Weekly Market Update – December 08, 2023

Quick Takes

• Investors appear to be betting that there will be sufficient economic strength for the U.S. to skirt a recession but not too much strength that the Fed will have to remain restrictive with monetary policy. That helped the S&P 500 and Nasdaq advance for a sixth straight week.
• The small-cap Russell 2000 Index is riding a 4-week win streak after gaining +1.0% last week and has been the leading U.S. index in three of the last four weeks, a turnaround from being the lagging index for much of the year.
• The Bureau of Labor Statistics reported that 199,000 jobs were added in November, higher than expected but not too high to keep the Federal Reserve from holding rates steady at this week’s FOMC rate decision meeting.

U.S. stocks and bonds continue their streak, non-U.S. mixed

U.S. stocks rallied Friday following a strong, but not too-strong, Employment Situation report from the Bureau of Labor Statistics, which showed that nonfarm payrolls grew by 199,000 in November, an acceleration from October, and more than the 185,000 expected by Wall Street economists. Investors appear to be betting that there will be sufficient economic strength for the U.S. to skirt a recession but not too much strength that the Federal Reserve (the Fed) will have to remain restrictive with monetary policy (i.e., no more rate hikes and perhaps a handful of cuts in 2024). After a week of mostly soft economic data, Friday brought the stronger-than-expected November jobs report as well as an upside surprise in consumer attitudes from the University of Michigan Consumer Sentiment survey that rebounded sharply in early December — and also showed a reduction in year-ahead inflation expectations.

With a Goldilocks-like week of economic news, the major U.S. equity indexes each rose for the week. For both the S&P 500 Index and Nasdaq Composite Index, it was their sixth straight weekly gain – although performance was more modest than the earlier weeks of the streak. The S&P 500 was up +0.2% for its longest weekly winning streak since November 2019. The Nasdaq was up +0.7% for its longest streak since being up eight straight weeks from April to June earlier this year. Both indices closed at their highest levels since early 2022. The small-cap Russell 2000 Index is only riding a 4-week win streak after gaining +1.0% last week and has been the leading U.S. index in three of the four weeks, a turnaround from being the lagging index for most of the year. Developed market international stocks (as measured by the MSCI EAFE Index) were up +0.4% to match the Russell with a 4-week win streak. Like in the U.S., European stocks appear to be getting a lift from expectations that central banks could cut interest rates next year as inflation slows there and economies falter. Japan fell for the week as its economy contracted more than initially estimated in the third quarter. The one major equity index to fall over the week was the MSCI Emerging Markets Index. It dipped -0.7%, breaking a 5-week win streak. China led that index down as equities fell following Moody’s downgrading its outlook on China’s sovereign debt. The Shanghai Composite Index declined -2.1%, while the blue chip CSI 300 fell -2.4%, hitting its lowest level in nearly five years midweek.

Short and intermediate yields bounced back last week after the sharp decline the prior week. The benchmark 10-year U.S. Treasury yield inched up +3 basis points to end the week at 4.23% but hit an intraday low of 4.1% on Thursday. The shorter-end 2-year U.S. Treasury yield rebounded more, jumping +18 basis points to close at 4.72%. Despite the rebound in yields, the Bloomberg U.S. Aggregate Bond Index was positive, with a total return of +0.2% for the week. Non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) also advanced over the week, adding +0.4%. 

With consumer and wholesale inflation reports on Tuesday and Wednesday, plus the Fed’s rate hiking decision on Wednesday afternoon, there is some potential for higher volatility in the coming week. However, the Fed is expected to hold rates steady, and markets have largely treated Fed chairman Jerome Powell’s comments as dovish lately. That, and the fact that the Fed’s favored inflation gauge, Core PCE Inflation, looks on track to end the year well below their forecast and not too far from their 2% target, could be enough to keep the market’s positive momentum going. 

Chart of the Week

Orders for manufactured goods fell in October, pulled down by the transportation sector. U.S. Factory Orders fell -3.6 % for the month, more than the -3.0% gain forecasted and sharply lower than the prior month’s +2.3% increase (revised down from +2.8%). That was the largest month-over-month contraction since April 2020, when factory orders plunged -13.5% in the midst of the COVID outbreak. The big monthly decline and revisions resulted in Factory Orders dropping -2.1% on a year-over-year basis, the largest annual decline since September 2020.  Ex-Transportation orders were down a more modest -1.2%, off from the prior month’s +0.4% increase (revised down from +0.8%). Durable Goods Orders sank -5.4%, unrevised from the initial estimate late last month and down from +4.0% the prior month (which was negatively revised from +4.6%). It is the third drop in the past four months for durables. Non-Durable Goods Orders fell -1.9% following the prior month’s +0.6% gain (revised down from +1.0%). The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, slide -0.3% following an unrevised -0.1% dip the prior month.  Shipments of Core Capital Goods Orders, which feeds into the Gross Domestic Product (GDP) report, were flat in October after a -0.1% dip the prior month. The bottom line is that October saw the largest monthly and annual contraction in manufactured goods since 2020. It also continued a trend of downward revisions of prior month results. The trend of consistent downward revisions has cut across many facets of the economy, including the labor market.

U.S. Factory Orders See Biggest Drop Since 2020

Monthly and Annual Factory Orders Sink in October

Note: Seasonally adjusted.
Source: The Commerce Department, Bloomberg.

Economic Review

• The monthly Employment Situation showed hotter-than-expected hiring in November. On Friday, the Labor Department reported that U.S. employers added a seasonally adjusted 199,000 new Non-Farm Payrolls (NFP) during the month, ahead of Wall Street expectations for 185,000, and an acceleration from the 150,000 in October (unrevised, but September was revised down to 262,000 from 297,000). The return of Auto Workers from strikes was primarily responsible for the upside surprise, as 47,000 went back to work. In addition, 49,000 were government jobs. Excluding those would result in just 103,000 private payrolls added in November. Employment gains were concentrated in cyclical sectors like health care, which represented about 77,000 jobs. The Unemployment Rate slipped to a four-month low of 3.7%, down from 3.9% the prior month, where it was expected to remain. What caught many inflation watchers’ attention was the bump in Average Hourly Earnings, which saw an unexpected sharp +0.4% increase, the largest in four months. Year-over-year, Average Hourly Earnings were up +4.0%, in line with expectations and the prior month. Average Weekly Hours also inched up to 34.4 from 34.3 the prior month. Labor-Force Participation was a tick higher than expectations at 62.8% compared to 62.7% the prior month, where it was expected to remain. It remains well below the February 2020 prepandemic level of 63.3%.  
• The October Job Openings Labor Turnover Survey (JOLTS) showed job openings slide to 8.7 million, the lowest level since March 2021, down from 9.4 million the prior month (revised lower from 9.6 million). That was well shy of expectations for 9.3 million and far 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 health care, finance, real estate, retail, and hospitality — areas of the economy that had previously been the strongest. The number of job openings for each unemployed worker fell again to 1.3 from 1.5 the previous month, still 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 remained at 3.7% and has been little changed in recent months. The Quits Rate was flat at 2.6%, sitting at the pre-pandemic levels. The number of people quitting jobs was also unchanged at 3.6 million. Job quitters had climbed to as high as 4.5 million last year before declining. People quit less often and tend to stay put when the economy softens and jobs become harder to find.
• According to the University of Michigan, the preliminary December Consumer Sentiment Index rose to 69.4 from a six-month low of 61.3 the prior month. That was the highest level since August and well above expectations for a reading of 62.0. The Current Economic Conditions component jumped to 74 from 68.3 the prior month. The Consumer Expectations component improved to 66.4 from 56.8 the prior month. One-year inflation expectations sank to +3.1% from +4.5% the prior month, which is the lowest level since March 2021. The five-year inflation expectations also fell to +2.8% from +3.2% the month before, that was the highest reading since March 2011.
• The Institute for Supply Management (ISM) reported that economic activity in the U.S. services sector rebounded in November from a five-month low in October. The ISM Services Purchasing Managers Index (PMI) improved to 52.7% from 51.8% the prior month, beating expectations for 52.3%. The report showed 15 of the 18 industries reporting growth. November marked the eleventh consecutive month of growth for the services sector. The New Orders index was unchanged at 55.5% after being at a nine-month low of 51.8% in September. The Employment index rebounded to 50.7% from 50.2%. The Prices Paid index slipped a bit to 58.3% from 58.6%–not much relief on the inflation front.  Anthony Nieves, head of the ISM services survey committee, said, “The buildup for the holiday season is not as robust as sometimes in the past but better than last year.”
• The S&P Global U.S. Services PMI showed a slight improvement in service sector business activity in November, rising to 50.8 from 50.6 the prior month and matching the earlier flash estimate. The latest data signaled the fastest expansion in output since July, albeit only marginal and slower than the long-run series average. New Orders expanded slightly for the fourth month running. Inflationary pressures subsided to weakest since October 2020. 
• U.S. Consumer Credit increased +$5.2 billion in October, down from the +$12.2 billion gain the prior month (revised up from +$9.1 billion), and under expectations for a +$8.5 billion increase. Growth for revolving credit, such as credit cards, was up +2.7%, slower than the +4.1% rate the prior month. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, was up +0.7% following the prior month’s +2.5% plunge. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt. Tighter lending standards and higher interest rates have slowed the pace of credit usage, particularly for nonrevolving debt. 
• The Census Bureau reported Wholesale Trade for September, which saw Inventories, or unsold goods, declined by -0.4%, following a -0.2% decline the prior month, which is where it expected to stay. Year-over-year inventories were down -2.3%. Wholesale Trade Sales fell -1.3%, down from +2.0% the prior month (revised lower from +2.2%), far behind expectations for a +1.0% rise. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio was steady at 1.34 months.
• U.S. Household Net Worth fell in the third quarter as a dip in equity prices was only partly offset by another increase in real estate equity. Wealth was down $1.3 trillion to $151 trillion following a $5.7 trillion gain in the second quarter (revised up from $5.6 trillion). Household Net Worth increased on a year-over-year basis for the first time in a year, rising +5.7% after a +4.1% gain in the second quarter (revised down from +4.9%). Housing wealth rose for a second straight month after not rising for a year, and the components of wealth tied to the stock market fell for the first time in a year. Household liabilities rose modestly but more slowly than in the first quarter.
• The U.S. Trade Deficit grew to a three-month high of $64.3 billion, a +5% increase, largely because of a decline in exports of U.S.-made automobiles. Higher deficits subtract from Gross Domestic Product (GDP), the official scorecard for the U.S. economy. Imports rose +0.2% to $323 billion, largely from computers and oil drilling equipment. Exports fell -1% to $258.8 billion, though they remained close to a record high. The deficit is still on track to be the lowest in three years, though it is still running high historically.
• Weekly MBA Mortgage Applications jumped +2.5% for the week ended December 1, following the prior week’s +0.3% gain. The Purchase Index slipped -0.3% following a +4.7% advance the prior week, and the Refinance Index surged +13.9% following a -8.9% drop the prior week. The average 30-Year Mortgage Rate slipped to 7.17% from the prior week, the third straight weekly decline and the fifth drop in the last six weeks.
• Weekly Initial Jobless Claims rose +1,000 to 220,000 for the week ended December 2, in line with expectations. The prior week was revised up to 219,000 from 218,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) slid -64,000 to 1,861,000 in the week ended November 25, below consensus for 1,910,000 and last week’s reading of 1,925,000 (revised down from 1,927,000).

The Week Ahead

The upcoming week brings closely watched inflation data as well as the Federal Reserve’s December rate decision meeting. On Tuesday, the Bureau of Labor Statistics will release the Consumer Price Index (CPI) for November. The next morning, the Producer Price Index (PPI) for November comes out. Both are expected to moderate on a year-over-year basis. Wednesday afternoon is the Fed rate decision and Powell press conference. The market overwhelmingly expects the central bank to hold interest rates steady at the current target range of 5.25%-5.50%. The European Central Bank and Bank of England follow with their respective monetary-policy decisions on Thursday. Other economic data out next week includes the National Federation of Independent Business’ (NFIB) Small Business Optimism Index for November on Tuesday, the Census Bureau reports Retail Sales data for November on Thursday, and S&P Global’s Manufacturing And Services Purchasing Managers’ Indexes (PMIs) for December are due on Friday.

Did You Know?

HOLIDAY SPENDING ALL TIME HIGHS? – U.S. Consumers plan to spend an average of $1,652 for the year-end holidays this year, representing a +14% increase over 2022 and the first time that expected spending has exceeded 2019’s level of $1,496. The biggest reported increases were in those making between $50K and $100K (+26%) and those making over $200K (+22%) (Source: Deloitte, MFS).

CAN THE PARTY KEEP GOING? – In the 24 prior years since 1945, that the S&P 500 was up +15% or more year-to-date through the end of November, its median gain in December was +1.96% with positive returns 75% of the time. In the 10 most recent occurrences since 1995, the median gain has been +2.1%, with positive returns 90% of the time (Source: Bespoke Investment Group).

LEGEND – Investing legend Charlie Munger passed away at the age of 99 on 11/28/23. Since he joined Berkshire Hathaway to become vice chair and Warren Buffett’s right-hand man in 1978, $100 invested in the S&P 500 has grown in value to $16,527, including dividends. That same $100 invested in Berkshire Hathaway stock grew in value to $396,282 (Source: Bespoke Investment Group).

This Week in History

YAHOO! WHAT A STRANGE TRIP IT’S BEEN – On December 7, 1999, Standard & Poor’s added Yahoo to the S&P 500 Index. The internet portal surged +32% in a single week. Just weeks later, on January 3, 2000, Yahoo stock closed at an all-time high of $475.00 (pre-split price) a share, making it the most valuable company in the world at the time. Eight years later, in February 2008, Microsoft made a $44.6 billion bid for Yahoo. Yahoo ultimately rebuffed the offer and continued as a standalone company, only to falter and lose to competitors Google and Microsoft. In July 2016, Verizon agreed to purchase Yahoo’s operating business for $4.8 billion, just a fraction of the Microsoft bid eight years earlier (the deal closed in June 2017). Verizon consolidated the assets of Yahoo in a subsidiary company, Oath and Yahoo ceased to exist as an independent corporate entity. In January 2018, Yahoo’s parent company, Oath re-branded to Verizon Media Group. In May 2021, Apollo Global Management entered into an agreement with Verizon to acquire Verizon Media (Yahoo and AOL Brands) for $5 billion, with the new company renamed back to Yahoo when the deal closed in September 2021 (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.