Weekly Market Update – May 19, 2023

Quick Takes

• Stocks had decent gains for the week but ended on a down note Friday after debt ceiling negotiations stalled. The S&P 500 gained +1.7% for the week, the small cap Russell 2000 was up +1.9%, and the tech-heavy Nasdaq Composite jumped +3%.
• Treasury bonds sold off all week with yields breaking above a trading range that persisted the last few weeks. The 2-year Treasury yield was up +28 basis points (bps) for the week to end at 4.27%, while the 10-year Treasury yield gained +21 bps to finish at 3.67%.
• Economic data for the week was mixed but on the subpar side. April retail sales had their first gain since January, yet still short of expectations and were negative when adjusted for inflation. Leading Economic indicators continued to fall into negative territory.

Fed weighs rate pause, debt ceiling negotiations hit an impasse

After closing at a 2023 high on Thursday, stocks ended the week on a sour note. White House and congressional Republicans reached an impasse in negotiations on the debt ceiling on Friday and stocks closed the session down with no clear plans for negotiations to resume. The end of week decline was moderate, so perhaps investors still believe a deal can be worked out. Markets also had to contend with new comments from Federal Reserve Chair Jerome Powell during Friday’s trading session, in which he said banking-system pressures could influence the Fed’s interest-rate decisions. Fed officials have recently suggested that raising rates again at their June 13-14 policy meeting could be a close call, with a handful saying inflation and economic activity aren’t slowing enough to justify leaving rates unchanged, but others, including Powell, hinting that a pause to assess the effects of their past increases would be appropriate, especially with the strains in the banking sector. Like the market overall, shares of regional banks tumbled Friday after Treasury Secretary Janet Yellen said more mergers might be needed to shore up the sector.

Notwithstanding the slump on Friday, bank stocks, and the broader market ended the week higher. The S&P 500 gained +1.7% for the week, the small cap Russell 2000 was up +1.9%, and the tech-heavy Nasdaq Composite jumped +3%. The exuberance wasn’t as high overseas as developed international stocks, as measured by the MSCI EAFE Index, were up just +0.3% and the MSCI Emerging Markets Index was only slightly higher at +0.4%.

Treasury bonds were selling off all week until the setback in the debt ceiling negotiations on Friday. Treasury yields, which rise when bond prices fall, still wrapped up a sixth straight day of gains to close out the week. The 2-year Treasury yield was up +28 basis points (bps) for the week to end at 4.27%, while the 10-year Treasury yield gained +21 basis points to finish at 3.67%. Treasury yields remain well below their highs for the year, but they have now broken above a trading range that persisted over the last few weeks. For the week the Bloomberg US Aggregate Bond Index was down -1.4% and non-US bonds, measured by the Bloomberg Global Aggregate ex US Bond Index, were down -1.6%.

Economic data for the week was mixed but subpar with April retail sales showing their first gain since January, yet still short of expectations. And when adjusted for inflation, retail sales were actually negative. The Conference Board reported that the Leading Economic Index (LEI) fell further into negative territory in April and is now at levels typically only seen in recessions. Housing data was mixed with builder confidence and housing starts rising but existing home sales, which make up most of the housing market, falling.

Chart of the Week

Advance estimates of Retail Sales were up +0.4% in April, only half of the +0.8% monthly gain that Wall Street economists expected. However, it did represent a rebound from March’s -0.7% drop, which was positively revised from the originally reported -1.0%. It’s important to note that Retail sales are seasonally adjusted but not inflation adjusted. Retail sales ex-autos also rose +0.4% for the month, in line with expectations and well above March’s -0.5% (revised up from -0.8%). Sales ex-autos and gas were up +0.6%, above expectations for +0.2%, and above March’s -0.5% (revised down from -0.3%). The Control Group, a figure used to calculate GDP, increased +0.7%, well above expectations of +0.4% as well as March’s -0.4% (revised down from the originally reported -0.3%). Year-over-year Retail Sales were up +1.6% from April 2022. However, when adjusted for inflation, Retail Sales were down -3.2% from last year – a level that has only been worse in October 2002, the Financial Crisis, and the Covid pandemic. Moreover, as shown in the chart below, the six-month rolling average of the net number of sectors showing growth in monthly retail sales, has only been weaker in a few other months, all of which occurred during the 2007 – 2009 Financial Crisis. Negative readings have historically been associated with recessions as well.

Retail Sales Diffusion Index of Sectors Showing Growth
Six Month Average, 1993 – 2023

Source: Bespoke Investment Group.
Note: shaded areas represent U.S. recessions.

Economic Review

• The Conference Board’s Leading Economic Index (LEI) fell further into negative territory in April, declining -0.6%, in line with expectations and marking the 13th consecutive monthly decline — which has only occurred during the recessions that started in 1973 and 2007 (the last consecutive negative 13 month mark was April 2008). On a year-over-year basis, the index was down -8.0%. Weakness was broad-based, with eight of the ten indicators falling in April. Consumer Expectations for Business Conditions and ISM New Orders were the two largest detractors in May. The next two largest detractors are two of the three Financial Component indicators, the Interest Rate Spread and the Leading Credit Index. These two components are receiving a close watch because of concerns over the banking system. The Conference Board said “the LEI continues to warn of an economic downturn this year,” and they are forecasting a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023.
• April Industrial Production rose +0.5% after being revised down to flat in March (from the originally reported +0.4%) which is also where April was expected to be. February’s figure was adjusted negatively as well, from +0.2% to 0.0%. Manufacturing output increased +1.0%, well above expectations for +0.1%, but March’s figure was revised down to -0.8% from -0.5%. Capacity Utilization ticked up from 79.7% in April, in line with expectations, and above 79.4% in March (revised down from 79.8%).
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, plunged -42.6 points in May to negative -31.8. Readings below zero indicate deteriorating conditions. The only larger monthly decline in the survey’s approximately 22-year history occurred in April 2020 at the start of the pandemic. Not only was it the fifth time in six months that the top-line general business conditions index landed in contractionary territory, but it more than wiped out the prior month’s +35.4 point jump. According to Bloomberg data, economists had expected a reading of -3.9. The details of the report weren’t much better than the headline, as demand indicators drove the weakness. The index for new orders dropped -53.1 points to -28, reversing the sharp +46.7-point gain in April. The shipments index fell -40.3 points to -16.4, almost reversing a +37.3-point gain in the prior month. Unfilled orders fell -13.2 points to negative -13.2. Perhaps the only silver lining was the expectations index (6 months ahead) that ticked up +3.2 points to +9.8, a three-month high, which suggests some optimism about the second half of this year.
• Manufacturing in the Federal Reserve’s Third District, improved in May with the Philly Fed Manufacturing Business Outlook Survey rising to -10.4 from an unrevised -31.3 in April, which was the lowest level in three years. The May reading is the ninth consecutive negative month, but it was higher than expectations for a -20.0 reading. Any reading below zero indicates deteriorating conditions. New Orders rose to -8.9 from -22.7 and Shipments were up to -4.7 from -7.3. The Prices Paid index rose to +10.9 from 8.2 in April, showing inflation pressures remain stubborn. The Prices Received index slid from -3.3 to -7.0, meaning more respondents reported lowering their prices in May than those saying they raised prices. The measure of six-month business outlook worsened to -10.3 in May from -1.5 in the prior month. The Employment index fell to -8.6 from -0.2 in April and about 7% of respondents reported adding staff in May, which was down from 16% the prior month.
• Homebuilder confidence rose in May as the National Association of Home Builders (NAHB) Housing Market Index (HMI) gained +5 points to 50, beating expectations to remain flat at 45. This marks the fifth straight month of increases and is the first time that sentiment levels have reached the midpoint mark of 50, the threshold marking good building conditions, since July 2022. All three subcomponents increased for the month, with current sales conditions up +5 points, sales expectations for the next six months up +7 points, and traffic of prospective buyers up +2 points. The index also climbed in all census regions, although only the South exceeded the 50-point threshold, at 55. A year ago, the index stood at 69. Builders were optimistic about the future as buyers continue to deal with a shortage of homes for sale on the market, which is in part a consequence of millions of homeowners refinancing their mortgage to ultra-low rates during the pandemic.
• April Housing Starts rose +2.2% to a seasonally adjusted annual rate of 1,402,000 units from a downwardly revised 1,371,000 units in March (originally 1,402,000), slightly beating market forecasts of 1,400,000 units. Single-family starts were up +1.6% for the month, but only because of a +59.5% jump in the West, single-family starts declined in all other regions. Building Permits, one of the leading indicators tracked by the Conference Board, fell -1.5% after March’s -3.0% drop, which was positively revised from the original -8.8%, to an annual rate of 1,416,000 units, below expectations for 1,430,000 million and the positively revised 1,437,000 in March (originally 1,413,000). Like starts, single-unit permits were up, rising +3.1% for the month, but unlike starts all regions saw gains.
• The National Association of Realtors reported that April Existing Home Sales, which make up most of the housing market, fell -3.4% to a seasonally adjusted annual rate of 4.28 million, below expectations for 4.30 million and February’s downwardly revised 4.43 million (originally 4.44 million). Declines were broad-based from a regional perspective, with all four regions losing ground. The Northeast and Midwest each slipped -1.9%, the South fell -3.4%, and the West tumbled -6.1%. April marked the 14th time in the last 15 months that sales have dropped, which is now weighing on prices. The Median Existing Home Price has fallen on an annual basis for three consecutive months for the first time in 11 years, with a -1.7% slide in April from a year earlier to $388,800.
• The weekly MBA Mortgage Application Index sank -5.7% for the week ended May 12, following a +6.3% jump the previous week. The index has now oscillated between positive and negative readings for eight straight weeks. The Purchase Index fell -4.8%, exactly wiping out the prior week and the Refinance Index sank -7.7%following a 10.0% surge the prior week. The declines came as the average 30-Year Mortgage Rate rose +9 basis points to 6.57%.
• Weekly Initial Jobless Claims fell -22,000 to 242,000 for the week ended May 13, worse than expectations for 251,000 and the prior week’s unrevised 264,000. The number of people already collecting unemployment claims (i.e. Continuing Claims) fell -8,000 to 1,799,000 in the week ended May 6, down from the prior week’s downwardly revised 1,807,000 (originally 1,813,000).

The Week Ahead

First quarter earnings season is nearly done with just a few dozen firms left to report, primarily retailers like Lowes, AutoZone, DICK’S Sporting Goods, Kohl’s, Best Buy, and Costco. But the economic calendar gets busier. More regional Fed manufacturing reports are due from the Richmond and Kansas City districts. Housing data will include New and Pending Home Sales, along with the regular weekly Mortgage Applications. The Fed will release the FOMC meeting minutes from the last Fed meeting and several Federal Reserve board members are on the speech circuit during the week. S&P Global’s U.S. manufacturing and service sector PMIs, the Chicago Fed National Activity Index (CFNAI), and Gross Domestic Product (GDP) will provide clues on national economic health. And of course, investors will watch the U.S. debt ceiling drama as the threat of a government shutdown or default becomes more of a risk unless an extension or agreement can be hammered out.

Did You Know?

RETIREMENT BUDGET DEFICIT – Nearly half of all Americans do not have a retirement account… and relying on Social Security is not going to cut it. While the average monthly Social Security check to a retired worker is $1,800, the average household headed by an American over the age of 65 spends over $4,000 per month (Source: TheHill.com, MFS).

LOSING CREDIBILITY – In a Gallup poll conducted in April, just 36% of those surveyed said they had a great deal or fair amount of confidence in Fed Chair Jerome Powell to do or to recommend the right thing for the economy, which was down 7 percentage points from the 43% reading a year ago (Source: Gallup, MFS).

TIMBER! – After surging +545% from April 2020 lows to May 2021 highs, lumber futures prices have plummeted -80% and are now -25% below pre-COVID prices seen in February 2020. The sharp drop in this key input for homebuilders is one reason why the S&P 1500 Homebuilder group is up +44% over the last year and less than 2% from all-time highs (Source: Bespoke Investment Group, MFS).

This Week in History

BOOK STORE IPO – 26 years ago, on May 15, 1997, Amazon.com went public. Today’s Amazon.com looks nothing like the company that went public at a price of $18 per share. Long before the Kindle, Alexa, and Amazon Prime, Amazon’s business was much more focused. “Amazon.com is the leading online retailer of books,” the company said succinctly in its S-1 filing. At the time, Amazon reported 80,000 average daily visits to its website. Amazon had 256 total employees and full-year revenue of only $15.75 million. The company’s IPO placed Amazon’s total value at around $300 million. Today, Amazon’s market cap is $1.13 trillion. At the time, the S&P 500 traded at 836.04. Today, the S&P 500 is trading at 4,122 (Source: Bezinga).

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. 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.