Weekly Market Update – November 03, 2023

Quick Takes

• Stocks rallied sharply higher over the week. The S&P 500 Index rebounded +5.9%, the Nasdaq jumped +6.6%, and Russell 2000 surged +7.6%. For the S&P and Nasdaq, it was the best week since November 2022, and for the Russell, it was the best week since February 2021.
• A week after the 10-year U.S. Treasury yield crossed the key 5% level, it had its largest weekly decline since March, dropping -26 basis points to 4.57%, and the Bloomberg U.S. Aggregate Bond Index rebound +2.0%, its best week since November last year.
• The government reported that new nonfarm payrolls added in October were much fewer than expected, and the prior two months of job gains were revised lower. The unemployment rate reached its highest level since January 2022, while wage growth slowed.

Stocks and bonds rally on hopes that Fed hikes are on hiatus

The “bad news is good news” playbook returned with a vengeance last week. Bad news regarding the labor market and economy was cheered by investors. Stocks and bonds rallied following Wednesday’s Federal Reserve (Fed) decision to leave rates unchanged, with Fed chairman Jerome Powell acknowledging that tighter financial conditions are likely to weigh on economic activity, hiring, and inflation in the months ahead. On the same morning, the Institute for Supply Management (ISM) reported that the manufacturing sector had dropped to its lowest level of activity since July, marking twelve straight months of economic contraction. Then, on Friday morning, the government reported that new nonfarm payrolls added in October were much fewer than expected, and the prior two months of job gains were revised lower. The unemployment rate also reached its highest level since January 2022, and wage growth slowed. The ISM also reported its service sector PMI on Friday morning that showed economic activity in the key services sector, which makes up more than two-thirds of all economic activity, was at a five-month low and far behind Wall Street forecasts. The market thinking is that the softer jobs data and slowing economy will keep the Fed on the sidelines going forward. 

All told, “bad news is good news” boosted stocks to their best week of the year. The S&P 500 jumped +5.9% for the week, its best week since November 11, 2022. Technology and small caps rebounded even more. The tech-heavy Nasdaq Composite popped +6.6% after entering correction territory the previous week. The small-cap Russell 2000 Index surged +7.6% on the week after being down for four consecutive weeks. It was the Russell’s best week since February 2021. Stock overseas couldn’t keep up with their U.S. counterparts but still made gains. Developed market international stocks (as measured by the MSCI EAFE Index) rose +3.1%, and the MSCI Emerging Markets Index was up +1.2%.

As with much of the year, it was bond yields driving much of the market action. The perceived dovish remarks by Fed chair Powell after holding rates steady, along with the weaker-than-expected jobs and PMI data, sent yields much lower. The 10-year U.S. Treasury yield dropped -26 basis points for the week, its biggest weekly decline since March 17. The 10-year UST yield closed the week at 4.57%, its lowest level since October 11, after crossing 5.0% the prior week. Bond prices move inversely to bond yields, and that helped the Bloomberg U.S. Aggregate Bond Index to rebound +2.0% for the week, and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) gained +1.9%. After the European Central Bank and the Bank of Canada held their benchmark interest rates steady at the end of October, the Bank of England and Norges Bank (Norway’s central bank) followed suit this past week. Eurozone inflation fell faster than expected in October, its lowest level since July 2021, and its largest economy, Germany, shrank again in the third quarter. Overall, the eurozone remained stagnant for the fourth quarter in a row, with economic growth rising just +0.1% in Q3.

Chart of the Week

The monthly Employment Situation showed weaker-than-expected hiring in October. On Friday, the Labor Department reported that U.S. employers added a seasonally adjusted 150,000 Non-Farm Payrolls (NFP) during the month, well under the negatively revised 297,000 in September (originally 336,000) and under Wall Street expectations for 180,000. The United Auto Workers strikes were primarily responsible for the gap, as the impasse meant a net loss of jobs for the manufacturing industry. Employment also fell in transportation and warehousing. All told, revisions knocked -101,000 off the prior two months as well. That now marks eight of the last nine months of downward revisions–including six straight months of negative revisions from January through June that was the longest streak of negative revisions since the global financial crisis. The Unemployment Rate inched up to 3.9% from 3.8% last month, where it was expected to remain, and is now at the highest level since January 2022. Average Hourly Earnings slipped a bit to +0.2%, down from +0.3% the prior month (revised up from the original +0.2%) and shy of expectations which were also for +0.3%. Year-over-year, Average Hourly Earnings were up +4.1%, just above expectations for +4.0% the prior month and below the prior month’s +4.3% (revised up from +4.2%). In another sign of a softening labor market, Average Weekly Hours people worked was down a tick to 34.3 from 34.4, which is what was expected again this month. Businesses tend to cut hours before resorting to layoffs when the economy slows. Labor-Force Participation was also down a tick at 62.7% from 62.8%, which is where it was the prior month and what Wall Street expected this month. It remains well below the February 2020 prepandemic level of 63.3%. 

Monthly job creation in the U.S.

January 2022 through October 2023

Source: U.S. Bureau of Labor Statistics, CNBC.

Economic Review

• The Institute for Supply Management (ISM) reported on Wednesday that its Manufacturing Purchasing Managers Index (PMI) fell to its lowest level since July, dropping to 46.7 in October, down from 49.0 the prior month, where it was expected to stay. The manufacturing PMI has remained in contraction territory for a full year now (levels below 50 indicate contracting economic activity), which is the longest monthly contraction streak since the 2007-2009 Great Recession, although that period saw levels drop below 40. Like the overall index, New Orders remained in contraction for more than a year now, falling back to 45.5 from 49.2 the prior month. The Production and Employment components also declined, but Production did keep above expansion levels at 50.4. The Prices Paid index, a measure of inflation, rose to 45.1 from 43.8. Overall, 4 of 10 component indexes advanced in the month, and only one is in expansion. In terms of industries, only two reported growth, while 13 reported contraction. Meanwhile, economic activity in the U.S. services sector fell to a five-month low in October, with ISM Services PMI dipping to 51.8% from 53.6% the prior month, well below expectations for 53.0%. The Business Activity/Production index had its largest monthly decline of the year, dropping to 54.1% from 58.8% the prior month, but the New Orders index rebounded to 55.5% from a nine-month low of 51.8% the prior month. The Employment index fell -3.2 percentage points to 50.2%, just barely hanging in growth territory. The Prices index slipped a bit to 58.6% from 58.9%–not much relief on the inflation front.
• Contrary to the ISM, the competing S&P Global U.S. Manufacturing PMI improved to 50.0 from 49.8 the prior month, in line with the earlier flash estimate. New Orders increased for the first time in six months and at the fastest pace since September 2022. Backlogs of work contracted for the thirteenth month running. Input Costs rose at the fastest pace since April, with manufacturers noting that greater oil and oil-derived material prices had pushed up operating expenses. Manufacturers continue to anticipate a rise in output over the coming year, but the degree of confidence in the outlook dipped to the lowest in 2023 so far. The S&P Global U.S. Services PMI showed a slight improvement in service sector business activity in October too, rising to 50.6 from 50.1 the prior month—but that was down from the earlier flash estimate of 50.9, where it was expected to remain. It was the weakest expansion since January. New Orders fell for the third month running, albeit at only a slight pace. Inflationary pressures subsided as service providers recorded slower increases in Input Prices and Output Prices. Firms were hopeful of a pick-up in demand conditions, however, as business confidence rose to the strongest in four months.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices rose for a seventh straight month in August to a new all-time high, as the index increased a seasonally adjusted +1.01%, well ahead of expectations from a +0.80% increase and the prior month’s +0.78% pace (revised down from +0.87%).  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +2.16%, beating expectations for +1.75% and the prior month’s +0.15% annual gain (revised up slightly from +0.13%). Chicago was up the most (+5% YoY) for the fourth month in a row. Regionally, gains continue to be healthy in the East, with Atlanta, Boston, Miami, and New York setting all-time highs, while the West lags, particularly Las Vegas, Phoenix, and San Francisco. Decent demand and shortage of homes for sale continue to characterize the market. Until supply catches up, it’s unlikely that there will be any big relief in home prices any time soon. The lack of properties for sale has driven home prices up +5.8% year-to-date, well above the median full-year increase in more than three decades of data.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) also showed U.S. home prices on the rise, up a seasonally adjusted +0.6% in August, above expectations for +0.5% but down from the unrevised +0.8% past the prior month. The government data has now shown monthly increases for twelve straight months and is up +5.6% year-over-year after rising +4.6% the prior month. All census divisions posted gains on a monthly basis except for the South Atlantic region. Meanwhile, all census divisions are up on an annual basis, with the Middle Atlantic census division leading the pack.
• The Commerce Department reported Construction Spending rose for the ninth month in a row, up +0.4% in September to a seasonally adjusted annual rate of $1.99 trillion, in line with expectations and well above the sharply negatively revised +0.1% the prior month (originally reported as +0.5%). Year-over-year (YoY), total construction spending was up +8.7%, compared to +7.4% the prior month. Total Private Construction was up +0.4% month-over-month, as was total Public Construction. Total Residential Spending increased +0.6% month-over-month while total Nonresidential Spending rose +0.3% month-over-month. Single-Family construction rose +1.3%, while Multi-Family construction slipped -0.1%.
• The September Job Openings Labor Turnover Survey (JOLTS) rose slightly to 9.55 million from 9.50 million the prior month (revised down from 9.61 million). That was well above expectations for 9.40 million but still well off the peak of 12 million last year. Job openings are an indication of the health of the labor market and the broader U.S. economy. Openings rose the most in service-oriented sectors like hotels, restaurants, arts, entertainment, and recreation. Job listings fell in the federal government and information-related services like media. The number of job openings for each unemployed worker was unchanged at 1.5, remaining well above prepandemic levels of 1.2 but down from a peak of 2.0 in 2022. The Fed is watching the ratio closely and wants to see it fall back to prepandemic norms. The Hiring Rate remained at 3.7% and has been little changed in recent months. The Quits Rate was flat at 2.6%, off from the peak of 3.0% in April 2022. The number of people quitting jobs, meanwhile, was unchanged at 3.6 million. Job quitters had climbed to as high as 4.5 million last year before ebbing. People quit less often and tend to stay put when the economy slows, and jobs become harder to find.
• The Employment Cost Index (ECI) rose to a seasonally adjusted +1.1% in the third quarter, above consensus expectations for +1.0% and the unrevised +1.0% for the three-month period ending in June 2023. The ECI is the Federal Reserve’s preferred measure of wage gains, and the unexpected acceleration will raise concerns that a strong labor market risks keeping inflation above the Fed’s target. The cost of labor has risen by +1% or more for nine consecutive quarters now, beginning back to the middle of 2021. Prior to that, the last time compensation rose at least +1% a quarter was in 2006. Wages and Salaries, which account for about 70% of compensation costs, jumped about +1.2% following a +1.0% increase last quarter. One positive aspect of the wage jump is that it was driven by salaries at state and local governments, which popped +1.8%, while private industry salaries were up a more modest +1.1%. Year-over-year, the ECI was up +4.3%, down from +4.5% for the prior quarter. Wages and Salaries increased +4.6% for the 12-month period ending September 2023, unchanged from the prior quarter. The Fed wants to see compensation growth return to pre-pandemic levels, but workers still have lots of leverage because of the tightest labor market in decades. This data doesn’t yet reflect the significant gains that major unions have achieved by winning more generous contracts in Hollywood and the auto industry, among others.
• Consumer confidence fell to a five-month low in October as the Conference Board’s Consumer Confidence Index slipped to 102.6 from 104.3 the prior month (revised up from 103.0). That was comfortably above expectations for 100.5, though. A year ago, the index stood at 102.2. The Present Situation gauge fell to 143.1 from 146.2 the prior month (revised down from 147.1). The Expectations gauge — which reflects consumers’ six-month outlook — fell as well, moving down to 75.6 from 76.4 (revised up from 73.7). 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. 1-year inflation expectations increased to 5.9% in October, from 5.7% over the prior quarter. “Consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular,” Dana Peterson, chief economist at the Conference Board, said in a statement. “Consumers also expressed concerns about the political situation and higher interest rates.” 
• Texas factory activity fell further into contraction territory in October, with the Texas Manufacturing Outlook Survey slipping to -19.2 from -18.1 the prior month, below expectations for -16.0 and the 18th consecutive negative reading. New Orders reversed lower and remain in contraction, Unfilled Orders and Hours Worked fell back into contraction, and Employment dropped but is still growing. The 6 Months Ahead components are beginning to improve but are still somewhat negative. The Texas Service Sector Outlook Survey also sank further, dropping to -18.2 after falling to -8.6 the prior month. That’s the lowest level since hitting -20.5 in December. The Future (Six Months Ahead) components fell to -12.0 from -3.4 the prior month. 
• September Factory Orders rose +2.8% month-over-month, more than the +2.3% gain expected and up sharply from the prior month’s +1.0% increase (revised down from +1.2%). That was the sharpest rise since January 2021. Ex-Transportation, orders were up a more modest +0.8%, down from the prior month’s +1.5% increase (revised up slightly from +1.4%). Durable Goods Orders rose +4.6%, slightly weaker than the expected +4.7%, driven by a +12.7% increase in Transportation Equipment orders. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.5% following an unrevised +0.6% gain the prior month.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), slipped to 44 in October from 44.1 the prior month, below expectations of 45.0. New Orders rebounded after a sharp fall in September, while Production dropped 4.6 points to 46.5. Employment moved into expansionary territory for the first time since April. The index has remained below 50 (the break-even point distinguishing expanding versus contracting economic activity) for 14 consecutive months. The index peaked at 71.3 in May 2021.
• Weekly MBA Mortgage Applications fell -2.1% for the week ended October 27, following the prior week’s -1.0% decline. The Purchase Index was down -1.4% following a -2.2% drop the prior week, and the Refinance Index dropped -3.5% following a +1.8% gain the prior week. The average 30-Year Mortgage Rate slipped to 7.86% from 7.90% the prior week, which is +0.80 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims increased +5,000 to 217,000 for the week ended October 28, the highest level in seven weeks, and above expectations for 210,000 as well as last week’s 212,000 (revised up from 210,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) increased +35,000 to 1,818,000 in the week ended October 21, above consensus for 1,800,000 and last week’s reading of 1,783,000 (revised down from 1,790,000).

The Week Ahead

The calendar is decidedly lighter in the upcoming week, and there are no big headline economic reports. A glimpse into the U.S. consumer will come from Consumer Credit and Consumer Sentiment reports on Tuesday and Friday, respectively. Third-quarter earnings reports are also set to slow down, with more than 80% of S&P 500 companies already reported.

Did You Know?

SEEKING HELP –  According to a recent poll of 6,000 affluent investors by Cerulli Associates conducted in the first half of 2023, the percentage of investors willing to pay for financial advice surged from 36% in 2009 to 64% this year. Relationships have also become less transactional as 55% of advised assets are now in fiduciary accounts, compared to just 34% in 2011 (Source: Cerulli Associates, RIA Intel).

END ON A HIGH NOTE? – In the post-WWII period, the S&P 500’s performance in November has averaged the third best of any month with an average gain of +1.5% and positive returns 67% of the time. The S&P 500’s average performance in the last two months of the year also ranks as the best two-month period, with an average gain of +3.02% and positive returns 76% of the time (Source: Bespoke Investment Group).

FULLY FUNDED – Higher interest rates and a resilient economy have helped the classic retirement benefit, pension funds. The top 100 corporate pension plans last year returned to better-than fully funded status at 103% (meaning pension funds’ assets were 103% of their liabilities). That’s the best funded status since plans were 106.1% funded in 2007 (Source: The Wall Street Journal).

This Week in History

PATRIMONY PANIC – On October 30, 1989, Mitsubishi Estate agreed to pay $846 million for 51% of Rockefeller Center in New York City, setting off mass hysteria among U.S. pundits who claimed America’s patrimony was being scooped up by the Japanese. By 1996, the Mitsubishi affiliate was so financially troubled that it sold Rockefeller Center for less than $400 million (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 than 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.

* 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.