Weekly Market Update – September 1, 2023

Quick Takes

• A run of soft economic and inflation reports, including weaker-than-expected job openings and consumer confidence earlier last week, plus slowing new nonfarm payrolls late in the week, suggests the job market is cooling and eases the pressure on the Fed to fight inflation.
• Stocks celebrated the prospect of a more dovish Fed and economic soft landing. The S&P 500 was up +2.5%, the Nasdaq Composite rose +3.3%, the small cap Russell 2000 jumped +3.6%. The MSCI EAFE Index added +2.5% and the MSCI Emerging Markets Index rose +1.5%.
• The 2-year U.S. Treasury yield sank -20 basis points (bps) to 4.88%, its largest weekly decline since March 17. The 10-year U.S. Treasury yield dipped -6 bps to 4.18%. The Bloomberg U.S. Aggregate Bond Index was up +0.5% for the week and the Bloomberg Global Aggregate ex U.S. Bond Index rose +0.7%, the first positive week since July 14.

Stocks and bonds celebrate easing inflation pressures

Stocks and bonds entered the long Labor Day weekend confident that inflation is moderating sufficiently to end the Federal Reserve’s historically aggressive interest rate-hiking campaign. Most of the major global benchmarks ended the week with solid gains after most suffered their first negative month since February in August. A steady decline in interest rates over much of the week helped lift stocks and bonds, especially growth and smaller cap stocks. Economic data showing signs that the job market was loosening, and inflation pressures were easing were major contributors to the week’s gains. On Tuesday job openings were reported for July that showed the lowest level of openings in 28 months, as well as fewer workers quitting, and consumer confidence was much weaker than expected. On Wednesday, Gross Domestic Product (GDP), the official scorecard for the economy, showed that growth in the second quarter was slower than expected and revised down. Thursday brought news that the Fed’s preferred inflation gauge, Core Personal Consumption Expenditures (Core PCE), was in line with expectations and unchanged from the prior month. The heavily watched Employment Report for August was released on Friday and brought more welcome news for a soft landing. A significant uptick in the number of people looking for work sent the unemployment rate higher in August, to a 17-month high, and nonfarm payrolls rose only modestly while the prior two months were revised meaningfully lower. Moreover, average hourly earnings were slower than July’s pace. The probability that the Fed would remain on hold for the rest of the year, as measured by the CME FedWatch tool, rose considerably over the week, from 44.5% to 59.8%.

In the end, the S&P 500 Index climbed to a four-week intraday high early Friday before fading slightly but still ended up +2.5% for the week, the benchmark’s best week since June 16. The tech-heavy Nasdaq Composite Index rose +3.3% for its best week since July 14. Small companies led with the Russell 2000 Index gaining +3.6%, its best week since June 30. Despite the U.S. dollar rising for a seventh straight week (+0.2% last week), non-U.S. stocks also rallied. Developed market international stocks (as measured by the MSCI EAFE Index) rose +2.5% and the MSCI Emerging Markets Index was up 1.5%.

Short-term Treasury yields decreased considerably over the week, with the yield on the 2-year U.S. Treasury note falling -20 basis points (bps) to 4.88%, the biggest weekly drop since March 17, following three straight weeks of increases and the highest close since June 2008. Meanwhile the yield on the benchmark 10-year U.S. Treasury note fell only -6 bps to 4.18%. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index gained +0.5% for the week, the first time of two straight positive weekly gains since June 23. Non-U.S. bonds were up too with the Bloomberg Global Aggregate ex U.S. Bond Index rising +0.7%, the first positive week since July 14.

Chart of the Week

Besides the big July downward revision, the increase in employment in June was also knocked down to a more than two-and-a-half year low of 105,000 from 185,000. Payrolls have now been revised downward from the initial release for seven consecutive months–the longest streak of negative revisions since the global financial crisis. Fed officials say the increase in hiring needs to slow to 75,000 to 100,000 new jobs a month to ease the worst labor shortage since World War II and help reduce inflation.

The Unemployment Rate jumped to 3.8% from 3.5% where it was expected to remain and marks the highest level in a year and a half. Average Hourly Earnings were up +0.2% in August, half of July’s +0.4% rate and under expectations of +0.3%. Year-over-year, Average Hourly Earnings were up a solid +4.3%, in line with expectations and a tick slower than the +4.4% the month before. The Fed wants to see wage growth slow to pre-pandemic levels of 3% or less. Average Weekly Hours people worked unexpectedly ticked up to 34.4 from 34.3 the prior month where they were expected to stay. Businesses tend to cut hours before resorting to layoffs when the economy slows.

Labor-Force Participation was also higher than expected at 62.8%, versus the 62.6% expected which was also the prior month’s rate. That remains below the February 2020 prepandemic level of 63.3% but is the highest level early 2020. Nearly three-quarters of a million people entered the labor force in August, partly explaining why the unemployment rate rose sharply. These people are considered unemployed until they actually find a job. Overall, the data shows a moderating labor market that takes pressure off the Fed to hike any further but still tighter than the Fed would like to see to meet its 2% inflation target.

As shown below, the number of people not at work due to a labor dispute last month was the highest since 2003. That has the potential to complicate the Fed’s ability to read the labor market as the strike in Hollywood and transportation unions, as well as the failure of freight company Yellow, impacts the headline jobs number. People are not counted as employed if they are not working, even if they are on strike.

Strike That

Number of people not at work due to a labor dispute

Source: Labor Department, The Wall Street Journal.

Economic Review

• U.S. economic growth for the second quarter was revised lower in the second estimate (of three). Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was cut to a +2.1% annual rate, down from the +2.4% initial estimate, where it was expected to remain but slightly faster than the +2.0% pace from the first quarter. The downward revision to GDP reflected less inventory and business investment than initially reported, which outweighed stronger household spending, which was revised higher, to a +1.7% pace from the initial +1.6%. The GDP Price Deflator was also revised lower to +2.0 from +2.2% where it was expected to stay. That’s quite a bit lower than the prior quarter’s +4.1%. Overall, the report was indicative of a ‘soft landing’ and the downward revisions to the Price Deflator ease pressure on the Fed to hike rates further. The third, and final, update for second quarter GDP is due in a month. A measure of U.S. growth based on income, known as Gross Domestic Income or GDI, suggests the economy grew just +0.5% in the second quarter, so second-quarter GDP could be lowered again.

• The Institute for Supply Management’s (ISM) Manufacturing PMI improved a bit to 47.6% in August, the highest since February, up from 46.4% in July, and above Wall Street expectations of 47.0%. Levels below 50% signal economic contraction, and the manufacturing sector has now contracted for nine consecutive months, which is the longest monthly losing streak since the 2007-2009 Great Recession. Like the overall index, New Orders are stuck in contraction, for an entire year now, and dipped -0.5 points to 46.8. On the upside, the Production and Employment indexes both rose for the month. The Prices Paid index, a measure of inflation, jumped to 48.4 from 42.6, well ahead of expectations for 44.0. Only five of 13 manufacturing industries reported growth in August.

• The seasonally adjusted S&P Global U.S. Manufacturing Purchasing Managers’ Index (PMI) fell further in contraction territory, moving down to 47.9 in August, up from the flash estimate of 47.0 but down from 49.0 in July. New Order volumes fell for the thirteenth time in the past 15 months in August, with the rate of decline gathering momentum to one of the sharpest seen since the Global Financial Crisis. On the positive side, the ratio of New Orders to Purchased Inventory has risen to its highest since December 2021. This improvement hints at some support for future production.

• Consumer confidence retreated markedly from last month’s 2-year high, as the Conference Board’s Consumer Confidence Index fell to 106.1 from 114.0 in July (revised down from 117.0), and far below expectations for 116. The August decline pretty much wiped out all the gains from June and July but is still 10.8 points above the cycle low from July 2022. Reaccelerating grocery and gas prices were noted for the decline in August. The present situation index slipped to 144.8 from 155.3 the prior month, which was the best level since March 2020. The expectations index — which reflects consumers’ six-month outlook — also fell, moving down to 80.2 from 88.0 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.

• Personal Spending jumped +0.8% in July, the most since January and slightly ahead of expectations for +0.7% and last month’s +0.6% reading (revised up from +0.5%). After adjusting for inflation, Real Personal Spending was up +0.6% compared to last month’s increase of +0.4% and was up 3.0% year-over-year versus 2.4% in June. Personal Income rose +0.2%, behind expectations and last month’s level which were both +0.3%. Employees Compensation increased by +0.4%, driven by a +0.4% growth in wages and salaries, and a +0.3% rise in other costs. The Personal Savings Rate declined to 3.5% from 4.3% the prior month. That is the lowest savings rate this year. The key takeaway is that the higher-than-expected increase in household spending, combined with higher wages and salaries, will give the Fed some leeway for further tightening.

• The cost of goods and services remained at mild levels in July, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.2%, in line with Wall Street expectations and the prior month. On a year-over-year basis, the PCE Price Index was up +3.3%, also in line with expectations and up from +3.0% the prior month. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.2% in July, matching expectations, and the prior month. Year-over-year, the Core-PCE Price Index is up +4.2%, matching expectations and up at tick from +4.1% the prior month. The key takeaway is that inflation has moderated in recent months, taking pressure off the Federal Reserve in its battle to get inflation down to its target level of 2.0%.

• The July Job Openings Labor Turnover Survey (JOLTS) report fell again to 8.83 million from 9.17 million the prior month, which was revised down from 9.58 million and is the fifth month this year below the 10 million mark. That is the lowest level since March 2021, below expectations for 9.50 million, and well off the peak of 12 million last year. Job openings are an indication of the health of the labor market and the broader U.S. economy. Openings fell the most in white-collar jobs and professional roles. Job listings rose in transportation and information services. The number of job openings for each unemployed worker slid to 1.5, remaining well above prepandemic levels of 1.2 but down from a peak of 2.0 in 2022. The Fed is watching the ratio closely and wants to see it fall back to prepandemic norms. The Hiring Rate slipped to 3.7% from 3.8% the prior month and has been little changed in recent months. The Quits Rate decreased to 2.3% from 2.4% the prior month and is off from the peak of 3.0% in April 2022.

• Texas factory activity improved in August but remained in contraction with the Texas Manufacturing Outlook Survey coming in at -17.2, up from -20.0 the prior month, and beating expectations for -19.0. May was a three-year low at -29.1. The production index, a key measure of state manufacturing conditions, slipped further to -11.2 from -4.8 the prior month, but the new orders index improved to -15.8 from -18.1 (but has been in negative territory for more than a year). The outlook (6 months ahead) components of the survey fell back to negative territory in August after turning positive in July for the first time since April 2022. The Texas Service Sector Outlook Survey also improved in July, but it too remains in contraction territory at -2.7, up from -4.2 the prior month. Unlike the manufacturing sector, the services sector six-month forward outlook remained positive, but slipped a bit to +3.9 from +4.4 the prior month.

• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), improved to 48.7 from 42.8 the prior month, well above expectations of 45.0 and the highest reading in a year. The index has remained below 50 (the break-even point distinguishing expanding versus contracting economic activity) for twelve consecutive months. The index peaked at 71.3 in May 2021.

• According to the Case-Shiller S&P CoreLogic National Home Price Index, U.S. housing prices increased for a fifth straight month in June, as the index increased a seasonally adjusted +0.65%, a slower rate than the +0.82% in May. Strong demand continues to overcome a short supply of homes and high mortgage rates. Prices have lost some momentum from last year’s levels, with the index down -0.2% year-over-year (YoY). 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 for a second straight month.

• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) saw U.S. house prices rise again in June, up a seasonally adjusted +0.3%, below the +0.7% unrevised gain last month and expectations for +0.6%. The index is now up +3.1% year-over-year, after hitting +2.9% the prior month which was the lowest annual change since July 2012. Home prices were the strongest in New England and posted gains on a monthly basis in 7 of the 9 census divisions.

• The National Association of Realtors (NAR) reported that Pending Home Sales rose for the second month in a row, up +0.9 in July, easily beating expectations for a -1.0% drop and the prior month’s +0.4% increase (revised up from +0.3%). The West and South gained while the Midwest and the Northeast lost ground. All four regions have fallen significantly from July 2022. Year-over-year sales were down -13.8%, beating expectations of -15.7%. 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. The ongoing dearth of inventory and with rates at multidecade highs in August, housing sales are expected to remain sluggish.

• The Commerce Department reported Construction Spending rose +0.7% in July to a seasonally adjusted annual rate of $1.97 trillion, beating expectations for a +0.5% rise and June’s upwardly revised +0.6%, up from the initial release of +0.5%. Year-over-year (YoY), June total construction spending was up +5.5%, compared to +3.5% for the year ended June. Total Private Construction was up +1.0% month-over-month while total Public Construction fell -0.4% month-over-month. Total Residential Spending increased +1.4% month-over-month while total Nonresidential Spending rose +0.5% month-over-month. Single-Family construction rose +2.8%, while Multi-Family construction was up +0.2%. Overall, the report showed residential construction spending, particularly single family construction, remains strong despite the jump in mortgage rates.

• The weekly MBA Mortgage Application Index rose for the first time in five weeks, up +2.3% for the week ended August 25, following the prior week’s -4.2% drop, which marked the index’s lowest level since 1995. The Purchase Index increased 2.0% following a -2.0% drop the prior week and the Refinance Index rose +2.5% following a -2.8% drop the prior week. The average 30-Year Mortgage Rate was unchanged at 7.31%, the highest since December 2000 and 1.51% percentage points higher from a year earlier.

• Weekly Initial Jobless Claims fell -4,000 to 228,000 for the week ended August 26, below expectations for 235,000 and last week’s 232,000 — revised up from the initially reported 230,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +28,000 to 1,725,000 in the week ended August 19, above consensus for 1,706,000, and up from last week’s reading of 1,697,000, revised down from 1,702,00.

The Week Ahead

Did You Know?

SEPTEMBER FUNK – In the post-WWII period, the S&P 500 Index’s average performance during the month of September has been a decline of -0.73% with gains just 44% of the time. February and August are the only other months that the index has averaged declines, but no other month has been down more than half of the time (Source: Bespoke Investment Group).

PUMP PAIN REDUX – The national average price for a gallon of regular gasoline has risen back to $3.82. That’s about 60 cents higher than at the beginning of the year, according to energy-data and analytics provider OPIS. Due to the increase, some small businesses are delaying upgrades, reducing workers, avoiding hiring extra help and moving to charge customers more (Source: OPIS, 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.