- Investors were able to put aside banking sector contagion concerns and instead focused on several indicators pointing to inflation easing. The prospects of bank troubles being contained and inflation pressures falling helped global stocks rally solidly for the week.
- Most major global stock indexes were up +3% or more for the week, helping to push monthly and quarterly returns nicely positive. Bonds fell over the week but still held onto decent monthly and quarterly gains.
- The Fed’s preferred inflation gauge came in lower than expected, the University of Michigan Consumer Sentiment report showed that 1-year inflation expectations dropped, and home prices also fell more than expected. The softer inflation data may give the Fed reason to take a less hawkish stance on rate increases.
Stocks rise, bonds slip, as banking contagion appears contained
Despite stress in the banking sector, signs of broader contagion appeared contained, which boosted stocks in the final week of the month and quarter. Stocks closed out the final week of March with most major global stock indexes posting solid gains, which helped them also book healthy returns for the first quarter. Even with two days of congressional testimony putting the focus on the banking turmoil, investors considered it contained for now. Instead, the focus shifted to economic data that suggested the Federal Reserve may have reason to lessen its aggressive stance with rates. On Friday, the Fed’s preferred inflation gauge, the Core PCE Price Index, came in slightly lower than expected. Also Friday, in the University of Michigan Consumer Sentiment report, which saw sentiment unexpectedly slip, the 1-year inflation expectation component dropped. As noted below in the Chart of the Week, home prices also fell more than expected. In sum, besides the banking troubles, there was plenty of economic data to help ease inflation pressures for the Fed. With several Fed speeches set for the upcoming week, it will be interesting to see if the inflation rhetoric gets more dovish.
The end result was a market cheering a perceived bank containment accompanied by the prospect of a more dovish Fed. The S&P 500 Index ended up +3.5% for the week and the month, pushing it to a +7.0% gain for the first quarter. Small caps also rallied for the week, with the Russell 2000 Index up +3.9%, but was down -5.0% for March, yet still up +2.3% for Q1. The big winners were tech stocks though, which fueled the Nasdaq Composite up +3.4% for the week on the way to a +6.7% March return and a stellar +16.8% for the quarter. Non-U.S. stocks also posted solid gains with the MSCI EAFE Index up +3.7% for the week, +1.9% for the month, and +7.7% for Q1. The MSCI Emerging Markets Index lagged behind the developed markets but still managed to close up +1.9% for the week, +2.7% for March, and +3.5% for Q1.
With inflation data subsiding, bond yields fell, particularly the short end of the curve. The 2-year U.S. Treasury note yield rose 26 basis points (bps) over the week to 4.03% but was still down -79 bps in March and -40bps for Q1. The benchmark 10-year U.S. Treasury yield rose 11 basis points to 3.47%, a +9 bps rise. For the month the 10-year yield was down -45bps and for Q1 it fell -41 bps. The Bloomberg Aggregate Bond Index slipped -0.5% for the week but still managed nice gains of +2.5% and +3.0% for the month and quarter. Non-U.S. bonds performed similarly, with the Bloomberg Global Aggregate ex U.S. Bond Index down -0.3% for the week, but up +3.7% and +3.1% for the month and quarter.
Sunday evening brought a surprise oil production cut by OPEC of 1.16 million barrels per day, which sent oil prices sharply higher. The potential for energy inflation will complicate the easing inflationary pressures that developed over the last week and make the Fed’s job even more challenging.
Chart of the Week
Home prices declined in January from the prior month as increased mortgage rates continued to slow the housing market. The S&P CoreLogic Case-Shiller National Home Price Index, which measures home prices across the nation, fell -0.2% in January compared with December on a seasonally adjusted basis. Prices have fallen for seven straight months, the longest streak of declines since 2012. Year-over-year, the index was up just +3.79%, the lowest annual rise since December 2019. Annual price gains peaked in April 2022 at +20.78 and have declined every month since. The rise in mortgage rates in the past year has limited home sales and slowed home-price growth.
Home Prices Fall for Seventh Straight Month
S&P CoreLogic Case-Shiller National Home Price Index, 1-month change (%)
Note: Seasonally adjusted.
Source: S&P Dow Jones Indices, The Wall Street Journal
- U.S. Gross Domestic Product (GDP) rose +2.6% in the fourth quarter according to the BEA’s third, and final, estimate. That was down from the +2.7% in the third quarter, where it was expected to remain. Still, it marks the second consecutive quarter of above-trend growth, with consumer spending, nonresidential business investment, imports, and government spending contributing to the gain. Exports and residential investment dragged on growth. Real disposable income was up +5%, its second quarterly gain, and largest in a year and a half, after a string of declines. The saving rate jumped to 4% from 3.2%. Corporate Profits declined -2% (not annualized) after decreasing marginally in the third quarter, marking the technical definition of a profits recession (two successive negative quarters).
- The Conference Board’s Consumer Confidence held up in March despite the recent bank failures, with the index up from a positively revised 103.4 (previously 102.9) to 104.2, beating expectations for a decline to 101. The increase was driven by an improvement in consumers’ near-term outlook for income, business, and job market conditions. On the other hand, their appraisal of current business and labor market conditions deteriorated some. The banking crisis has increased recession odds in recent weeks, as deposit outflows from small and midsize regional banks could lead to an appreciable tightening of available credit, but so far it doesn’t appear to be weighing off consumer confidence.
- The University of Michigan Consumer Sentiment Survey fell to 62 in March from 67 in February after posting three straight gains. That’s down from the preliminary report at 63.4, and below expectations from a decline to 63. The expectations component fell -5.5 points, while the current conditions component dropped -4.4 points. Expectations were revised down 2.3 points. Current conditions were revised down 0.1 point. Inflation expectations also fell in the short term, though they remain elevated. The 1-year inflation expectations dropped from 4.1% to 3.6%, the lowest since April 2021, while five-year inflation expectations held at 2.9% for the fourth straight month. This marks the first time in four months that consumer sentiment has declined, said Surveys of Consumers Director Joanne Hsu. “This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank,” Hsu said. “Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead. While sentiment fell across all demographic groups, the declines were sharpest for lower-income, less-educated, and younger consumers, as well as consumers with the top tercile of stock holdings.”
- February Personal Income fell to 0.3% from 0.6% the prior month but beat expectations of 0.2%. Personal Spending was up 0.2% month-over-month, shy of expectations for 0.3%, and in line with January’s positively revised 2.0% (from 1.8%). The personal savings rate as a percentage of disposable income, a volatile measure but useful to gauge the health of household balance sheets, increased to 4.6% from a negatively revised 4.4% (from 4.7%) in January. The PCE Price Index increased 0.3% month-over-month, down from a 0.6% increase in January. Year-over-year, the PCE Price Index is up 5.0% versus a downwardly revised 5.3% (from 5.4%) in January. The Core-PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, also increased 0.3% month-over-month, down from a negatively revised 0.5% increase in January (originally 0.6%). Year-over-year, the Core-PCE Price Index is up 4.6%, down slightly from 4.7% in January.
- Texas factory activity remained weak in March, and the service sector dropped as well. The Texas Manufacturing Outlook Survey fell to -15.7, from -13.5 last month, which was far below expectations of -10. Production rose slightly, shipments fell, new orders continued to slide, and uncertainty remains elevated. The Texas Service Sector Survey fell to a three-month low of -18.0 from -9.3 in February as business conditions worsened further and uncertainty picked up.
- The Richmond Fed Manufacturing Survey showed activity in the Fifth Federal Reserve District improved moderately in March but remained in contraction (readings less than zero). The composite manufacturing index rose from -16 to -5, above expectations for -10. Each of the three component indexes showed weakness, with shipments down the most. The employment and new orders indexes improved slightly but remain negative. Firm expectations about business conditions over the next six months were unchanged and are still very negative. The Richmond Fed Services Index fell to -17 in March from -3 in February, the lowest since June 2020. The indexes for both current and expected business conditions remained negative. Readings below -20 are consistent with previous recessions.
- The National Association of Realtors’ Pending Home Sales index increased for the third month in a row in February, rising +0.8% from the month prior to 83.2. Growth was robust regionally, with each region posting gains except for the West. Affordability is still weighing on conditions, but the market is finding stability at elevated mortgage rates.
- The weekly MBA Mortgage Application Index rose +2.90%, the fourth week of gains after the prior week’s +3.0% increase, as the Refinance Index rose +4.8% and the Purchase Index was up +2.0%. The increase came as the average 30-year mortgage rate fell -3 basis points to 6.45%, which is up 2.18 percentage points versus a year ago.
- Weekly Initial Jobless Claims rose by +7,000 to 198,000 for the week ended March 25, above expectations for 196,000 and the prior week’s unrevised 191,000. It was the tenth week in the past eleven that initial claims have been below 200k. Continuing Claims for the week ended March 18 rose by +4,000 to 1,689,000 from a negatively revised 1,685,000 (originally 1,694,000), below expectations of 1,700,000.
The Week Ahead
The calendar is full this week, with a heavy dose of both economic data and Fed speak. S&P Global and the Institute for Supply Management (ISM) release their respective Purchasing Manager’s Indices (PMIs) during the week. Capital Goods Orders, Durable Goods Orders, and Factory Orders are all due. Employment data is also prevalent with JOLTS Job Openings, ADP Employment Change, Challenger Job Cuts, weekly Jobless Claims, and the big U.S. Employment Report for March on Friday. Fed events are on the docket with St. Louis Fed President James Bullard speaking on Monday and Thursday, Fed Governor Lisa Cook speaks Monday, and Cleveland Fed President Loretta Mester speaks Tuesday.
Did You Know?
NOT WHAT IT USED TO BE – According to IBIS World, a record 35% of all US households will have incomes of $100,000 or more in 2023, which is up 53% over the last 30 years. But $100K isn’t what it used to be, adjusted for inflation $100,000 today is the equivalent of $47,340 thirty years ago, $60,965 twenty years ago, and $77,000 ten years ago (source: Bespoke Investment Group).
HIGH-INCOME HESITATION – In Morning Consult’s monthly labor market survey for March, 24.2% of high-income earners (those with annual incomes >$100k) said they were worried about a loss of income in the next four weeks. That jumped from just 9.1% in February. The likely reason for the large jump is that March’s survey was conducted between 3/10 and 3/13 just as the Silicon Valley Bank run on deposits was occurring (source: Morning Consult, MFS).
WEEKEND WARRIORS – People now work an average of 6.6 hours on the weekend. That’s up 5% from 2021, according to a new study of 134,260 employees across more than 900 organizations by the workforce-analytics software firm ActivTrak. The trade-off for flexible midweek schedules and hybrid offices is a seven-day workweek, many professionals say (source: ActivTrak, The Wall Street Journal).
This Week in History
MELTDOWN – On March 28, 1979, a minor malfunction occurred in a cooling mechanism at a power plant in Pennsylvania. One technical error followed another until the malfunction escalated into a “meltdown.” Three Mile Island became synonymous with troubles in American nuclear power, which once held out the promise of cheap, safe, clean energy for all (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.