Weekly Market Update – October 20, 2023

Quick Takes

• Stocks ended their worst week in a month as concerns that Israel’s conflict with Hamas could escalate into a wider Middle East war weighed on investors. The S&P 500 Index fell -2.4% on the week, closing below its 200-day moving average—a key technical level.
• The 10-year U.S. Treasury yield crossed the key 5% level for the first time in 16 years. Bond prices move inversely to yields, and the Bloomberg U.S. Aggregate Bond Index fell -1.7% while non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) slipped -0.5%.
• Retail Sales posted their sixth straight month of gains, rising far ahead of expectations. That reinforced the persistent pressure seen in other inflation data the last few weeks and added to the upward momentum of rates and yields.

Stocks and bonds post declines, test key levels

Stocks ended their worst week in a month as concerns that Israel’s conflict with Hamas could escalate into a wider Middle East war weighed on investors. Hotter-than-expected Retail Sales and comments from data along with mixed commentary from Federal Reserve chairman Jerome Powell, followed up the prior week’s persistent inflation data to reinforce the likelihood of rates remaining higher for longer. The yield on the 10-year U.S. Treasury note crossed the key 5% level for the first time in 16 years on Thursday. These elevated levels have implications throughout the economy in terms of dramatically increasing borrowing costs for the U.S. government, raising rates on mortgages (as well as credit cards, auto loans and other consumer borrowing), and provides investors an attractive investment alternative to stocks. Bond prices move inversely to bond yields, so the Bloomberg U.S. Aggregate Bond Index fell -1.7% for the week and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) slipped -0.5%.

The S&P 500 Index fell -2.4% on the week, snapping a two-week winning streak and closing below its 200-day moving average—a key technical level—for the first time since March 17.  The Russell 2000 Index dropped -2.3%, the small-cap index’s third straight weekly decline, taking it to just 2% from its key June 2022 cycle low of 1,649.8. It is now -16% off its recent July 31 high of 2,003.2. The Nasdaq Composite sank -3.2% and closed below 13,000 for the first time since May 31, which has been a key psychological level for the tech-heavy index. The Nasdaq has fallen for four-straight days for a decline of -4.3%, its worst four-day stretch since late December. Things weren’t any better for the overseas indices. Developed market international stocks (as measured by the MSCI EAFE Index) fell -2.6 and the MSCI Emerging Markets Index was down -2.7%. Stocks need to see some strong earnings to arrest the recent stock slump and it will be a busy week for third-quarter reports, including several members of the so-called Magnificent Seven–the giant cap tech stocks who have bolstered the indices in 2023. FactSet notes that analysts are currently tracking a Q3 earnings decline of -0.4% for the S&P 500. That figure includes companies already reported and estimates of the ones to come. That’s down from just a week ago when FactSet’s forecast was for a Q3 earnings gain of +0.4%.

On Wednesday, the Federal Reserve released its Beige Book, which is a collection of business anecdotes from the 12 Federal Reserve districts used by policymakers to prepare for their next monetary policy decision. According to the latest book most parts of the country “indicated little to no change in economic activity since the September report”. Consumer spending was mixed with a little improvement in tourism. Loan demand saw modest declines according to respondents. Higher wages, oil prices and insurance costs has kept upward pressure on inflation, the Beige Book found. However, this is some evidence that the Fed may be making some progress in its fight against inflation saying, “labor market tightness continued to ease across the nation and firms were hiring less urgently.” Businesses said it was a bit easier to hire and retain employees. The Fed also released its semi-annual Financial Stability Report on Friday. The report flagged four primary vulnerabilities to the financial system: elevated asset valuation; excessive borrowing by businesses and households; excessive leverage within the financial sector; and funding risks (the possibility that investors will rapidly withdraw their funds from a particular institution or sector, creating strains across markets or institutions). The report also discussed the two most frequently cited near-term risk in the survey—the risk of persistent inflationary pressures leading to a more restrictive monetary policy stance and the potential for large losses in commercial real estate (CRE) and residential real estate—which were mentioned by three-fourths of all survey participants, up from one-half of all participants in the previous survey. The report also finds risks posed by economic weakness in China increasingly cited as near-term risk.

Chart of the Week

The National Association of Realtors (NAR) reported that Existing Home Sales fell again in September to the lowest level since 2010, with inventory at the lowest level on record. Existing home sales make up most of the housing market but fell -2.0% to a seasonally adjusted annual rate of 3.96 million. That was above expectations for 3.89 million but down from the prior month’s unrevised 4.04 million homes. Year-over-year existing home sales are down -15.4%. The Northeast was the only region to rise, up +4.2%, but the other regions were unchanged or down. The Median Existing Home Price rose to $394,300 from $404,100 the prior month and is up +2.8% from a year ago. Homes for sale fell to 1.13 million, down -8.1% from August, and the lowest since the lowest since 1999, when the NAR began tracking the data. Around 26% of properties are being sold above list price, the NAR noted. All-cash buyers made up 29% of sales, highest since January 2023.

Home sales fell in September to the lowest rate in 13 years

U.S. Existing Home Sales

Note: Seasonally adjusted annual rate.
Source: National Association of Realtors, The Wall Street Journal.

Economic Review

• The Conference Board’s Leading Economic Index (LEI) fell for the 18th month in a row in September, sinking -0.7%, worse than expectations for a -0.4% decline and the prior month’s -0.5% (which was revised down from the -0.4% originally reported). At 104.6, the LEI is the lowest level since June 2020. The last two times the index has fallen consecutively for this long coincided with the recessions that started in 1973 and 2008. Breadth of the index was negative with six of the ten indicators tracked by the Conference Board negative, two unchanged, and just two positive. On a year-over-year basis, the index was down -7.6%. Non-Financial components, specifically New Orders and Consumer Expectations for Business Conditions were the largest detractors, and all three Financial Component indicators, the Leading Credit Index, the S&P 500 Index, and Interest Rate Spread were negative. “So far, the U.S. economy has shown considerable resilience despite pressures from rising interest rates and high inflation,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators at the Conference Board, which publishes the index.
• The Commerce Department reported that September Retail Sales posted their sixth straight month of gains, rising +0.7%, far ahead of expectations for +0.3%, but just below the prior month’s downwardly revised +0.8% (+0.6% originally). Retail sales represent about one-third of all consumer spending and are seasonally adjusted but not inflation adjusted. Retail sales ex-autos increased by +0.6%, also beating expectations (+0.2%), but trailed the prior month’s +0.9% gain (a big upward revision from the original +0.6%). Sales ex-autos and gas were also up +0.6%, well above expectations for +0.1% gain, and above the prior month’s +0.3% (revised up from +0.2%), highlighting how the sharp +5.2% increase in receipts at gas stations carried the headline increase. Sales rose +1% at auto dealers, which represent about 20% of overall retail sales. Gasoline stations were also up about +1%, but that came primarily from higher prices not volume. Ecommerce sales remain strong, up +1.1%, but sales fell at big-box brick-and-mortar stores. The Control Group, a figure used to calculate GDP, was also up +0.6%, above expectations for a +0.1% advance, and above the prior month’s +0.2% (revised up from the originally reported +0.1%). Year-over-year Retail Sales were up +3.8%, more than the prior month’s +2.9% annual pace.
• Homebuilder confidence fell again in October, with the National Association of Home Builders (NAHB) Housing Market Index (HMI) falling -4 points to 40, under expectations to remain at the prior month’s 44, which was revised down from 45. Levels above 50 indicate “good” building conditions. The October data was the third consecutive drop in the index and marked the lowest level since January and far off the 56 registered in July. The share of builders cutting home prices to boost demand rose to its highest level in nine months, moving up to 32% in September from 25%. Like the prior two months, all three subcomponents declined, with Current Sales down -4 points, Sales Expectations (in the next six months) down -4 points, and Traffic of Prospective Buyers off -4 points. Sentiment once again fell across all four major US regions. 62% of builders reported offering sales incentives of all forms in October, up from 59% in September and tied with the previous high for this cycle set in December 2022. The rise in mortgage rates above 7% has triggered a sharp reversal in homebuilder sentiment. “Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said Alicia Huey, chair of the NAHB.
• September Housing Starts rebounded +7% to a seasonally adjusted annual rate of 1,358,000 units, up from a negatively revised 1,269,000 units the prior month (originally 1,283,000), and below expectations for 1,383,000 units. Housing starts peaked at 1,800,000 million in April 2022. Housing starts rose in the Midwest, South and West, with the only drop coming in the Northeast. Single-family rose +3.2%, while multi-family units plunged -26.3%.  Building Permits, one of the leading indicators tracked by the Conference Board, fell -4.4% after the prior month’s +6.8% increase (revised down from +6.9%), and well above expectations for a -5.7% decline. Single-unit permits were up +3.2%, while permits for buildings with at least five units or more surged by +17.1%.
• September Industrial Production rose +0.3%, more than prior month’s 0.0% flat reading (revised sharply down from +0.4%) and above expectations which was also for no change. Manufacturing output rose +0.5%, reversing a -0.5% drop the prior month. Manufacturing rose +0.4%, Motor vehicle production was up +0.3%, stifled some by the ongoing automakers strike, while Utilities output fell -0.3%. The index for defense goods had its fifth monthly gain of at least +1%. Capacity Utilization, a measure of potential output, increased to 79.7% from 79.5% the prior month (which was revised down from 79.7%) a bit above expectations for 79.6%.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, fell -6.5 points to-4.6 for October, above expectations for a drop to -6.0, and down from the prior month’s unrevised +1.9 reading (readings below zero indicates economic contraction). New Orders slumped -9.3 points after the prior month’s +25 surge, sending it back to negative territory at -4.2. A decline in the Prices Received index and a return to positive territory for Employment indicators were positives. Unfilled orders plunged -19.1 points to -13.9.
• Manufacturing in the Federal Reserve’s Third District improved in October with the Philly Fed Manufacturing Business Outlook Survey increasing +5 points, but at -9 it remained in economic contraction territory for the 15th month in the last 17 months. That was worse than expectations of -7.0 (readings below zero indicates contracting economic conditions). Underlying details were better than the headline number with New Orders up +14.6 points to move back to positive +4.4. The Shipments improved +14 points to +10.8 and Employment turned positive. The Six-Month Business Outlook slipped to +9.2 from +11.1 and the Prices Paid index increased again.
• Weekly MBA Mortgage Applications sank -6.9% for the week ended October 13, following the prior week’s +0.6% increase. The Purchase Index dropped -5.6% following a +1.0% rise the prior week and the Refinance Index plunged -9.9% following a +0.3% gain the prior week. The average 30-Year Mortgage Rate rose to 7.7%, which is +0.76 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims fell -13,000 to 198,000 for the week ended October 14, below expectations for 210,000 and last week’s 211,000 (revised up from 209,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) increased +29,000 to 1,734,000 in the week ended October 7, above consensus for 1,706,000, and last week’s reading of 1,705,000 (revised up from 1,702,000).

The Week Ahead

Economic reports for the upcoming week are back loaded towards the end of the week, highlighted by the BEA’s advance estimate of third-quarter Gross Domestic Product (GDP) on Thursday. Bloomberg consensus estimates are for a +4.0% GDP real growth rate, versus +2.1% in the second quarter. On Friday, the BLS releases the Personal Consumption Expenditures (PCE) Price Index, as well as the Fed’s preferred inflation measure—Core PCE, which excludes food and energy prices—which is forecast to be up +3.7% from last September. New and Pending Home Sales will also give some additional insight into how high mortgage rates are impacting the real estate sector. After numerous speaking events by Fed members last week, this week begins the blackout period ahead of the next FOMC meeting to be held October 31-November 1. Global investors will be watching the European Central Bank’s (ECB) interest rate decision Thursday. The ECB is expected to hold rates steady after hiking their benchmark rate by 450 points since July 2022. Earnings season heats up with the busiest week of the third-quarter earnings season including several of the so-called Magnificent Seven stocks that have powered most of the S&P 500’s 2023 gains. Microsoft and Google-parent Alphabet report on Tuesday, followed by Facebook-parent Meta Platforms on Wednesday and Amazon.com on Thursday. Other earnings during the week include Boeing, Chevron, Chipotle, Coca-Cola, ExxonMobil, Ford, General Electric, General Motors, IBM, Merck, NextEra Energy, Spotify, Southwest Airlines, UPS, Verizon, and Visa.

Did You Know?

HEALTH CARE COSTS RISE – The cost of employer health insurance rose this year at the fastest clip since 2011 because of inflation. The +7% jump in the cost of a family plan brought the average annual tab to nearly $24,000, according to healthcare research nonprofit KFF. A worker’s average payment of $6,575 for those plans was nearly $500 more than last year. Some good news: Employers aren’t increasing deductibles, and employees have a choice of many doctors and hospitals (Source: KFF, The Wall Street Journal).

HEATING OIL COSTS RISE – The increase in households’ average spending on heating oil this winter is projected to be +8%—or roughly $1,850 per household, according to the Energy Information Administration. That threatens to prop up inflation in the Northeast, home to four million of the five million U.S. homes that burn the fuel. A combination of aging buildings, reduced refining capacity, and limited natural-gas pipelines means relief options are limited (Source: Energy Information Administration, The Wall Street Journal).

CHARGED-UP INCOMES – The median household income of electric-vehicle buyers In the U.S. is $186,000, according to a survey by Strategic Vision. As the vehicles get even more expensive for many potential buyers amid higher interest rates, the EV transition is confronting polarizing politics and an economic divide (Source: Strategic Vision, The Wall Street Journal).

This Week in History

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.