Weekly Market Update – July 21, 2023

Quick Takes

• Stocks were mostly up on the week, but in a countertrend move technology and growth trailed the overall market. The S&P 500 was up +0.7%, the Russell 2000 gained +1.5%, but the tech-heavy Nasdaq slipped -0.6%.
• Overseas, stocks pulled back after nice gains the prior week. Developed market international stocks (the MSCI EAFE Index) slipped -0.6% while the MSCI Emerging Markets Index was down -1.4%.
• Treasury yields popped up on Thursday, largely due to an unexpected fall in the initial weekly jobless claims that reminded investors that wage pressures may make inflation sticky. The 2-year U.S. Treasury yield rose +7 bps while the 10-year U.S. Treasury yield was flat.

Stocks and bonds mixed with a big earnings week ahead

U.S. stocks advanced in hopes that the tight labor market and moderating inflation may help the economy avoid a hard landing. The S&P 500 Index was up +0.7% for the week, its eighth weekly gain in the past ten weeks. Smaller companies rallied even more with the Russell 2000 Index rising +1.5%. However, the tech-heavy Nasdaq Composite bucked the trend with a modest pullback of -0.6%. Technology and growth stocks, the leaders for much of 2023, saw a bout of profit-taking on Thursday, as the Nasdaq slid -2.1% on the day following disappointing earnings from Tesla and Netflix after the close on Wednesday. It’s the second down week in the last three for the Nasdaq but remains up +34% for the year. Overseas, developed market international stocks, such as the MSCI EAFE Index, slipped -0.6% and the MSCI Emerging Markets Index dropped -1.4%.

Bonds were mixed as the 2-year U.S. Treasury yield rose +7 bps to 4.84%, but the yield on the benchmark 10-year U.S. Treasury note was flat, remaining at 3.83%, and resulting in a further inversion of the yield curve. The 30-year U.S. Treasury yield dropped -3 bps to 3.90%. As a result, the Bloomberg U.S. Aggregate Bond Index was little changed with a +0.01% move for the week. International bonds fell with the Bloomberg Global Aggregate ex U.S. Bond Index slipping -1.0%. After Thursday morning’s weekly jobless claims data came in below expectations, falling to the lowest level in two months, yields popped up on the reminder that the labor market remains tight and that wages pressures will likely persist longer.

Chart of the Week

The National Association of Realtors (NAR) reported that Existing Home Sales fell again in June as low inventories, higher mortgage rates, and high home prices make ownership less affordable. Existing home sales make up most of the housing market but fell -3.3% in June to a seasonally adjusted annual rate of 4.16 million, shy of expectations for 4.20 million and May’s unrevised 4.30 million. That was the slowest sales pace since January as well as the slowest rate of homes sold for the month of June since 2009, during the sub-prime lending crisis. The Northeast rebounded with a +2% gain in June, but the other regions were flat or down. Compared to June 2022, home sales were down -18.9% on a year-over-year basis. The Median Existing Home Price rose for a fifth consecutive month to $410,200, the highest level since June 2022 and the second-highest price that the NAR has recorded since it began tracking the data in 1999. Inventory of existing homes for sale remains tight, with homes for sale now at a record low of 960,000 units. Homes listed for sale remained on the market for 18 days on average, unchanged from the previous month. Last June, homes were only on the market for 14 days.

Home Sales Fell Again

U.S. Existing Home Sales

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

Economic Review

• June Housing Starts saw the biggest drop in a year, falling -8.0% to a seasonally adjusted annual rate of 1,434,000 units, down from a negatively revised 1,559,000 units in May (originally 1,631,000), and underperforming expectations for 1,480,000 units. Single-family starts fell -7% and multi-family units fell by -11.6%. Starts fell the most in the Midwest, down -33%, after surging +67% in May. The only part of the U.S. where housing starts rose in June was in the West, where housing starts rose by +4.6% for single-family homes. Building Permits, one of the leading indicators tracked by the Conference Board, fell -3.7% after May’s +5.6% surge, which was positively revised from the original +5.2% to an annual rate of 1,440,000 units, below expectations for 1,500,000 million and the positively revised 1,496,000 in May (originally 1,491,000). Single-unit permits were up +2.2%, while multi-unit with at least five units dropped -13.5%.
• Solid demand and a lack of existing inventory continue to buoy homebuilder confidence, which has now improved for the seventh straight month in July after declining every month of 2022. The National Association of Home Builders (NAHB) Housing Market Index (HMI) ticked up +1 point to rising to 56, in line with expectations (a level above 50 indicates “good” building conditions). The three subcomponents were mixed, with current sales conditions up +1 point, sales expectations for the next six months down -2 points, and traffic of prospective buyers up +3 points. The use of incentives to attract buyers declined, with the share of builders reducing home prices falling to 22% in July from 25% in June. Sentiment increased in the Northeast and West regions while moderating in the Midwest and the South.
• The Conference Board’s Leading Economic Index (LEI) fell for the 15th month in a row in June, down -0.7%, a bit worse than expectations for -0.6% and a bit worse than May’s positively revised -0.6% (up from the initially reported -0.7). At 106.7, the LEI is 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 -7.8%. The breadth of the index was negative, as seven of the ten indicators tracked by the Conference Board declined in June. Non-Financial components, specifically 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.
• June Retail Sales inched up +0.2%, shy of expectations for +0.5%, and down from an upwardly revised +0.5% in May (+0.3% originally). Retail sales represent about one-third of all consumer spending and are seasonally adjusted but not inflation adjusted. Retail sales ex-autos ticked up +0.2% for the month, also shy of expectations which were forecast to be +0.3%, and down from a positively revised +0.3% the prior month (initially reported at +0.1%). Sales ex-autos and gas were up +0.3%, in line with expectations, but down from the prior month’s +0.5%, which was revised up from +0.4%. Bars and Restaurants, the only service sector in the retail report, barely rose in June–up +0.1% after surging +1.2% in May–yet remain up +8.4% over the past year. The Control Group, a figure used to calculate GDP, jumped +0.6%, well above expectations and the prior month which were both +0.3% (revised up from the originally reported +0.2%). Year-over-year Retail Sales were up +1.5%. Overall, sales increased in seven of the 13 retail categories.
• June Industrial Production fell -0.5%, well below expectations to be flat, and matching the negatively revised -0.5% in May (originally -0.2%). At 102.25, Industrial Production hasn’t been lower since last December. Manufacturing output fell -0.3% after the prior month’s +0.2% rise. Capacity Utilization fell to 78.9% from 79.4% in May (originally 79.6%), below expectations for 79.5%. The last time the capacity utilization rate was lower was in October 2021.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, fell -5.5 points to +1.1 in July, and beating expectations for -3.5. Readings below zero indicate deteriorating conditions. The index had been in negative territory for six of the past seven months. New Orders inched up 0.2 points to +3.3, but Shipments fell -8.6 points to +13.4. The index for Future Business Conditions fell -4.6 points to +14.3, suggesting optimism is still subdued.
• The Philly Fed Manufacturing Business Outlook Survey inched up a bit in July to -13.5 from an unrevised -13.7 in June, but that was well below expectations for an improvement to -10.0. This was the eleventh consecutive negative month. Any reading below zero indicates deteriorating conditions. New Orders fell to -15.9 in June from -11.0 the previous month. After turning positive just last month the Shipments index plunged -22.4 points to -12.5. The Prices Received index jumped to 23 in July — the highest level since January — from near zero in the previous month, which may indicate a resurgence in inflation. On the positive side, the Six-Month Business Outlook rose to +29.1 in July, the highest reading since August 2021.
• The weekly MBA Mortgage Application Index was up +1.1% for the week ended July 14, following the prior week’s +0.9% rise. The Purchase Index dipped -1.3% following a +1.8% rise the prior week and the Refinance Index jumped +7.3% following a -1.3% decline the prior week. The average 30-Year Mortgage Rate fell for the first time in four weeks, down -20 basis points to 6.87%, which is +1.05 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims fell -9,000 to a two-month low of 228,000 for the week ended July 15, below expectations for 240,000 and last week’s unrevised 237,000 reading. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +33,000 to 1,754,000 in the week ended July 8, higher than expectations for 1,722,000 and last week’s reading of 1,721,00 (revised down from 1,729,00).

The Week Ahead

The Federal Reserve’s FOMC policy meeting on Wednesday will be closely watched with traders assigning a 99.8% probability that the headline interest rate will be hiked by 25 basis points, according to CME FedWatch Tool. Overseas, the European Central Bank is also forecast to raise its benchmark rate by 25 basis points and not rule out another rate hike in September. U.S. economic data will include Consumer Confidence, second-quarter Gross Domestic Product, and U.S. inflation data with the Fed’s preferred inflation measure, the Core Personal Consumption Expenditures (PCE) price index for June on Friday. Earnings season picks up steam next week with dozens of second-quarter earnings reports slated including Microsoft, Facebook-owner Meta, and Google parent Alphabet. Overall, 166 S&P 500 companies are scheduled to report during the week, according to FactSet.

Did You Know?

HOME TURNOVER DROPS – High mortgage rates are keeping U.S. homeowners on the sidelines, with the home turnover rate in the first half of 2023 falling to the lowest level in at least a decade. About 14 of every 1,000 homes changed hands during the first six months of the year, down from 19 in the same period in 2019, before the pandemic. Real estate brokerage firm Redfin estimates mortgage rates need to drop closer to 5% to change the dynamic and help free up some inventory and bring monthly payments down (Source: Redfin, Seeking Alpha).

STOCK BUYING RISES – According to Schwab CEO Walt Bettinger, retail investors are turning bullish. The brokerage firm’s clients have been adding equity exposure over the past few months, with the volume of buy orders coming in +20% higher than sell orders in Q2 (Source: Charles Schwab, Seeking Alpha).

INSTANT SETTLEMENT – The Federal Reserve is about to launch a new instant-payments system that’ll be available 24/7/365. Initially “FedNow” will be supported by 57 organizations like JPMorgan, Bank of New York Mellon, Chase, Wells Fargo, and U.S. Bancorp, but there are plans to onboard more lenders and credit unions shortly. Generally, it takes anywhere from a day to several days for cash payments to settle (to verify a transaction, the account amounts, and the clearing of the funds), but FedNow should make it happen instantaneously (Source: Seeking Alpha).

This Week in History

GREENBACK ARRIVES – On July 17, 1861, the first paper money payable on demand was issued by the U.S. government. The color of the bills gave the nickname “greenbacks” to the U.S. currency (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.