Weekly Market Update – July 28, 2023

Quick Takes

• Most major stock indices were up on the week, with the U.S. leading a +6.8% jump in the Communication Services sector. The S&P 500 was up +1.0%, the Russell 2000 gained +1.1%, and the tech-heavy Nasdaq rose +2.0%.
• Overseas, stocks also gained despite the U.S. dollar rising +0.6% during the week. Developed market international stocks (the MSCI EAFE Index) increased +0.9% while the MSCI Emerging Markets Index jumped +2.8%.
• The Fed raised their benchmark rate a quarter-percentage-point to a range of 5.25% to 5.5%, marking their highest level since 2001. The 2-year U.S. Treasury yield rose +4 bps while the 10-year U.S. Treasury yield was up +12 bps, helping to relieve the inversion in the yield curve.

Stocks advance on improving sentiment and easing inflation

Most major global stock indices rose during the week. In the U.S., data showed U.S. consumer sentiment rose and inflation eased, while earnings held up better than expected, providing optimism that the economy may avoid a recession and encourage the Federal Reserve to end its interest rate increases. In fact, on Friday the June Core Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve’s (the Fed) preferred inflation measure, showed modest increases in prices on both a monthly and annual basis. Additionally, consumer expectations for longer-term inflation came in under Wall Street forecasts. Meanwhile, U.S. Gross Domestic Product (GDP) came in stronger than expected while second-quarter corporate earnings reports also were better than expected on balance. On Wednesday, in a unanimous decision, the Fed resumed lifting interest rates after a one-month pause in June. The Fed raised their benchmark rate a quarter-percentage-point to a range of 5.25% to 5.5%, marking their highest level since 2001. In his press conference, Fed Chairman Jerome Powell didn’t rule out another rate rise. The Fed upgraded its assessment for U.S. growth from modest to moderate and Fed staff reduced its recession forecast. The European Central Bank (ECB) also hiked rates by a quarter-percentage-point to 3.75% on Thursday, matching the highest level in the ECB’s 25-year history.

For the week, the S&P 500 Index gained +1.0%, the small-cap Russell 2000 Index rose +1.1%, and the tech-heavy Nasdaq Composite Index advanced +2.0%. The gains were robust with nine of the eleven S&P 500 sectors up for the week, led by Communication Services which surged +6.8%. Overseas, developed market international stocks also saw gains with the MSCI EAFE Index rising +0.9%, while the MSCI Emerging Markets Index jumped +2.8%.

With Fed rates and bond yields increasing, bond indices were down for the week. The 2-year U.S. Treasury yield rose +4 basis points (bps) to 4.87% and the benchmark 10-year U.S. Treasury yield was up +12 bps to 3.95%, helping to relieve some of the inversion in the yield curve. As a result, the Bloomberg U.S. Aggregate Bond Index slipped -0.4%, while international bonds dipped -0.2%.

Chart of the Week

The Commerce Department reported New Home Sales fell -2.5% in June to a seasonally adjusted annual rate of 697,000 units, well below expectations for 725,000 units and May’s 715,000 units (a big negative revision from the originally reported 763,000). Sales varied wildly among the four major regions, led by the Northeast with +20.6% growth for the month, while the Midwest trailed with a -28.4% plunge. Year-over-year, sales are up +23.8%. The Median New Home Price fell to $415,400 from $416,300 the prior month. June’s inventory of new homes for sale increased to 7.4 months of supply at the current rate of sales, up from 6.7 months in May, but is down from 9.5 months a year ago in June 2022. As shown in the chart below, new homes have become cheaper over the past few months, getting closer to the median price of an existing home. In June, the median price of an existing home was $410,200, according to the National Association of Realtors (NAR). NAR also reported during the week that Pending Home Sales rose +0.3 in June, easily beating expectations for a -0.5% drop and marking the first gain after three straight months of losses. Last month was revised up a bit to -2.5% from -2.7%, which was the lowest level of the year. Sales in the Midwest and South were up while the West and Northeast declined. Year-over-year sales were down -14.8%, beating expectations of -16.3%. Pending home sales reflect transactions where a contract has been signed for the sale of an existing home but the sale has not yet closed. Economists view it as an indicator of the direction of existing-home sales in subsequent months.

Meet Me in the Middle

Median Sales Prices for New Homes and Existing Homes Converge

Note: Seasonally adjusted annual rate.
Source: U.S. Census Bureau, National Association of Realtors via St. Louis Fed, MarketWatch.

Economic Review

• U.S. economic growth accelerated in the second according to the Bureau of Economic Analysis advance estimate (the first of three). Real Gross Domestic Product (GDP), a measure of the value of all the goods and services produced in the U.S., sped up to a +2.4% annual rate in the second quarter, following +2.0% growth in the first quarter, marking the fourth consecutive quarter of growth. That handily beat expectations of +1.8% growth. However, below the headline number, the internals were less promising. Consumer spending slowed to +1.6% from +4.2% in the first quarter but remained the biggest contributor to the increase in GDP. Exports declined -10.8% after increasing +7.8% in the first quarter. Imports declined -7.8% after increasing +2.0% in the first quarter. Net exports subtracted -0.12 percentage points from growth. Inventories switched from a major drag to a small contributor. Meanwhile, government spending rose +2.6% in Q2 following a +5.0% surge in the first quarter. It was the fourth consecutive quarterly increase in government spending, which added a full 0.45 percentage points to the Q2 top-line growth. Real disposable income also posted a fourth quarterly gain, but it was modest compared with the first quarter’s COLA-driven surge, up +2.5%. The personal saving rate was relatively unchanged at +4.4%, up from 4.3% in the first quarter. The GDP Price Deflator dropped to +2.2% from +4.1% in Q1. Overall the report showed a deceleration in personal consumption, with growth driven to a large extent by government spending, but also got a lift from business investment in July with fixed investment at nearly a +5% annual pace, its largest increase in six quarters (though part of the gain came from a 2021 law passed by the Biden administration that gives subsidies and tax credits to businesses that investment in green energy and technology such as microchip production).
• The cost of goods and services remained at mild levels in June, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.2%, in line with Wall Street expectations and up from +0.1% the prior month. On a year-over-year basis, the PCE Price Index was up +3.0%, also in line with expectations and down from +3.8% the prior month. That’s the lowest annual rate since October 2021. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.2% in June, matching expectations and down from +0.3% the prior month. Year-over-year, the Core-PCE Price Index is up +4.1%, just under expectations for +4.2% and down from +4.6% the prior month. That marks its slowest annual rate since March 2021. The key takeaway is that inflation has slowed in recent months, taking pressure off the Federal Reserve in its battle to get inflation down to its target level of 2.0%.
• Personal Spending rose +0.5% in June, slightly ahead of expectations for +0.4% and last month’s +0.2% reading (revised up from +0.1%). After adjusting for inflation, Real Personal Spending was up +0.4% compared to last month’s increase of +0.1%. Personal Income rose +0.3%, behind expectations and last month’s level which were both +0.5%. The increase in spending was primarily due to an unexpected boost in employee compensation, which rose +5.9 billion in comparison to the total increase of personal income of +7.6 billion. The Personal Savings Rate declined to +4.3% from +4.6% the prior month.
• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) fell to 52.4 in July from 54.4 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI remains in contraction but slowed less dramatically than in previous months, rising to 49 from 46.3 the prior month and beating expectations for 46.2. The Services PMI is continuing to grow, but at a reduced pace, falling to 52.4 from 54.4 in the prior month, the lowest level in five months and below expectations for 54.0. Most Americans are employed on the service side of the economy, in areas such as technology, healthcare, finance, and hospitality. According to Chris Williamson, chief business economist at S&P Global, “July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence, and sticky inflation.”
• The final July University of Michigan Consumer Sentiment report came in at 71.6, below expectations and the preliminary reading which were both for 72.6, but well above June’s final reading of 64.4 and is the highest final reading since October 2021. A year ago the index was at 51.5. The Current Economic Conditions component slipped to 76.6 from the preliminary reading of 77.5 but was up from 69.0 in June and 58.1 a year ago. The Consumer Expectations component also declined, dipping to 68.3 from the preliminary level of 69.4, but is up from 61.5 in June and 47.3 a year ago. The one-year inflation expectations held at +3.4% from the preliminary level and are down from +3.3% in June. The five-year inflation expectations slipped to +3.0% from +3.1% in the preliminary reading and were unchanged from June.
• Consumer confidence hit a 2-year high, as the Conference Board’s Consumer Confidence Index jumped to 117.0 in July from a positively revised 110.1 (initially 109.7) the prior month, easily beating expectations for 112. Overall, the increase was driven by improved perceptions about income, business, and job market conditions. The present situation index continued to climb, moving up to 160.0 in July from 155.3 the prior month, marking its best level since the pandemic in March 2020. The expectations index — which reflects consumers’ six-month outlook — also advanced, moving up to 88.3 from 80.0 the prior month. Below the 80 mark on the expectations index often signals a recession within the next year and the index has been below that level in every month except for two in the 16 months preceding the July report.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment unexpectedly jumped +4.7% in June, the fourth straight increase. This follows an upwardly revised +2.0% rise in May (from +1.7%) and handily beat expectations of +1.3%. Once again, the transportation sector drove the improvement, with transportation orders surging +12.5% after increasing +3.9% in May. The transportation segment is a large and volatile category that can exaggerate the ups and downs in industrial production. A spike in new contracts for Boeing passenger planes drove the surge. Durable Goods Orders Excluding Transportation increased a much more modest +0.6% in June, beating expectations of +0.1%, but down from May’s +0.7% (revised up from the originally reported +0.6%). Even without panes and cars, results were robust with new orders for every major category increasing. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.2% following a +0.5% rise in May (revised down from +0.7%).
• The Chicago Fed National Activity Index (CFNAI) showed economic growth remained slow, falling -0.32 in June from a downwardly revised -0.28 the prior month (originally (-0.15), which was well below expectations for -0.13%. Readings below zero indicate below-trend growth in the national economic activity. Three of the four broad categories of indicators used to construct the index decreased from May, and three of the four categories made negative contributions in June. Employment-related indicators contributed +0.03 in June, up from –0.06 in May, but overall breadth was negative with only 31 of the 85 monthly individual indicators making positive contributions, while 54 indicators affected the index negatively. Thirty-three indicators improved from May to June, while 51 indicators deteriorated, and one was unchanged.
• The Richmond Fed Manufacturing index slipped a bit more into contraction in July, down -9 from -8 in June (revised down from -7) but above expectations for -10. July was the seventh consecutive negative reading, though still above a level of -20 which is typically associated with previous recessions. Two of its three component indexes fell—new orders and shipments—while the employment index moved back into positive territory. Sentiment toward current business conditions remains negative but has improved some, while expectations that conditions will improve over the next six months fell slightly with only a thin majority expecting better days ahead.
• According to the Case-Shiller S&P CoreLogic National Home Price Index, U.S. housing prices rose for a fourth straight month in May, as the index increased a seasonally adjusted +0.7%, up from +0.6% in April. Strong demand continues to overcome a short supply of homes and high mortgage rates. Prices are gaining momentum monthly, but are still falling from last year’s levels, with the index down -0.5% year-over-year (YoY), the largest annual decline since April 2012. The top cities for price gains have shifted in recent months from warmer climates to cities further north. Chicago, Cleveland, and New York posted some of the biggest price increases, the first time in five years that a cold-weather city held the top spot.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) saw U.S. house prices rise again in May, also up a seasonally adjusted +0.7%, matching the unrevised gain last month and beating expectations for +0.6%. The index is now up +2.8% year-over-year, the lowest annual change since July 2012. All census divisions, except the New England census division, posted gains monthly. Meanwhile, the Pacific and Mountain census divisions were the only census divisions to post losses on an annual basis.
• The weekly MBA Mortgage Application Index fell -1.8% for the week ended July 21, following the prior week’s +1.1% rise. The Purchase Index fell -2.5% following a -1.3% dip the prior week and the Refinance Index dipped -0.4% following a +7.3% jump the prior week. The average 30-Year Mortgage Rate was flat for the week remaining at 6.87%, which is +1.44 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims fell -7,000 to a five-month low of 221,000 for the week ended July 22, 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) decreased from -59,000 to 1,690,000 in the week ended July 15, below consensus for 1,750,000, also a five-month low, and down from last week’s reading of 1,749,00 (revised down from 1,754,00).

The Week Ahead

Major economic reports are lighter in the week ahead but include the highly anticipated July Employment Report on Friday. According to Bloomberg, Wall Street consensus forecasts are for Nonfarm Payrolls to increase by 200,000, down a bit from June’s 209,000 new jobs, but still indicating a tight labor market. Other employment data includes JOLTS job openings on Tuesday, ADP Employment Changes on Wednesday, and weekly unemployment claims on Thursday. In addition to employment data, S&P Global and ISM each release their competing Purchasing Manager Indices (PMI) during the week with the manufacturing sector PMIs on Tuesday and the services sector PMIs on Thursday. Construction Spending, Factory Orders, and a couple of regional Fed reports are also on the docket. Markets will also be digesting earnings reports from more than 30% of the S&P 500 companies including heavyweights like Apple, Amazon, Merck, Pfizer, Caterpillar, AMD, and Starbucks.

Did You Know?

CLIMBING THE WALL OF WORRY – According to the Association of Individual Investors (AAII), bullish sentiment topped 50% for the first time since April 2021, ending the third-longest streak of sub-50% readings in the survey’s history (since 1987). Over the past ten years, bullish sentiment has exceeded 50% in only 17 out of 520 weeks, and yet during this stretch, the S&P 500’s annualized total return has been 12.5% (Source: AAII, MFS).

SLIMMER SIBLING SAVINGS – Families that have multiple children enrolled in a college or university will no longer receive preferential treatment in calculations for financial aid. Changes to the Free Application for Federal Student Aid (FAFSA) formula will no longer divide the total family contributions by the number of children enrolled in college, and that could result in one-third of families receiving less financial aid (Source: The Wall Street Journal).

STREAMING SURGES – Over the past two years, broadcast TV and cable have seen their share of total US screen time decline from 64% in May 2021 to 51.4% in June 2023. Picking up the slack, streaming has seen its share surge 45%, rising from 26% up to 37.7%. On a combined basis, YouTube, Netflix, and Hulu now account for 20.5% of all US screen time, or nearly equal to the 20.8% share of broadcast TV (Source: Nielson, MFS).

This Week in History

TABLE IT – On July 26, 1786, the earliest known U.S. stock and bond tables were published in the Massachusetts Centinel (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.