Weekly Market Update – October 27, 2023

Quick Takes

• The S&P 500 Index fell -2.5% on the week, remaining well below its 200-day moving average—a key technical level—and joining the Nasdaq and Russell 2000 indexes in correction territory (a more-than-10% drop from the closing highs on July 31).
• The 10-year U.S. Treasury yield crossed the key 5% level again on Monday but then trended lower throughout the week helping the Bloomberg U.S. Aggregate Bond Index rebound +0.7%, offsetting some of the prior week’s -1.7% slump.
• Gross Domestic Product (GDP), the primary measure of U.S. economic activity, grew at a +4.9% annual rate, beating expectations for +4.5% and the +2.1% reading in Q2. Personal Spending surged +4.0% from 0.8% in Q2 and accounted for 69% percent of the GDP growth.

Stocks fall again, but bonds rebound as rates retreat

Stocks retreated again as earning reports continue to be less-than-spectacular and as investors continue to fuss over the probability that the Federal Reserve (the Fed) will keep rates high for a while. The S&P 500 sank -2.5% on the week, following the prior week’s -2.4% drop, pushing the benchmark index into correction territory (a more-than-10% drop from the closing high on July 31). Technology and small caps stocks fared even worse. The tech-heavy Nasdaq Composite also entered correction territory last week and finished down -2.6% following the prior week’s -3.1% fall. The small-cap Russell 2000 Index also finished down -2.6%, its fourth consecutive weekly decline, and its eleventh negative week in the last thirteen. The small cap benchmark has been in correction territory since September 20, and is now less than -2% away from falling into bear market territory (a more-than-20% decline from the closing high on July 31). It was better for stocks overseas, but they were still down on the week. Developed market international stocks (as measured by the MSCI EAFE Index) fell -0.8% and the MSCI Emerging Markets Index was down -0.6%.

A big contributor to Wall Street’s slump this week were mixed earnings reports and a brief spike above 5% for the 10-year U.S. Treasury yield. Nearly a third of the S&P 500 companies reported profits including several members of the so-called Magnificent Seven–the giant cap tech stocks that have carried the performance for the major indices in 2023. Investors were particularly focused on results from Amazon.com, Google parent Alphabet, Facebook owner Meta Platforms, and Microsoft. The companies largely reported decent growth and exceeded Wall Street expectations, but investors fretted over evidence of rising expenses and subpar forward guidance. Clearly markets were looking for even stronger results from the market leaders to justify their heady returns and multiples in 2023, and to compensate for the additional concerns about higher interest rates and geopolitical risks.

Despite a better-than-expected Gross Domestic Product (GDP) report, led by surprisingly strong consumer spending, interest rates generally trended lower throughout the week after the yield on the 10-year U.S. Treasury note peaked above 5% on Monday. On Friday, the Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, was in line with expectations, with the year-over-year rate ticking down to +3.7% in September. By Friday’s close the 10-year U.S. Treasury yield settled -8 basis points (bps) lower at 4.83%, while the 2-year yield was down -7bps to 5.00%. Bond prices move inversely to bond yields, and that helped the Bloomberg U.S. Aggregate Bond Index to rebound +0.7% for the week and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) gained +0.2%. Both the European Central Bank and the Bank of Canada held their benchmark interest rates steady at +4.0% and +5.0% respectively.

Chart of the Week

The Fed’s favorite inflation gauge has only been revised higher lately

Core PCE consistently revised upwards

Source: Federal Reserve Bank of San Francisco, Macrobond.

Economic Review

• U.S. economic growth for the third quarter was hotter than expected in the advanced estimate. Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was up a +4.9% annual rate, ahead of expectations for +4.5% and the +2.1% reading in the second quarter. The GDP increase marked the biggest gain since the fourth quarter of 2021. Personal Spending surged +4.0% from 0.8% in Q2 and accounted for 69% percent of the GDP growth. That was the fastest rate since 2019 excluding the pandemic years. Government Spending also continues to contribute a big chunk to GDP growth, up +4.6% from 3.3% last quarter and making up 17% of Q4 GDP. On the other hand, Business Investment sank to +0.8% from +5.2% in Q2. Inventories were little changed, up +1.1% from 0.0 in Q2. The GDP Price Deflator was +3.5%, up from +1.7% last quarter. The report shows that consumers haven’t slowed spending despite higher interest rates, gas prices and the resumption of student loans. That certainly will make the Fed’s fight to bring down inflation more difficult but shows a soft landing without a recession is still possible.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances and transportation equipment unexpectedly jumped +4.7% in September, beating expectations for +1.9%, mostly due to Boeing plane orders (commercial plane orders accounted for 93% of overall orders). The prior month was downwardly revised to a -0.1% dip (from +0.1%). Durable Goods Orders Excluding Transportation were up +0.5%, beating expectations of +0.2%, and matching the prior month (revised up from the originally reported +0.4%). The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.6% following a +1.1% jump the prior month (revised up from +0.9%).
• Personal Spending rose a sharp +0.7% in September, above expectations for +0.5% and last month’s unrevised +0.4%. After adjusting for inflation, Real Personal Spending was up a more modest +0.4%, above last month’s increase of +0.1%. Spending was up in Housing, Travel, and Healthcare. Some of the gains continue to come from spending on Gasoline as well. Personal Income rose +0.3%, below expectations and last month, which were both +0.4%. The accelerated pace of Hiring and the increase in Average Hours Worked accounted for much of the increase in income growth. The Personal Savings Rate slipped to 3.4% from 4.0% the prior month. The savings rate has fallen since the end of the pandemic, leaving households with less financial cushion. But with a tight labor market and low unemployment, there shouldn’t be a big drop in spending anytime soon, which should help the so-called “soft landing” scenario of no, or a very shallow, recession.
• The final reading of the October University of Michigan Consumer Sentiment Index improved to 63.8, up from the initial estimate of 63.0, but is down from 69.5 in August and a 22-month high of 71.6 in July. It is the first month-over-month decline since May. The Current Economic Conditions component rose to 70.6 from 66.7 in the early estimate but is down from 71.4 the prior month. The Consumer Expectations component slipped to 59.3 from the preliminary 60.7 and is down from 66.0 the prior month. One-year inflation expectations jumped to +4.2% from +3.8% the prior month. The five-year inflation expectations came in at 3.0%, matching expectations and the prior month. The U.S. consumer remains fairly resilient but is now showing some signs of concern from higher gas prices.
• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) showed a solid start to the fourth quarter, improving to a three-month high of 51.0, up from 50.2 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI rose to a six-month high of 50.0, up from 49.8 the prior month, and beating expectations of 49.5. The index has been in negative territory since last spring. The Services PMI improved to a three month high of 50.9 from 50.1 the prior month, beating expectations for 49.9. “Hopes of a soft landing for the US economy will be encouraged by the improved situation seen in October,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.
• US economic activity fell in August, according to the Federal Reserve Bank of Chicago. The Chicago Fed National Activity Index (CFNAI) unexpectedly increased to +0.02 from -0.22 the prior month (revised down from -0.16). That was far above expectations for -0.14%. Readings below zero indicates below-trend-growth in national economic activity. Two of the four broad categories of indicators used to construct the index increased and all four made positive contributions. The Production and Income indicators led the surprise gain, increasing +0.03 in September, up from -0.10 the prior month. Employment-related indicators were also positive, up +0.10, after being flat the prior month. The Personal Consumption and Housing as well as the Sales, Order, and Inventories groups both improved to -0.01 from -0.06 the prior month. Overall breadth was positive with 47 of the 85 monthly individual indicators making positive contributions, while one was neutral, and 37 were negative.
• The Richmond Fed Manufacturing index fell to +3 in October from an unrevised +5 the previous month but was in line with expectations and the second consecutive positive reading which hasn’t happened since April 2022. The three component indexes were mixed with the Shipments expanding to +9 from +7, but the New Orders index slid to -4 from +3, while the Employment index held steady at +7.
• The Commerce Department reported New Home Sales surged +12.3% in September to a seasonally adjusted annual rate of 759,000 units, above expectations for 680,000 units and the prior month’s 676,000 units (revised up from the originally reported 675,000). That is the highest level since February 2022. The rate of new-home sales was fueled by big gains in the Northeast and Midwest. The Median New Home Price fell to $418,800 from $430,300 the prior month. The inventory of new homes for sale fell -10.4%, which represents 6.9 months of supply at the current rate of sales, down from 7.8 months the prior month.
• The National Association of Realtors (NAR) reported that Pending Home Sales rebounded in September, up +1.1%, well ahead of expectations for a -2.0% drop and the prior month’s unrevised -7.1% plunge. Year-over-year sales were down -11%, as a dearth of inventory continues to depress sales. From a regional perspective, the Midwest, South and Northeast were up, while the West lost ground. All four regions have fallen significantly from September 2022.
• Weekly MBA Mortgage Applications fell -1.0% for the week ended October 20, following the prior week’s -6.9% plunge. The Purchase Index was down -2.2% following a -5.6% drop the prior week and the Refinance Index inched up +1.8% following a -9.9% decline the prior week. The average 30-Year Mortgage Rate rose to 7.90%, which is +0.74 percentage points higher than a year earlier and the highest rate in the series since September 2000.
• Weekly Initial Jobless Claims increased +10,000 to 210,000 for the week ended October 21, above expectations for 207,000 and last week’s 200,000 (revised up from 198,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) increased +63,000 to 1,790,000 in the week ended October 14, above consensus for 1,740,000, and last week’s reading of 1,727,000 (revised down from 1,734,000).

The Week Ahead

The calendar gets quite busy in the upcoming week. Economic releases are plentiful, front loaded on Tuesday and Wednesday. Tuesday brings the FHFA and S&P CoreLogic House Price Indices as well as Consumer Confidence from the Conference Board. Wednesday has the U.S. Manufacturing PMI releases from S&P Global and ISM, Construction Spending, JOLTS Job Openings, and the headline event that afternoon is the Federal Reserve rate decision. Markets will also closely watch the October Employment Report on Friday. Aside from all the economic data, the earnings calendar is also loaded, including McDonald’s, Advanced Micro Devices, Anheuser-Busch InBev, Caterpillar, Pfizer, Airbnb, CVS Health, DoorDash, Electronic Arts, Kraft Heinz, PayPal Holdings, Qualcomm, Yum! Brands, Apple, Booking Holdings, ConocoPhillips, Eli Lilly, Moderna, Novo Nordisk, Starbucks, and Dominion Energy among others.

Did You Know?

T.G.I. MONDAY – Last Monday (10/23), broke a 16-week win streak for Monday trading sessions for the S&P 500. Since 1952 (when the five-trading day week started), there has never been a longer streak of Monday gains, and only two other streaks have cracked double-digits, 11 weeks ending 6/13/05 and 10 weeks ending 7/6/20 (Source: Bespoke Investment Group).

GOOD NEWS FOR NATURAL GAS HEATING – The average winter bill for U.S. households that heat with natural gas is forecasted to be about $601. That is -21% lower than last winter, when the average charge between Nov. 1 and March 31 was $764, according to the Energy Information Administration. The savings stem from ample stockpiles of natural gas and expectations for a warmer-than-normal winter (Source: Energy Information Administration, 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.