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

Quick Takes

  • Global stocks continued their win streak, now four straight weeks, as the “Sell in May and Go Away” historical period is clearly not playing out in 2024. The S&P 500 gained +1.5% for the week, while the Nasdaq was up +2.1%, and the Russell 2000 was up +1.7%.
  • Yields were down modestly for the week with the 2-year U.S. Treasury off -4 basis points and the 10-year U.S. Treasury down -8 basis points. The Bloomberg U.S. Aggregate Bond Index was up +0.6% and the Bloomberg Global Aggregate ex U.S. Bond Index gained +0.9%.
  • The major impact supporting the gains appeared to be Wednesday’s soft consumer price index (CPI), which was a bit below expectations. Futures began upping the odds for Federal Reserve interest rate-cuts after the report. Retail sales were also unexpectedly flat.
[Market Update] - Market Snapshot 05172024 | The Retirement Planning Group

Global stocks and bonds continue to make hay in May

Stocks, bonds, commodities, and virtually all assets have been going up lately. The S&P 500 Index and Nasdaq Composite Index closed the week just shy of the record highs they set on Wednesday. The S&P 500 closed the week up +1.5% and is up 5.8% in May. The Nasdaq Composite led U.S. indices for the week with a +2.1% gain and is up +6.6% in May. Small cap stocks are participating too, with the Russell 2000 Index climbing +1.7% for the week and up +6.2% in May. The widespread gains were attributed primarily to the latest consumer inflation data which was slower than expected. The Consumer Price Index (CPI), released on Wednesday, was a bit below Wall Street expectations in April. Following the report, stocks began their ascent and futures began upping the odds for Federal Reserve interest rate-cuts. The number of companies reporting earnings reports was lighter last week, but first-quarter results have been solid, including a stellar report by Walmart on Thursday that helped hold stocks up after the CPI euphoria had started to fade.  

Overseas stocks rallied too, with developed market international stocks (as measured by the MSCI EAFE Index) up +1.5% for the week and up +4.4% in May. The MSCI Emerging Markets Index rose +2.6% for the week and is up +5.2% for the month. The gains came despite European Central Bank (ECB) policymakers advocating caution on the rate path. The ECB is likely to cut rates in June, but the path afterward is less certain. In China, the People’s Bank of China (PBOC) lowered the minimum down payment ratio by 5% to 15% for first-time buyers and 25% for second-home purchases in an attempt to spark demand. The PBOC also said that it would eliminate the nationwide floor level of mortgage rates and allow cities to make their own decisions on what mortgage rates to charge.

Fixed income markets also liked the soft inflation data as the 10-year U.S. Treasury yield slipped -8 basis points to end the week at 4.42%, its lowest level in a month. The 2-year U.S. Treasury yield dipped -4 basis points to finish the week at 4.82%. The Bloomberg U.S. Aggregate Bond Index was up +0.6% for the week and up +1.9% in May. Non-U.S. bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, climbed +0.9% for the week and are also up +1.9% month-to-date.

Chart of the Week

The rate of inflation slowed a bit in April, with the headline Consumer Price Index (CPI) increasing +0.3% for the month, below last month’s unrevised +0.4%, which is where Wall Street expected it to stay. Year-over-year (YoY) CPI grew at a +3.5% rate, more than the expected +3.4%, and up from an unrevised +3.2% rate the prior month. Core CPI, which excludes the more volatile food and energy prices, was also up +0.3% for the month, matching expectations and down a tick from the prior month’s +0.4%. YoY Core CPI was +3.6%, also in line with expectations, down a bit from the prior month’s unrevised +3.8% annual rate, and the smallest rise in four months. Though both measures are well off their 2022 peak levels, they remain stubbornly higher than the Fed’s +2% target. Indeed, the annual rate of CPI has been stuck above 3% since March 2021. Shelter and Energy costs drove much of the increase again, with Energy up +1.1% for a second straight month, while Shelter, which makes up about one-third of the weighting in the CPI, was +0.4% higher for a third straight month–and up +5.5% from a year ago. Motor Fuel was up +2.8% for the month, the third month of increases. Vehicles were the only primary category to decline month-over-month, falling -0.8%. The overall takeaway of the report is that the slowdown in the rate of inflation for the month was a positive surprise yet is still only a modest step towards the Fed’s 2% inflation target. As such, the report still likely leaves the Fed in a wait-and-see mode for more confirmation that the slowdown will persist.

Consumer Inflation Eases in April, but Still Up +3.4% from a Year Ago

Consumer Price Index (CPI), Month-over-Month % Change

[Market Update] - Consumer Inflation Eases 05172024 | The Retirement Planning Group

Note: Seasonally adjusted.
Source: U.S. Bureau of Labor Statistics, CNBC.

Economic Review

  • Unlike consumer inflation, wholesale inflation did accelerate more than expected in April. The headline Producer Price Index (PPI) jumped +0.5%, above expectations for a +0.3% increase and far above the prior month’s -0.1% rate (which was revised sharply lower from +0.2%). The year-over-year (YoY) PPI ticked up to +2.2% from +1.8% (revised lower from +2.1%), the highest level in a year. Core PPI, which strips out volatile food and energy costs, was up +0.5%, more than twice the expected +0.2%, and up sharply from the prior month’s -0.1% (which was revised down from +0.2%). YoY Core PPI was up +2.4%, above expectations for +2.3% and the prior month’s +2.1% (revised down from +2.4%). The details of the report offered little in the way of good news, with the costs of services–the biggest source of inflation in the past few years–up a sharp +0.6% for the month. Meanwhile, the costs of goods were up +0.4% and the costs of raw materials surged +3.2%–the biggest increase in nearly two years.  
  • In late 2022 and 2023, Imports Prices fell steadily but have now risen for four consecutive months. April marked the largest increase in two years with a +0.9% surge, triple the +0.3% Wall Street was forecasting. That follows a +0.6% jump the month before, which was revised higher from the originally reported +0.4%. The increase was from components across the board, not just higher oil prices. Year-over-year (YoY) import prices were up +1.1% versus expectations for a +0.4% annual rate which is where it was the prior month. Export Prices were up +0.5%, above expectations for +0.2%, and up from the prior month’s +0.1% rise (revised down from +0.3%). Export prices are down -1.0% over the past year, better than the -1.6% annual drop the prior month (revised lower from the originally reported -1.4% decline). Cheaper import prices helped to lower U.S. inflation last year because Americans buy so many foreign-made products. Higher import prices make U.S. inflation worse.
  • The Commerce Department reported that U.S. Retail Sales were unchanged in April, falling well short of expectations for a +0.4% gain and the prior month’s +0.6% (which was revised down a tick from +0.7%). Sales rose +3.1% at gas stations, which offset weakness in cars and other categories. Internet sales were down, as well as at furniture stores and auto dealers. Sales of food, building materials, and electronics all saw strong gains. Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Sales ex-autos and gas were down -1.0% versus the prior month’s +0.7% gain, which was revised up from +0.1%. The Control Group, a figure used to calculate GDP, was down -0.3%, below expectations for +0.1%, and down from the +1.0% the prior month. 
  • The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index rebounded to 89.7 in April, from an unrevised 88.5. That was noticeably better than expectations for 88.2. The bounce was broad-based, with seven of the 10 components improving on the month and only 2 falling. Plans to Make Capital Outlays improved +2 points and Plans to Increase Employment improved a point. Current Job Openings improved +3 points. Expectations for Sales Growth rebounded +6 points after seeing a -8 point drop the prior month. However, Expected Credit Conditions deteriorated further. Continued stress in navigating inflation pressures remains the top business problem. Inflation continues to frustrate owners as a significant share of them still report it as their biggest problem in operating their business.
  • The Conference Board’s Leading Economic Index (LEI) fell -0.6% in April, below all Wall Street estimates and twice the consensus forecast of -0.3%, which was the unrevised level from the prior month. The index has declined in 24 of the last 25 months. The breadth of the index was mixed with five of the ten indicators tracked rising, four negative, and one unchanged. The decline was mainly because of weaker new orders, lower consumer confidence, and fewer building permits. While the index “no longer signals a forthcoming recession, it still points to serious headwinds to growth ahead,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators.
  • April Industrial Production was flat, in light of expectations for +0.1% which is where it was the prior month after being revised down from +0.4%. However, that was offset as February output was revised up to a +0.8% increase from the prior estimate of a +0.4% gain. Manufacturing fell -0.3% after a +0.2% gain the prior month (revised down from +0.5%), with declines broad-based across durable goods. Capacity Utilization, a measure of potential output, slipped to 78.4% from 78.5% the prior month, in line with expectations. It’s the fifth straight month that production has been weak.
  • The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, fell -1.3 points in April to -15.6, well above expectations to come in at -10.0 and its sixth straight month in contraction territory (reading below zero indicates deteriorating economic conditions). New Orders slipped -0.3 points to -16.5. Shipments improved +13.2 points, but remained negative at -1.2. Expectations for six months ahead fell -2 points to +14.5.  The Prices Paid and Prices Received component both declined as did the Employment index. “Manufacturing conditions remained sluggish in New York State in May,” said Richard Deitz, economic research advisor at the New York Fed.
  • Manufacturing in the Federal Reserve’s Third District in May fell to 4.5 from 15.5 the prior month according to the Philly Fed Manufacturing Business Outlook Survey. That was light of expectations for 7.8 and broke three consecutive monthly increases (readings above zero indicate economic expansion). New Orders sank to -7.9 from +12.2 the month before, the first negative reading since February. The Shipments component fell to -1.2 from +19.1. The Employment index improved to -7.9 from -10.7. The Six-Month Business Outlook fell to +32.4 from +34.3 previously. The Prices Paid index declined to +18.7 from +23.0 the prior month, which had been the highest reading since December 2023.
  • Homebuilder confidence waned in May according to the National Association of Home Builders (NAHB) Housing Market Index (HMI) which fell -6 points to 45, well short of expectations for a reading of 50, and the first decline since November 2023. 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, 25% of builders reported cutting home prices, up from 22% the prior month. The average price reduction held steady at -6% for the eleventh straight month. The use of sales incentives beyond price cuts is also rising, with the share of builders offering some form of incentive up to 59% from the previous 57%.  The three subcomponents of the overall index all fell, with Current Sales and Future Sales (in the next six months) both down to 51 and Traffic of Prospective Buyers down to 30. Geographically, all four regions slipped, with the Northeast dropping to 58 from 65, the Midwest dipping to 49 from 50, the South fell to 45 from 50, and the West plunged to 36 from 48. “A lack of progress on reducing inflation pushed long-term interest rates higher in the first quarter and this is acting as a drag on builder sentiment,” Robert Dietz, chief economist at the NAHB, said in a statement.
  • April Housing Starts rebounded +5.7% to a seasonally adjusted annual rate of 1,360,000 units, far below expectations for +7.6% and 1,421,000 units. That compared to the negatively revised 1,287,000 units, or -16.8%, the prior month (originally 1,321,000 and -14.7%). Housing starts peaked at 1,800,000 million in April 2022. Single-family homes sank -0.4% in the month while multi-family units rebounded +31.4%. New construction was mixed across most of the nation, with the biggest drops in the Northeast and the West, while most new construction increases were in the Midwest followed by the South. Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, dropped -3.0% after the prior month’s -5.0% decrease (revised down from -4.3%), and was far below expectations for +7.6%. Single-unit permits were down -0.8%, while multi-unit permits for buildings fell -7.4%.
  • Weekly MBA Mortgage Applications were up +0.5% for the week ended May 10, following the prior week’s +2.6% rise. The Purchase Index was down -1.7% following a +1.8% increase the prior week. The Refinance Index rose +4.7% following a +4.5% increase the prior week. The average 30-Year Mortgage Rate fell to 7.08%, after dipping to 7.18% the week before.
  • Weekly Initial Jobless Claims fell -10,000 to 222,000 for the week ended May 11, above expectations for 220,000. The prior week was revised to 232,000 from 231,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,794,000 in the week ended May 4, above consensus estimates for 1,780,000. Last week’s reading of 1,785,000 was revised down to 1,781,000.

The Week Ahead

The upcoming week will be light on economic data with virtually all the data in the back half of the week. No major releases are scheduled for Monday and Tuesday. Housing and Manufacturing data will dominate. Wednesday brings the usual weekly Mortgage Applications, as well as Existing Home Sales, and New Home Sales will follow on Thursday. The markets will be watching the Wednesday afternoon Fed’s release of the May FOMC Meeting Minutes for any clues on the Fed’s outlook on rates and monetary policy. Thursday and Friday bring data on manufacturing and consumer sentiment with the Chicago Fed National Activity Index, the flash estimates of May S&P Global U.S. PMIs, Durable & Capital Goods Orders, and consumer sentiment from the University of Michigan.

With more than 90% of S&P 500 companies now having reported earnings for the first quarter, the spotlight this week will be on Nvidia. The perceived leader of the artificial intelligence (AI) space is scheduled to report first-quarter earnings on Wednesday. It may act as a barometer for the AI frenzy and has the potential to push Wall Street to new record highs if earnings are strong.

With the light economic calendar and earnings season mostly over, markets may be influenced by all the Federal Reserve policymakers speaking. There are three Fed members speaking engagements on each Monday and Tuesday, the FOMC minutes on Wednesday, and a Fed member speaking on each of Thursday and Friday.

[Market Update] - Upcoming Economic Calendar 05172024 | The Retirement Planning Group

Did You Know?

THE 5% FRONTIERCombining property, income, sales, and excise taxes, the average total tax burden for individual states is 8.35%. New York, Hawaii, Vermont, Maine, California, and Connecticut all have total tax burdens of at least 10%, while Alaska is the only state with a total tax burden of less than 5% (Source: WalletHub, MFS).

SEARCHING FOR STAGFLATIONWhile Federal Reserve Chair Jerome Powell said there was no stagflation two weeks ago, Google searches by U.S. consumers for stagflation have recently spiked to levels seen only twice in the past 20 years, in February 2008 and from March to June 2022 (Source: Google Trends, MFS).

BACK-TO-BACK-TO-BACKThe Nasdaq Composite Index saw three straight days of 1%+ gains from May 2 through May 6. Back-to-back-to-back gains of 1%+ are more common than you might think, as this was the 65th occurrence since the Nasdaq’s inception in 1971 (Source: Bespoke Investment Group).

This Week in History

TOKYO TRADING RETURNS – On May 16, 1949, the Tokyo Stock Exchange, originally founded in 1878, reopened for business, along with exchanges in Osaka and Nagoya, after the devastation of World War II (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 05172024 | 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.