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

Quick Takes

  • The holiday-shortened week was relatively uneventful with respect to economic data and saw stocks reverse some of the bigger trends for much of May while bonds were mixed but mostly flat.
  • The Core version of the Personal Consumption Expenditure (PCE) price index report, which eliminates the food and energy components, is the Fed’s preferred inflation gauge, and it rose just +0.2% in April, down a bit from the previous two months.
  • Consumer spending appears to be slowing as signs of stress on American households may be emerging. After adjusting for inflation, Real Personal Spending was negative in April, missing Wall Street expectations and down sharply from the prior month.
[Market Update] - Market Snapshot 053124 | The Retirement Planning Group

Growth and tech dragged stocks lower, while bonds were flat

among U.S. equity indices and the only positive performance – albeit by a very thin +0.02% margin. The headline S&P 500 Index down -0.5% for the four-day week, while the tech-oriented Nasdaq Composite Index was the laggard, dropping -1.1% for the week. The weakness for the Nasdaq Composite was mostly due to a sharp pullback by cloud software provider Salesforce, which sank after releasing first-quarter earnings that badly missed Wall Street estimates. But for the month of May, the Nasdaq was the leader with an impressive +6.9% gain, while the Russell 2000 added +4.9% and the S&P 500 increased +4.8% for the month. Overseas stocks also struggled, with developed market international stocks (as measured by the MSCI EAFE Index) slipping -0.1% for the week, while the MSCI Emerging Markets Index sank -3.1%. But for May, the MSCI EAFE was up +3.3% while the MSCI Emerging Markets was a flattish +0.3%.

Economic reports were mostly as expected and didn’t do much to move stocks. Perhaps the most prominent report of the week was the Personal Consumption Expenditure (PCE) price index report, released Friday morning. The Core version of that report, which eliminates the food and energy components from the headline PCE Index, is the Federal Reserve’s (the Fed) preferred inflation gauge, and it rose just +0.2% in April. That is down a bit from the previous two months and may ease some of the inflationary pressures in the Fed’s eyes. The Fed released their Beige Book report, which is a collection of anecdotal economic observations from the regional Fed districts. It showed that 10 of the 12 Fed districts characterized growth as slight to modest and described retail sales as mostly flat. It also reflected lower discretionary spending and heightened price sensitivity among consumers. Job growth was depicted as negligible to modest in 8 of 12 districts.

Fixed income markets seemed more impacted by weak Treasury auctions than the economic data. The Treasury Department’s midweek auctions of 5- and 7-year Treasury Notes saw subdued demand that raised concerns about how funding the U.S. deficit will drive yields higher at the same time the Fed is indicating they are in no rush to cut rates. The 10-year U.S. Treasury yield inched up +3 basis points to end the week at 4.50%, while the 2-year U.S. Treasury yield fell -7 basis points to finish the week at 4.87%. The Bloomberg U.S. Aggregate Bond Index finished nearly flat with just a +0.04% appreciation, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) dipped -0.2%. 

Chart of the Week

Personal Spending wanes as signs of stress on American households may be emerging. Consumer spending rose +0.2% in April before inflation is considered. That was shy of expectations for +0.3% and down from +0.7% the prior month (revised downward from the originally released +0.8%). However, after adjusting for inflation, Real Personal Spending was down -0.1%, missing expectation for a +0.1% gain and well off the 0.4% pace the prior month (revised down from +0.5%). Also concerning is that most of the spending was attributed to necessities such as rent, utilities, medical expenses, gas, and insurance. That means less spending available for discretionary items like travel, recreation, and entertainment — confirmed by a drop in recreational spending in April. Meanwhile, Personal Income rose +0.3%, in line with expectations, but a slowdown from the prior month’s unrevised +0.5%. The Personal Savings Rate was unchanged from the prior month at + 3.6%.

Consumer Spending Shows Signs of Slowdown

Month-over-month percentage change in Personal Spending

[Market Update] - Consumer Spending Shows Signs of Slowdown 053124 | The Retirement Planning Group

Source: Bureau of Economic Analysis, Briefing.com.

Economic Review

  • U.S. economic growth for the first quarter grew at a tepid +1.3% annual pace in the first quarter revised figures show for real Gross Domestic Product (GDP). The first of two revisions for the government’s main gauge of economic activity in the U.S. was in line with consensus forecasts but down from +1.6% initial reading. A wider trade deficit, lower production of unsold goods or inventories, and a big downgrade in consumer spending were the biggest contributors to the slowdown in growth. Personal Consumption Expenditure (PCE) growth was just +2.0%, noticeably weaker than the initial report of +2.5% and the prior quarter’s +3.3% annual rate. Consumer spending accounts for about 70% of the U.S. economy, so the slowdown is a concerning signal for future growth. Government Spending was up just +1.3% versus +1.2% in the initial release and compared to +4.6% the prior quarter. Government expenditures had been up considerably from the 10-year average of about +1.8%. Business Investment, the second largest component of GDP, grew at a rate of +3.2%, up from +2.9% in the initial report but down from +3.7% the prior quarter. Exports increased just +1.2%, up from the initial +0.9% and down from +5.1% in the prior quarter, while Imports rose +7.7% versus +7.2% in the first report and +2.2% the previous quarter. Meanwhile, inflation indicators in the report were far higher than expected. The GDP Price Deflator, a gauge of inflation, unexpectedly increased to +3.1% from the unrevised +1.6% annual rate the previous quarter. The PCE Price Index increased +3.3%, a tick down from +3.4% in the initial release and up considerably from +1.8% in the fourth quarter. The Core PCE Price Index, which excludes food and energy and is a closely watched measure of underlying inflation, was also revised down a tick to +3.6% from +3.7%, but far higher than the +2.0% in the fourth quarter. The disappointing combination of weaker economic growth, primarily from slower personal spending, with higher inflation is troublesome for those looking for more than one or two rate cuts this year.
  • The cost of goods and services rose again in April, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.3%, in line with expectations and the prior month. On a year-over-year basis, the PCE Price Index was also unchanged at +2.7%, matching expectations. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased by +0.2%, in line with expectations and a tick down from the prior month’s +0.3% pace. Year-over-year, the Core-PCE Price Index is up +2.8%, matching expectations and matching the prior month. Essentially, there was little change in this inflation report that matched expectations and, therefore, will likely have little impact on the Fed’s timetable for rate cuts.
  • The Conference Board’s Consumer Confidence Index rebounded to 102 in May, beating estimates for 96.0 and breaking a trend of three straight monthly declines. That compares to 97.5 the prior month, which was the lowest reading since July 2022, even after being revised up from 97.0. Consumer confidence tends to signal whether the economy is getting better or worse. Confidence has retreated since the start of the year and sits well below the pre-pandemic high of 135.8. The Present Situation gauge rose to 143.1 from 140.6 the prior month (revised down from 142.9). The Expectations gauge — which reflects consumers’ six-month outlook — rose to 74.6 from 68.8 (revised up slightly from 66.4). Levels 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. 
  • According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit yet another all-time high in March, marking 14 straight monthly increases, as the index increased a seasonally adjusted +0.33%, above expectations of +0.30% increase, but down from the prior month’s +0.55% pace (revised down from +0.61%).  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +7.38%, above expectations for +7.30% and the prior month’s +7.33% annual gain. San Diego again posted the biggest year-over-year home-price gains, up +11.1%, followed closely by New York, Cleveland, and Los Angeles. Home prices grew the slowest in Denver, with a 2.13% annual rate. All 20 cities registered annual increases for the fourth consecutive month. 
  • Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) showed U.S. home prices rose in March, up a seasonally adjusted +0.1% compared to the unrevised +1.2% gain the prior month. Expectations were for a +0.5% increase. The government data showed home prices up +6.7% year-over-year compared to 7.0% the prior month.  All census divisions posted gains on an annual basis but were mixed on a monthly basis.
  • The National Association of Realtors (NAR) reported that Pending Home Sales slumped -7.7% in March to the lowest level since April 2020. That was far worse than expectations for a -1.0% dip and well below the prior month’s +3.6% rise (revised up from +3.4%). Year-over-year sales were down -0.8%, better than the -4.4% annual pace the prior month. From a regional perspective, the Midwest and West drove the drop, at -9.5% and -8.5%, respectively. The South–the country’s largest housing market–was down -7.6%, while the Northeast slipped -3.5%. According to Lawrence Yun, chief economist at the NAR, “the impact of escalating interest rates throughout April dampened home buying, even with more inventory in the market.” He added, “the Federal Reserve’s anticipated rate cut later this year should lead to better conditions, with improved affordability and more supply.”
  • Texas factory activity slid more than expected in May, with the Texas Manufacturing Outlook Survey slipping to -19.4 from an unrevised -14.5 the prior month, below expectations for -12.1. The Fed’s 11th District saw inflation pressures persist, with the prices paid index rising sharply, though the prices received gauge edged lower. The employment measure also worsened, falling to -5.3. Production, new orders, capacity utilization, and shipments all declined as well. The index for Future Conditions six months from now, which had been normalizing towards optimistic levels, slipped significantly over the month, implying that pessimism has set in again. The Texas Service Sector Outlook Survey also fell, dropping to -12.1%, below expectations for -10.6 and compared to -10.6 the prior month.  
  • The Richmond Fed Manufacturing index improved to 0 from an unrevised -7 the previous month, which is where it was expected to stay. Of its three component indexes, the Shipments component surged from -10 to +13, and the New Orders index, part of the Shipments component, improved to +6 from -9. However, the Employment index moved further into negative territory, falling from -2 to -6. The Capacity Utilization component slowed to -7 from -5. Meanwhile, the Employment component fell to -2 from 0.
  • The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), dropped to 35.4 in May from an unrevised 37.9 the prior month and badly missed expectations of 41.6. Readings below the 50 level indicate contraction. This is the sixth consecutive reading in contraction territory and the lowest level since May 2020. The index has fallen sharply from the November reading of 55.8, which was the highest level since May 2022. The index isn’t a national indicator but failed to show some improvement as other regional Fed surveys have. New Orders, Employment, Inventories, Supplier Deliveries, Production, and Order Backlogs all signaled contraction. In fact, only the Prices Paid component showed expansion, but at least it was at a slower pace. 
  • Weekly MBA Mortgage Applications sank -5.7% for the week ended May 24, following the prior week’s +1.9% rise. That was the first decline in 4 weeks and the worst decline since the week ending February 23. The Purchase Index was down -1.1% following a -1.2% decrease the prior week. The Refinance Index plunged -13.6%, the worst week since December 29, and follows a +7.4% increase the prior week. The average 30-Year Mortgage Rate inched up to 7.05% after dipping to 7.01% the week before and broke three weeks of declines. According to the Mortgage Banker Association, the 30-year fixed-rate mortgage has now been above 6.7% for 52 weeks, which hasn’t happened since 2001.
  • Weekly Initial Jobless Claims rose +3,000 to 219,000 for the week ended May 25, above expectations for 217,000. The prior week was revised up to 216,000 from 215,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,791,000 in the week ended May 18, below consensus estimates for 1,791,000. Last week’s reading of 1,794,000 was revised down to 1,787,000.

    The Week Ahead

    Employment data dominates this week’s economic releases. The headline event will be the Bureau of Labor Statistics April employment data on Friday. On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) will be released and is expected to show about 8.4 million job openings. Beyond labor market reports, S&P Global and ISM release their respective PMI reports throughout the week. Household Net Worth and Consumer Credit reports of Friday will provide an update on the shape of U.S. consumers. The European Central Bank is widely expected to lower its interest rate target on Thursday by a quarter-point to 3.75%. There is still a dwindling number of companies left to report first-quarter earnings, which includes Bath & Body Works, Campbell Soup, CrowdStrike Holdings, DocuSign, Hewlett Packard Enterprises, Lululemon Athletica, and NIO.

    [Market Update] - Upcoming Economic Calendar 053124 | The Retirement Planning Group

    Did You Know?

    LET SUMMER BEGINOver the last 50 years, the S&P 500’s average performance from Memorial Day to Labor Day has been a gain of +1.8% (median: +3.27%), with gains 70% of the time. Over just the last ten years, the S&P 500 has averaged a gain of +3.8% (median: 4.6%), with gains eight times, or 80% of the time (Source: Bespoke, MFS).

    LOW VOLOn May 17, the CBOE Volatility Index (VIX) closed below 12 for the first time since November 27, 2019, ending a streak of 1,137 trading days without a close below that level. Since 1990, there have only been two longer streaks without a close below 12 and just five that lasted over a year (Source: Bloomberg, MFS).

    DISCOUNT DUELSA week after retail giant Walmart announced it had “rolled back” pricing on 7,000 products, competitor Target announced it was lowering prices on 5,000 of “your favorite food, beverage, and household essentials items.” Likewise, fast food goliath McDonald’s announced an upcoming promotion for a limited time $5 Meal Deal and was quickly followed by competitor Burger King with an announcement for their own $5 ‘Your Way Meal’ value meal (Source: MFS, MSN).

    This Week in History

    BLUE MONDAY – On May 28, 1962, the Dow Jones Industrial Average suffered its worst one-day point drop since 1929, falling 34.95 points, or -5.7%. On “Blue Monday,” volume was a huge 9.35 million shares, and the ticker ran 2 hours and 28 minutes late in recording closing prices. (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 053124 | 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.