Weekly Market Update – March 29, 2024

Quick Takes

• U.S. stocks and bonds were modestly higher for the holiday-shortened week. The S&P 500 Index was up +0.4% to close at a new all-time high, while the Bloomberg U.S. Aggregate Bond Index was up +0.2%.
• Even in light of markets being closed for the Good Friday holiday, the economic calendar was full over the week. U.S. GDP for Q4 was revised higher, durable goods orders were better than expected, and consumer sentiment was the highest in 21 months. But pending home sales were down, consumer confidence waned, and Core PCE inflation ticked up.
• On Tuesday morning, the Francis Scott Key Bridge in Baltimore, Maryland, collapsed after being struck by a container ship. The bridge is vital for the port, which is one of the largest ports in the U.S. and provides access for car and truck shipments – triggering fears of another round of supply chain disruptions. 

Stocks close out the holiday-shortened week with gains

U.S. stock and bond markets were closed on Friday in observance of the Good Friday holiday, but that didn’t stop the S&P 500 Index from climbing +0.4% for the week to end at a new recorded high. The market’s advance was notably broad, with the equal-weighted S&P 500 Index gaining +1.6% and the small cap Russell 2000 Index jumping +2.5%. Counter to recent trends, the Technology sector lagged, and the tech-heavy Nasdaq Composite Index slipped -0.3% for the week. For a short week, the economic calendar was full. Durable Goods Orders for February rose a bit more than expected. Excluding the volatile defense and aircraft segments—a gauge that is considered to more closely reflect business spending plans—orders rose a solid +0.7%, much more than forecasted, and helped offset two months of declines. February New Home Sales unexpectedly fell, but Pending Home Sales rose more than anticipated. Consumer indicators were mixed, with the Conference Board reporting a slight decline in March Consumer Confidence versus expectations for an increase. But the week ended with the University of Michigan revising its index of Consumer Sentiment higher to the best level in 21 months. U.S. GDP for the final three months of 2023 was revised higher due to positive revisions for strong personal consumption. On the inflation front, the Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased in line with expectations and was a bit slower than the prior month. That was a bit of a relief for investors after the hotter-than-expected consumer (CPI) and wholesale (PPI) inflation reports earlier in the month. One of the bigger market-influencing events came outside of the scheduled economic reports. On Tuesday morning, reports of the collapse of the Francis Scott Key Bridge in Baltimore, Maryland, after being struck by a container ship were circulating. The bridge collapse cut off shipping access to the Port of Baltimore. The time and costs of rebuilding the bridge are in the trillions of dollars over as much as a ten year period. The broader economic implications of the shutdown remain uncertain, but fears are that it could trigger another stint of supply chain disruptions. The port is an important hub for the U.S. auto industry, with motor vehicles and parts accounting for 42% of all the imports passing through it. Coal exports are also expected to be impacted, at least in the near term.

Markets overseas were also mixed, with developed market international stocks (as measured by the MSCI EAFE Index) dipping -0.1% while the MSCI Emerging Markets Index rose +0.4%. The U.K. slipped into recession during the quarter for the first time since the pandemic. Germany also showed signs of an economic slowdown, with Retail Sales falling the most in 17 months and economic forecasters downgrading the 2024 growth forecast to just +0.1%, down from earlier projections of +1.3%. On the positive side, Consumer Confidence in the eurozone was more optimistic, according to the European Commission, hitting a two-year high. Stocks in Japan and China fell over the week.

Treasury yields were little changed for the week. The U.S. 10-year Treasury yield was flat, ending the week unchanged at 4.20%, while the 2-year U.S. Treasury yield inched up +3 basis points to finish the week at 4.62%. The Bloomberg U.S. Aggregate Bond Index was up +0.2% for the week, while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) inched up +0.1%. 

Chart of the Week

The cost of goods and services rose sharply in February, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.3%, a tick below expectations of +0.4%, which is where it was the prior month (revised up from +0.3%). On a year-over-year basis, the PCE Price Index was up +2.5%, matching expectations and slightly up from +2.4% the prior month. It marks the first annual increase since last September. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.3%, in line with expectations and a bit slower than the prior month’s +0.5% (revised up from +0.4%). Year-over-year, the Core-PCE Price Index is up +2.8%, in line with expectations and down from +2.9% the prior month (revised up from +2.8%). After the hotter-than-expected consumer (CPI) and wholesale (PPI) inflation weeks earlier in the month, the increase in the PCE report wasn’t a big surprise but reinforces how difficult it may be to get to the Fed’s +2% target rate.

Signs of U.S. Inflation Reheating

Short-term Core PCE Measures Estimated to Pick Up

Source: U.S. Bureau of Economic Analysis, Bloomberg.

Economic Review

• U.S. economic growth for the fourth quarter was upgraded a bit to a +3.4% annual pace in the third and final release, reflecting solid consumer spending and a stronger-than-expected economy. Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was previously estimated at +3.2% for Q4-2023. The growth rate of the economy is forecast to decelerate to a still-healthy +2% in the just-ended first quarter of 2024. Personal Consumption was revised up to +3.3% from +3.0% in the second estimate. Consumer spending accounts for about 70% of the U.S. economy. Government Spending was also revised higher, to +4.6% from +4.2%, contributing 0.79% to GDP growth. The government expenditures are up considerably from the initial estimate of +3.3% and remain well above the 10-year average of about +1.8%. Business Investment, which is the second largest component of GDP, was also a bit stronger in the final release, up to +3.7%. Exports decreased to +5.1% from 6.4% in the prior estimate and follows a +5.4% gain the prior quarter. Imports rose +2.2% versus +2.7% in the second estimate. The GDP Price Deflator was unchanged from the prior estimate at +1.6%. GDP is updated twice after its initial advance estimate.
• Personal Spending accelerated +0.8% in February, beating expectations for a +0.5% rise and the prior month’s unrevised +0.2% increase. It was the largest increase in 13 months. After adjusting for inflation, Real Personal Spending was up +0.4% from -0.2% the prior month (revised down from -0.1%). Spending appears to be holding up despite higher interest rates. Meanwhile, Personal Income rose +0.3%, short of expectations for +0.4%, and the prior month’s unrevised +1.0%. Wages and salaries led the month’s gain. One concern was the large drop in the Personal Savings Rate, which fell to 3.6% from 4.1% the prior month, the lowest since December 2022.
• The Conference Board’s Consumer Confidence Index retreated in March to a four-month low of 104.7 from 104.8 the prior month (revised down from 106.7) and missing expectations for 107. The Present Situation gauge rose to 151.0 from 147.6 the prior month (revised up from 147.2). The Expectations gauge — which reflects consumers’ six-month outlook — fell to a five-month low of 73.8 from 76.3 (revised down from 79.8). Below the 80 mark on the expectations index often signals a recession within the next year. In good times, the index can top 120 or more. 
• The final reading of the February University of Michigan Consumer Sentiment Index climbed to a two-year high of 79.4 from 76.5 in the initial reading, where it was expected to stay. That is the highest level since July 2021, but it’s still well below the pre-pandemic peak of 101. The Current Economic Conditions component was revised up to 82.5 from the preliminary estimate of 79.4, also the highest since July 2021. The Consumer Expectations component also moved higher to 77.4, a two and a half year high, and up from the preliminary level of 74.6. One-year inflation expectations are +2.9%, below expectations of +3.1%. The five-year inflation expectations came in at +2.8%, just below expectations of +2.9%.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit an all-time high in January, marking a full year of consecutive monthly increases, as the index increased a seasonally adjusted +0.14%, a bit below expectations for a +0.20% increase and down from the prior month’s +0.26% pace (revised up from +0.21%).  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +6.59%, slightly below expectations for +6.60% but above the prior month’s +6.15% annual gain. San Diego again posted the biggest year-over-year home-price gains, up +11.2%. Home prices grew the slowest in Portland, by +0.9%. All 20 cities registered annual increases for the second consecutive month.  
• Unlike the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) showed U.S. home prices slip, down a seasonally adjusted -0.1% in January compared to the unrevised +0.1% increase the prior month. Expectations were for a +0.3% increase. The government data showed home prices up +6.3% year-over-year. Affordability and elevated mortgage rates continue to weigh on demand.
• The Commerce Department reported New Home Sales dipped -0.3% in February, far below expectations for +2.3% and down from a +1.7% pace the prior month (which was revised up from +1.5%). That equates to 662,000 units versus the prior month’s 664,000 units (revised up from the originally reported 661,000). New Home Sales data tend to be volatile month-on-month and are often revised. New-home sales remain far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes are up +5.9% compared to the 2.3% annual pace the prior month. The Median New Home Price fell -7.6% to $400,500 from $414,900 the prior month. The inventory of new homes for sale was up a tick to 8.4 months of supply at the current rate of sales from 8.3 months the prior month. By region, sales were weakest in the Northeast (-31.5%) and the Midwest (-2.4%) but rose in the South (+3.7%) and West (+2.3%).
• The National Association of Realtors (NAR) reported that Pending Home Sales inched up +1.6% in February, a bit ahead of expectations for a +1.6% increase and much improved from the prior month’s -4.7% drop (revised up from the originally reported -7.9%). Year-over-year sales were down -2.2%, an improvement from the -6.8% slide the prior month. From a regional perspective, the Midwest drove the rebound, jumping +10.6%. The South–the country’s largest housing market–was up +1.1%. The Northeast and West were little changed. Pending home sales tend to lead existing home sales by a month or two.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment rebounded to +1.4% in February from -6.9% the prior month (revised down from -6.2%), beating expectations for -1.0%. Durable Goods Orders Excluding Transportation were up a solid +0.5% versus the prior month’s -0.3% level (revised up from the originally reported -0.4%), beating expectations for +0.4%. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, jumped +0.7% following a -0.4% drop the prior month (revised from +0.0%), and well above expectations for a +0.1% gain. Overall, the report suggests U.S. manufacturing might be perking up after a few years of malaise.
• US economic activity picked up again in February, according to the Federal Reserve Bank of Chicago. The Chicago Fed National Activity Index (CFNAI) moved up to +0.05 from -0.54 the prior month (revised sharply lower from -0.30). Readings below zero indicate below-trend-growth in the national economic activity. All four broad categories of indicators used to construct the index increased for the month, and three are in positive territory. Production-related indicators contributed the most to the improvement, increasing to +0.02 from -0.12. Employment-related indicators were up to +0.01 from -0.02 the prior month. Overall breadth was constructive, with just 46 of the 85 monthly individual indicators making positive contributions, while 39 were negative. 
• Texas factory activity slid in March, with the Texas Manufacturing Outlook Survey declining to -14.4 from an unrevised -11.3 the prior month, below expectations for -10.0. The Fed’s 11th District saw activity decline in most major indicators, from Production to New Orders to Employment. Except for Employment, most major indicators also returned to negative territory after a brief visit to positive levels the prior month. Indicators related to inflation increased and moved higher in positive territory, with Prices Paid up nearly 6 points to 21.4 and Prices Received up 10.2 points to 11. Wages and Benefits ticked up to 20.4 from 20.1. The Texas Service Sector Outlook Survey also fell, slipping to -5.5 from -3.9 the prior month.
• The Richmond Fed Manufacturing index fell to -11 from an unrevised -15 the previous month, far worse than expectations to remain at -5. Of its three component indexes, only Shipments increased, improving to -15 from −14 the previous month. The New Orders index slumped to -17 from −5, and the Employment index fell to 0 from +7.
• The Kansas City Fed Manufacturing Survey fell to -7 in March from -4 the month before, which is where it was expected to stay. The New Orders slumped to -17 from -2, while the Production index dropped to -9 from +3. The Prices Paid ticked up to +17 from +15 the prior month, while Prices Received rose to +5 from -2. The Kansas City Fed Service Sector Outlook Survey fell to +7 from +12 the prior month.
• Weekly MBA Mortgage Applications slid -0.7% for the week ended March 22, following the prior week’s 1.6% dip. The Purchase Index slipped -0.2% following a -1.2% decline the prior week. The Refinance Index declined -1.6% following a -2.5% drop the prior week. The average 30-Year Mortgage Rate rose to 6.93% versus 6. 97% the prior week. 
• Weekly Initial Jobless Claims fell -2,000 to 210,000 for the week ended March 23, below expectations for 212,000. The prior week was revised up +2,000 to 212,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +24,000 to 1,819,000 in the week ended March 16, above consensus estimates for 1,815,000, and last week’s reading of 1,795,000 (revised down from 1,807,000).

The Week Ahead

This week is “jobs week,” with the Employment Situation Report for March set to be released on Friday. Investors will be looking for clues on the labor market and how it may influence the Fed’s monetary policy and timing for expected rate cuts. Economists are expecting that 216,000 new nonfarm payrolls were added by employers in March, which would be a deceleration from the 275,000 additions in February. Before that, though, we will get the latest Job Openings and Labor Turnover Survey (JOLTS) report on, followed by ADP’s private employment report on Wednesday. Beyond jobs data, S&P Global and the Institute for Supply Management (ISM) report their respective Purchasing Managers Indices (PMIs) for manufacturing (Monday) and services (Wednesday). Federal Reserve speakers will also be out and about, with the spotlight on Fed chairman Jerome Powell, who will be delivering a speech on economic outlook at a Stanford forum on Wednesday. 

Did You Know?

RECORDS ABOUND – New records abound, from gold to bitcoin to the major U.S. stock indexes. Resilient corporate profits, enthusiasm around AI, and hopes that the Federal Reserve will cut rates have buoyed investor spirits. On Friday, the S&P 500 Index and Dow Jones Industrial Index set new record highs to close out a big first quarter (Source: The Wall Street Journal).

NO WHEELS – In its February survey of consumer expectations dating back to 2016, the New York Federal Reserve Bank found that only 9.9% of respondents are likely to apply for a car loan in the next year; a record 31.8% of respondents expected they would be rejected if they applied for a car loan (Source: New York Fed, The Wall Street Journal).

U.S. FINANCIAL ILLITERACY – According to a leading financial wellness group, 15- to 18-year-olds scored an average of only 64% on a financial literacy test, and 51.3% of participants failed (passing = 70). States with the lowest financial literacy scores were DE, AR, NV, and AZ, while the highest scores were found among teens in WV, HI, NM, and MA (Source: National Financial Educators Council, The Wall Street Journal).

This Week in History

FIRST BANK FAILURE – On March 25, 1809, the first notable bank failure in the U.S. was reported. The Farmers Exchange Bank of Glocester, R.I., went bust after issuing $800,000 in fraudulent loans against total capital of $45 (Source: The Wall Street Journal).

Asset Class Performance

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.