- 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 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 sink, bonds soar as banking turmoil spooks markets
Just as markets seemed to be getting comfortable with the “higher-for-longer” concept—in which the Federal Reserve would be hiking rates higher and keeping them at those levels longer—they were struck by concerns over a banking crisis that unfolded rapidly at the tail end of the week. The turbulence in the banking sector developed as SVB Financial, the parent corporation of Silicon Valley Bank, was shut down by government regulators on Friday. SVB was the sixteenth largest bank in the country before its closure Friday, and it marked the largest bank failure since 2008 and the second largest ever. SVB realized a rash of deposits leaving the bank (whose clients are primarily tech-focused businesses) late in the week and was not able to raise sufficient capital quickly enough to remain a growing concern. Fortunately, regulators and other large financial institutions—not taxpayers—will reimburse all depositors of the shuttered bank (along with another unrelated bank, Signature Bank, which was put in government receivership with SVB over the weekend).
But before Sunday, investors didn’t know the fate of SVB, nor several other shaky regional banks, which took a big toll on the markets and left them clinging to year-to-date gains. The S&P 500 posted its worst week since September 24 after four straight days of losses, falling -4.6% for the week and leaving up just +0.6% for the year. The tech-heavy Nasdaq Composite was down slightly more with a -4.7% drop but still holds a +6.4% 2023 gain. Small caps stocks got hit, sinking -8.0% for the week, their worst since January 2022, and leaving them with just a +0.7% gain for 2023.
U.S. Treasuries soared in a flight to quality as investors were spooked by the questionable health of the banking sector. When bond prices rise, yields fall, and the benchmark 10-year U.S. Treasury note fell -25 basis points (bps) to 3.70%, its biggest weekly decline since the first week of January. The 2-year U.S. Treasury yield dropped -27 bps to 4.59%. As a result, the Bloomberg U.S. Aggregate Bond Index rose +1.2%, its best week since January 6, and the Bloomberg Global Aggregate Bond Index ex U.S. (the benchmark for non-U.S. bonds) was up +1.5%, its best week since January 13.
The turmoil in bank stocks overshadowed the February jobs report, which showed some signs that inflation may be easing, as employee wages increased less than expected and the unemployment rate unexpectedly rose. Fed Chairman Jerome Powell completed his two-day semi-annual Congressional testimony on Wednesday and was generally received as having a hawkish tone, and indicating that rates may need to be raised more and for longer, meaning a potentially larger-than-expected rate hike at the next policy meeting on March 21 and 22. The Fed also released its Beige Book—an anecdotal read on business activity across the nation used by the Central Bank to prepare for its next monetary policy decision. The report indicated that overall economic activity was essentially unchanged from its release. Six of the Fed Districts noted modest increases in activity, while six showed no change and one District saw a slight decline, and most areas expecting little change to growth ahead. Consumer spending also held steady, though a few Districts reported moderate to strong growth in retail sales. Inflation and higher interest rates continued to reduce consumers’ discretionary income and keep the housing market subdued. Meanwhile, the report noted that manufacturing activity stabilized following a period of contraction.
The coming week will be interesting, and potentially volatile, as markets try to evaluate whether there are any other bank concerns on the horizon or whether they are confident with the U.S. government’s plan to shore up the sector. If the latter is true, then the focus may shift back to the Fed and whether the “higher-for-longer” approach will persist after the vulnerability with the banking sector became so evident over the last several days. There will be a lot of inflation data, as well as housing data, released throughout the week to keep investors on their toes.
Chart of the Week
Job gains have slowed somewhat in February from January’s torrid pace. February saw 311,000 Nonfarm payroll jobs added during the month, well above the expectations for a 225,000 increase, and January was revised downward modestly by 13,000 to 504,000 from the initial 517,000 reported. Excluding government hiring and firing, private sector payrolls rose by 265,000, versus the expected 215,000, after jumping by 386,000 in January, revised lower from the initial reported 443,000 gain. The labor force participation rate increased to 62.5% from January’s unrevised 62.4% level, where it was expected to remain. In a surprise, the unemployment rate rose to 3.6%, above expectations for it to remain at January’s 3.4% level. The underemployment rate—including total unemployed and those employed part-time for economic reasons, along with people who are marginally attached to the labor force—increased to 6.8% from the prior month’s 6.6% rate. Average hourly earnings were up +0.2% for the month, which was below expectations, as well as January’s +0.3% reading. Compared to last year, wages were up +4.6%, below expectations of +4.7%, but above January’s unrevised +4.4% rise. Finally, average weekly hours fell to 34.5 from January’s 34.6 rates, where it was expected to remain. Overall, it was a robust jobs report that shows employers remain in need of workers and that the economy remains resilient.
Payrolls Beat Forecasts Again, But Slow from January Blowout Number
Nonfarm payrolls, monthly change
*2019 average. Note: Seasonally adjusted.
Source: Labor Department, The Wall Street Journal.
- The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, fell to 10.82 million jobs available to be filled in January, above expectations of 10.55 million and December’s upwardly revised 11.23 million. The report showed the hiring rate was 4.1%, up from 4.0% in December, and total separations—including quits, layoffs, discharges, and other separations—remained at December’s 3.8% rate. The quit rate dipped to 2.5% from the prior month’s 2.6% pace.
- The Trade Balance for January showed the deficit widened by $68.3 billion, a smaller amount than expected $68.7, but above December’s upwardly revised $67.2 billion. Exports rose +3.4% for the month and imports increased +3.0%.
- January Consumer Credit showed consumer borrowing expanded by $14.8 billion during the month, below expectation for $20.0 billion. December was revised lower to an increase of $10.6 billion from the originally reported $11.6 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, was $3.6 billion, a +1.2% annual increase, while revolving debt, which includes credit cards, was $11.2 billion, an 11.1% annual rise.
- January Factory Orders fell -1.6% for the month, below the expected -1.8% drop and the prior month’s downwardly revised +1.7% increase. Excluding transportation, factory orders rose +1.2%, above the expected +1.0% gain and December’s -1.2% decline. Durable goods orders—preliminarily reported last week—matched expectations to remain at the unrevised previous estimate of -4.5%. Excluding transportation, orders were revised higher to a +0.8% increase from the previously-reported +0.7% rise, where it was expected to remain. January’s final read on nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—was unrevised at the 0.8% increase posted in the preliminary reading.
- The weekly MBA Mortgage Application Index rose +7.4%, snapping a 3-week losing streak, as the Refinance Index rose +9.4% and the Purchase Index was up +6.6%. This follows the prior week’s -5.9 decline. The increase came as the average 30-year mortgage rate rose 8 basis points to 6.79%, which is up 2.70 percentage points versus a year ago.
- Weekly Initial Jobless Claims rose by +21,000 to 211,000 for the week ended March 4, above expectations for 195,000 and the prior week’s unrevised 190,000. Continuing Claims for the week ended February 25 rose by +69,000 to 1,718,000, above expectations of 1,660,000.
The Week Ahead
Next week has the potential for a lot of drama as markets digest the collapse of SVB Financial Group (Silicon Valley Bank) and the late Sunday news that depositors will be made whole. Economic data will also be prominent, particularly Consumer Price Index (CPI) and Producer Price Index (PPI) reports, as investors wait to see what the implications of inflation will be for the next Federal Reserve meeting rapidly approaching. Retail Sales are expected to slow down, and industrial production is expected to move higher. Housing will be on display courtesy of the NAHB Housing Market Index, housing starts and building permits, as well as the weekly MBA Mortgage Applications.
Did You Know?
HIGHER-FOR-LONGER – Market expectations for US Federal Reserve policy moved higher-for-longer in February. At the start of the month, futures were pricing a peak ‘terminal’ federal funds rate of 4.89% in June 2023. By the end of the month, the terminal rate had increased to 5.47% at the September 2023 meeting (source: Bloomberg).
NOT HAPPY – The share of customers who have taken action to settle a score against a company through pestering, public shaming, or other measures rose to 9%, up from 3% in 2020, according to a new survey of 1,000 U.S. consumers. Americans are encountering more problems with products and services, and a higher proportion of them are actively seeking “revenge,” the study found (source: The Wall Street Journal).
TAX DEADLINE – The Federal deadline for filing taxes is just six weeks away, and for the average American it takes 13 hours and a cost of $250 to file their Form 1040. That amount varies significantly by type of return. For non-business filers, it takes an average of eight hours to prepare a return while business filers take an average of 25 hours (source: Internal Revenue Service, MFS).
This Week in History
NYSE BORN – On March 8 in 1817, the New York Stock & Exchange (NYSE) Board, the ancestor of the NYSE, was formed when 24 brokers agreed on a “Constitution” that fixed commissions at 0.25% and set a fine of at least six cents for talking out loud about other subjects while stocks were being traded (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.