Weekly Market Update – June 23, 2023

Quick Takes

• Global stock market indices broke multi-week win streaks with their worst week in months. The S&P 500 Index and the tech-heavy Nasdaq Composite Index fell -1.4%, and the small-cap Russell 2000 Index dropped -2.9%. International stocks fell -3.4% and emerging markets sank -3.7%
• Bonds were little changed with the Bloomberg U.S. Aggregate Bond Index up +0.1% for the week but non-U.S. bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, fell -0.6% – their first loss in four weeks.
• Overseas, several central banks hiked interest rates, including half-percentage point hikes in England and Norway. In the U.S., Federal Reserve Chairman Jerome Powell made hawkish comments in his semi-annual testimony before Congress.

Stocks have worst week since March, bonds little changed

Stocks ripped up the script from the last several weeks of gains with most major equity indices falling the most in months. The S&P 500 Index had its worst week since the March banking crisis, falling -1.4%, and ending a five-week winning streak. Only two of the 11 S&P sectors were positive (Industrials and Utilities) with Real Estate leading the other 9 sectors to the downside with a -2.1% loss. Technology was the second worst performing sector for the week with a -1.9% fall. That weighed on the tech-heavy heavy Nasdaq Composite Index which also had its worst week since March with a -1.4% drop, breaking an eight-week winning streak, which had been its longest since 2019. Small-cap stocks were among the hardest hit in the U.S. with the Russell 2000 Index down -2.9%. Non-U.S. stocks had it even worse as developed international stocks (the MSCI EAFE Index) fell -3.4% for the week, its worst since September 2022. The MSCI Emerging Markets Index dropped -3.7%, its worst week since October 2022. International stocks had the double whammy of declining prices along with an appreciating U.S. dollar, which had its first positive week in the last four, advancing +0.6% (U.S. Dollar Index).

Markets were shaken by a combination of several overseas central banks hiking interest rates along with Federal Reserve Chairman Jerome Powell making hawkish comments in his semi-annual testimony before Congress. The Bank of England and Norway’s Norges Bank surprised investors with larger than expected half a percentage point rate hikes, while central banks in Switzerland and Turkey also raised rates. China’s People’s Bank of China was the lone major central bank to lower rates this week, cutting the important loan prime rate -0.1% to 4.2% in an effort to lower borrowing costs and boost consumption. Stateside, Fed Chair Powell reiterated that more rate hikes are expected this year. “The level to which we raise rates is a separate question from the speed at which we move,” he declared, adding that it may “make sense” for the central bank to increase rates at a “more moderate pace” than it has over the past 15 months. During his testimony on the second day, he said he was committed to ramping up oversight of midsize lenders.

Despite Powell’s hawkish comments and the foreign central bank hikes, bonds were little changed. U.S. Treasury yields saw short-dated yields rise again while long-dated yields slipped. The 2-year U.S. Treasury yield was up +3 basis points (bps) to 4.74%, the benchmark 10-year U.S. Treasury yield was down -3 bps to 3.73%, and the 30-year U.S. Treasury yield fell -4 bps to 3.81%. The Bloomberg U.S. Aggregate Bond Index returned +0.1% for the week while non-U.S. bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -0.6% – their first loss in four weeks.   

Chart of the Week

U.S. homebuilders broke ground on more new projects in May, as strong demand from buyers and a limited supply of homes for sale outweighed higher costs brought on by rising interest rates. Total Housing Starts surged in May, jumping +21.7% to a seasonally adjusted annual rate of 1,631,000 units, beating market forecasts of 1,400,000 units, and up from a downwardly revised 1,340,000 units in March (originally 1,401,000). That marks the highest number of units started since April 2022 and the strongest monthly rate of starts since October 2016. Single-family starts were up +18.5% for the month, driven by a +59.1% surge in the Midwest. Only the West was negative (-4.1%). The monthly numbers can be volatile and are often revised, but the latest report showed multifamily construction ran at the hottest pace since 1986 and the single-family rebound came after matching an almost three-year low in April. Building Permits, one of the leading indicators tracked by the Conference Board, rose +5.2%, far exceeding expectations for a +0.6% gain and up from a positively revised -1.4% decline (originally -1.5%) the month before. The annual rate of 1,491,000 units in May exceeded expectations for 1,425,000 million and the positively revised 1,417,000 in April (originally 1,416,000).

Building Rebound

U.S. housing starts

Note: Seasonally adjusted annual rate
Source: Commerce Department, The Wall Street Journal.

Economic Review

• The preliminary S&P Global U.S. Purchasing Managers Indexes (PMIs) signaled softening growth in June, coming in at 53.0, just below expectations for 53.5 and down from 54.3 the prior month. The PMIs are based on polls of senior executives in charge of buying supplies for their companies and levels above 50 indicate economic expansion. Once again, the growth was entirely due to the services side of the economy while manufacturing remains sluggish. The Manufacturing PMI fell -2.1 points down to 46.3, significantly underperforming expectations of 48.5. New orders fell the most since December and input buying declined at the steepest rate since January due to manufacturers continuing to struggle with high inventories and necessary price cuts as consumers transition to buying services. The Services PMI declined as well, although only by -0.8 and remaining in expansion territory at 54.1, which was slightly ahead of expectations of 54.0. It appears service providers are fronting the bills for their customers, as prices charged fell -2.9 to 54.7 despite input costs rising the most in five months because of higher wage bills. New orders continued to rise, and business confidence reached its highest point since May of 2022, signally some positive outlook for the rest of the year.
• The Conference Board Leading Economic Index (LEI) fell for the 14th month in a row in May, down -0.7%, a bit better than expectations for -0.8% and a bit worse than April’s unrevised -0.6%. The May LEI at 106.7 was the lowest level since July 2020. The last two times the index has fallen consecutively for this long coincided with the recessions that started in 1973 and 2008. On a year-over-year basis, the index was down -7.9%. The breadth of the index was negative, as six of the ten indicators tracked by the Conference Board declined in May. Non-financial components, namely new orders and consumer expectations for business conditions were the largest detractors, and two of the three Financial Component indicators, the Leading Credit Index and Interest Rate Spread, continued their slide in the fallout from the banking crisis. According to the Conference Board, “rising interest rates paired with persistent inflation will continue to further dampen economic activity.” The Board recently updated their projections for a recession to occur sometime beginning in Q3 of 2023.
• Total Housing Starts surged in May, jumping +21.7% to a seasonally adjusted annual rate of 1,631,000 units, beating market forecasts of 1,400,000 units, and up from a downwardly revised 1,340,000 units in March (originally 1,401,000). That mark the highest number of starts since April 2022 and the strongest monthly rate of starts since October 2016. Single-family starts were up +18.5% for the month, driven by a +59.1% surge in the Midwest. Only the West was negative (-4.1%). Building Permits, one of the leading indicators tracked by the Conference Board, rose +5.2%, far exceeding expectations for a +0.6% gain and up from a positively revised -1.4% decline (originally -1.5%) the month before. The annual rate of 1,491,000 units in May exceeded expectations for 1,425,000 million and the positively revised 1,417,000 in April (originally 1,416,000).
• The National Association of Realtors reported that May Existing Home Sales, which make up most of the housing market, inched up +0.2% to a seasonally adjusted annual rate of 4.30 million, beating expectations for 4.25 million and April’s upwardly revised 4.29 million (originally 4.28 million). Declines were broad-based from a regional perspective, with all four regions losing ground. The Northeast and Midwest both fell (-2.0% and -2.9% respectively), while the South and West rose +1.5% and +2.6%, respectively. April marked the 14th time in the last 15 months that sales have dropped, which is now weighing on prices. Compared with May 2022, home sales were down -20.4%. The Median Existing Home Price has risen for four consecutive months to $396,100, the highest level since July 2022, but is down -3.1% from June 2022. for the first time in 11 years, with a -1.7% slide in April from a year earlier to $388,800. Inventory of existing homes for sale remains tight, with homes for sale at the end of May at 1.08 million units, up +3.8% from April but down -6.1% from a year ago. Unsold inventory sits at a 3.0-month supply at the current sales pace, up from 2.9 months in April and 2.6 months in May 2022. It remains well below the 6.0-month supply typically associated with a more balanced market.
• Solid demand and a lack of existing inventory helped push homebuilder confidence above 50, the threshold marking “good” building conditions, for the first time since July 2022. The National Association of Home Builders (NAHB) Housing Market Index (HMI) advanced +5 points for the second month in a row to 55, beating expectations to rise to 51. Homebuilder confidence has now been positive every month of 2023 after declining in every month of 2022. All three subcomponents increased for the month, with current sales conditions up +5 points, sales expectations for the next six months up +6 points, and traffic of prospective buyers up +4 points. June was the first month in a year that the HMI’s Current and Future sales components exceeded 60. The index also climbed in all census regions. with a shortage of homes for sale on the market, which is in part a consequence of millions of homeowners refinancing their mortgages to ultra-low rates during the pandemic. Builders have started to curtail sales incentives, with price cuts to boost sales down -25% in June, from a peak of 36% in November 2022. The typical builder was cutting prices by 7% in June, the NAHB said.
• The Chicago Fed National Activity Index (CFNAI) suggests economic growth declined in May, falling -0.15 for the month, below expectations for -0.10, and far slower than the +0.14 in April which was revised up from the originally reported +0.07%. Readings below zero indicate below-trend growth in the national economic activity. Three of the four broad categories saw declines, led by the Production and Income index component, but the Sales, Orders, and Inventories component and Employment, Unemployment, and Hours indexes also fell. Only the Personal Consumption and Housing index was positive. Likewise, breadth overall was negative, with 46 of the 85 composite indicators coming in negative while 39 were positive. Only 38 indicators improved, and 11 of those 38 are still negative.
• The Kansas City Fed Manufacturing Survey showed factory activity worsened for the Federal Reserve’s Tenth District in June, with the index falling to -12 from -1 in May, far worse than expectations for a -5 reading and the worst reading in three years. The production and shipment indexes both worsened as demand for goods deteriorated. Employment plunged to -12 from 7 the prior month and the average workweek sank to -11 from -4. Price pressures continue to alleviate as the prices paid index, on net, fell from 32 in April to 16 in May.
• The weekly MBA Mortgage Application Index was up +0.5% for the week ended June 16, following the prior week’s +7.2% surge. The Purchase Index was up +1.5% following a +7.6% jump the prior week and the Refinance Index fell -2.1% following a +6.0% gain the prior week. The average 30-Year Mortgage Rate fell for the third week in a row, down -4 basis points to 6.73%, which is +0.75 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims were unchanged at 264,000 for the week ended June 17, higher than expectations for 259,000. Last week’s claims were upwardly revised from the originally reported 262,000 with the 264,000 marking the highest weekly level of new unemployment claims since October 2021. The number of people already collecting unemployment claims (i.e. Continuing Claims) slipped -13,000 to 1,759,000 in the week ended June 9 from the prior week’s 1,772,000, which was revised down from the originally reported 1,775,000.

The Week Ahead

The last week of the quarter will be heavy with housing data, a few production and factory reports, as well as consumer confidence and consumer sentiment readings. It will also feature the release of the results of the Federal Reserve’s annual stress tests, which will be a major focus for the banking sector. Any changes to the capital requirements the regional banks are subject to could meaningfully impact their profitability.

Did You Know?

REBUILDING THE NEST EGG – With the average retirement account balance down -8.4% at the end of Q1 2023 compared to Q1 2022, workers are saving more for retirement. In Q1, 14.5% of retirement plan participants increased their contribution rate while just 3.2% lowered it. The increase in savings was led by Gen Z workers where a net of 20.6% increased their contribution rates (Source: Bank of America, MFS)

WHAT A DIFFERENCE A YEAR MAKES – Last year, as of 6/13/2022, there were 410 stocks in the S&P 500 with negative returns year to date (YTD), and 258 were down more than -20% and 14 were down more than -50%. Fast forward to 6/13/2023, 283 stocks in the S&P 500 are positive YTD, 91 are up more than +20% and 15 are up more than +50% (Source: Bespoke Investment Group, MFS).

BULLS LIVE LONGER THAN BEARS – Historically, S&P 500 bull markets have lasted about 3.5x as long as bear markets. Since 1928, the S&P’s 27 bear markets have lasted an average of 286 days, while the average bull has lasted 1,011 days. If the current new bull market were to last as long as the average bull, it would extend out to 7/19/25 (Source: Bespoke Investment Group).

This Week in History

SHARK ATTACK – 48 years ago on June 20, 1975, swimming in the ocean permanently changed forever when the movie Jaws hit the screens in movie theaters nationwide. The story of a great white shark that terrorizes the New England resort town of Amity Island was an instant blockbuster and is regarded as the first summer blockbuster. It became the highest-grossing film of that time until it was bested by 1977’s Star Wars (Source: Bespoke Investment Group, History.com).

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.