americans Aren’t Very Confident About the Future
Expectations and Present Situation components
Note: Seasonally adjusted, 1985=100.
Source: The Conference Board.
- The S&P Global U.S. Manufacturing PMI Index for February was revised further into contraction territory (a reading below 50), down to 47.3 from the preliminary read of 47.8, where it was expected to remain, but above January’s 46.9 figure.
- The final S&P Global U.S. Services PMI Index for February was unexpectedly revised slightly higher to 50.6 from the preliminary reading of 50.5, up from 46.8 in January and better than expectations for no change but remaining in contraction territory (readings below 50).
- The February Institute for Supply Management (ISM) Manufacturing Index remained in contraction territory (a reading below 50) but improved to 47.7 from January’s unrevised level of 47.4—the lowest reading since May 2020—and was below expectations of 48.0. The manufacturing sector contracted for a fourth-straight month even as new orders improved solidly but continued to contract, production dipped further into contraction, and employment fell back into contraction. Inventories were little changed and were modestly above the key 50 mark, and supplier delivery times shrunk slightly. Inflation pressures jumped back into expansion territory.
- The February ISM Services Index slid but beat expectations and remained in expansion territory (meaning a reading above 50). The index slipped to 55.1, above expectations of 54.5 but down from 55.2 in January. New Orders expanded at an accelerated pace, along with Employment, and Prices Paid decelerated, while Business Activity fell but continued to grow.
- Final Q4 Nonfarm Productivity was revised lower to a +1.7% quarter-over-quarter increase on an annualized basis, from an initial +3.0% estimate, and below a revision to a +2.5% gain. Q3 productivity was revised downward to a +1.2% rise. Labor productivity, or output per hour, is calculated by dividing real output by hours worked and is a major contributor to the economy’s long-term health and prosperity. Unit Labor Costs were adjusted to a +3.2% quarter-over-quarter increase, from the preliminary rise of +1.1%, and above expectations for a revised 1.6% gain. Unit labor costs were upwardly adjusted in Q3 to an increase of 6.9%.
- The preliminary Durable Goods Orders for January fell -4.5% month-over-month, below expectations for a -4.0% decrease and the prior month’s downwardly revised +5.1% gain. Excluding transportation, orders rose +0.7%, easily beating expectations of +0.1%, and the prior month’s negatively revised -0.4% decrease. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—increased +0.8%, beating expectations to remain unchanged and above December’s negatively revised -0.3% decrease.
- February Light Vehicle Sales fell -6.3% for the month to 15.19 million seasonally adjusted units after increasing +19.2% to 16.21 million in January. Sales remain below the April 2021 peak of 18.37 million, but the two months together stood at the highest level since June 2021. Vehicle sales comprise about four percent of real consumer expenditures.
- January Pending Home Sales rose +8.1% for the month, well above expectations of +1.0%, and December’s negatively revised +1.1% increase. Sales fell -22.4% year-over-year but improved from December’s unrevised -34.3% drop. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales, as properties typically go under contract a month or two before the contract is closed.
- The February Chicago Business Barometer fell -0.7 points to 43.6, the lowest since November, and has now been below 50 for the sixth consecutive month. New Orders have contracted for nine straight months, Production is at a three-month low, and Employment is at the lowest since June 2020 – all three have now contracted for six successive months.
- The February Richmond Fed Manufacturing Index fell to -16, far worse than expectations for -5, and the prior month’s -11. Shipments decelerated and Backlogs increased while New Orders and Inventories were unchanged.
- The Dallas Fed Manufacturing Index moved further into contraction territory (a reading below zero) than expected in February. The index dropped to -13.5 from the unrevised -8.4 in January and compared to estimates calling for a decrease to -9.3. The contraction in new orders accelerated, production fell back into contraction territory, inflation components accelerated, and delivery times increased.
- January Construction Spending unexpectedly dipped -0.1% month-over-month, well below expectations for a +0.2% gain, but better than December’s negatively revised -0.7% decline. Residential spending went down -0.6% for the month, more than offsetting a +0.3% increase in non-residential spending.
- The December 20-city composite S&P CoreLogic Case-Shiller Home Price Index increased +4.7% from the prior year, below expectations for a +4.8% increase, and the prior month’s upwardly revised +6.8% increase. Home prices fell -0.1% month-over-month on a seasonally adjusted basis, beating expectations for a -0.2% decline and matching the prior month’s unrevised drop.
- The Federal Housing Finance Agency (FHFA) reported that home prices eased -0.1% during December, the same as in November. Prices fell in four of the last six months and were stable in one. Home prices were down in six of the nine census regions. Prices increased +6.6% year-over-year versus a peak of +19.2% y/y reached in February of 2022.
- The weekly MBA Mortgage Application Index fell -5.7% to its lowest level in 28 years, as the Refinance Index slipped -5.5% and the Purchase Index slumped -5.6%. This follows the prior week’s -13.1 decline. The drop came as the average 30-year mortgage rate rose 9 basis points to 6.62%, which is up 2.56 percentage points versus a year ago.
- Weekly Initial Jobless Claims fell by -2,000 to 190,000 for the week ended February 24, below expectations for 195,000 and the prior week’s unrevised 192,000. Continuing Claims for the week ended February 18 fell by -5,000 to 1,655,000, below expectations of 1,669,000.
The Week Ahead
Next week’s economic calendar will focus on the labor market, with weekly jobless claims, the ADP Employment Change report, the Job Openings and Labor Turnover Survey (JOLTS), and Friday’s highly anticipated February Employment Report. Other key data points include Factory Orders and Consumer Credit, as well as the Fed’s Beige Book release—an anecdotal read on business activity across the nation used by the Fed to prepare for its next monetary policy decision slated for March 22. On the political front, the White House is expected to release a proposed budget on March 9.
Did You Know?
DON’T CALL IT A COMEBACK – Following a decades-long decline, three-pedaled vehicles are experiencing a modest resurgence. Manual transmissions accounted for 1.7% of total new vehicle sales in 2023, up from 1.2% last year and a low of 0.9% in 2021. The Autotrader marketplace reports a +13% rise in page views for new manual cars in 2023 compared with this time last year (source: J.D. Power, The Wall Street Journal).
SHIP IT – The cost of sending a freight container from China to Los Angeles fell to $1,238 this week, down from $15,600 this time last year, according to the Freightos Baltic Index. Inflation and high inventory levels are helping cause the ocean shipping industry’s biggest slump in years. That means idling ships, empty containers, and canceled sailings (source: The Wall Street Journal).
WHERE HAVE THEY GONE – At the end of 2022, there were 451,500 ATMs in the U.S., down from a peak of 470,000 in 2019, according to research firm Euromonitor International. During the pandemic, many people switched to digital payments; those who prefer using cash are feeling the crunch (source: Euromonitor International, The Wall Street Journal).
This Week in History
SHUT DOWN – On Friday, March 3, 1933, the Federal Reserve Bank of New York adopted a resolution formally requesting the Federal Reserve Board urge incoming President Franklin D. Roosevelt to proclaim a national banking holiday due to the mounting number of bank closures and failures that had occurred in recent weeks. On Monday, March 6, just 36 hours into his first term in office, FDR issued Proclamation 2039, suspending all U.S. banking activity for one week. The New York Stock Exchange would also shut down that entire week, and trading would not resume until Wednesday, March 15. March 1933 ended up being one of the darkest periods of the Great Depression (source: Benzinga).
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.