Weekly Market Update – December 22, 2023

Quick Takes

• The S&P 500 Index was up +0.8%, marking eight straight weeks of gains. That’s the longest weekly winning streak since November 2017 and leaves the index just +0.9% from its all-time high set on January 3, 2023.
• The 2-year U.S. Treasury yield fell -12 basis points to close at 4.32%, its lowest point since May. With yields still moving lower, bond indices were higher, with the Bloomberg U.S. Aggregate Bond Index inching up +0.1% for the week. The Bloomberg Global Aggregate ex U.S. Bond Index advanced +0.8% for the week.
• Third-quarter Gross Domestic Product (GDP) growth was trimmed to +4.9%, with consumer spending not quite as strong as in the previous estimates. On the other hand, Government Spending was revised even higher in the final release and thus contributed about a full percentage point to the overall +4.9% rate of growth.

Stocks and bonds extend rally on cooling inflation data

Stocks continued their weekly winning streak, extending the rally to eight straight weeks of gains. For the S&P 500 Index, that’s the longest weekly winning streak since November 2017 and leaves the index just +0.9% from its all-time high set on January 3, 2023. Market sentiment was boosted by favorable inflation data, particularly the Personal Consumption Expenditures (PCE) Index declining in November, the first month-to-month decline since April 2020. The core version of the PCE, which excludes food and energy and is closely tracked by the Federal Reserve, was up +3.2% from a year ago, below economists’ forecast for a +3.4% rise. Those declines help support the case that inflation is in a persistent downward trend and, therefore, the Fed can cut interest rates in 2024.

For the week, the S&P 500 finished up +0.8%, the Nasdaq Composite was up +1.2%, and the small cap Russell 2000 index added +2.5%. Overseas, stocks were mixed with developed market international stocks (as measured by the MSCI EAFE Index), gaining +0.8%, but the MSCI Emerging Markets Index was down -0.8%.

Bond traders continue to cheer a decline in interest rates. The benchmark 10-year U.S. Treasury yield shed another -2 basis points over the week to close at 3.90%. The shorter end 2-year U.S. Treasury yield fell -12 basis points to close at 4.32%, its lowest point since May. With yields still moving lower, bond indices were higher, with the Bloomberg U.S. Aggregate Bond Index inching up +0.1% for the week. The Bloomberg Global Aggregate ex U.S. Bond Index advanced +0.8% for the week.

Chart of the Week

U.S. economic growth for the third quarter was revised down some in the third and final 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, down from the second estimate of +5.2% but still up sharply from the +2.1% reading in the second quarter. The GDP increase marked the biggest gain since the fourth quarter of 2021 and the biggest increase in a decade if the pandemic years are excluded. However, the economy has since cooled off, and GDP is forecast to increase by a much more moderate +1% to +2% in the fourth quarter of 2023. Personal Spending, the primary source of economic growth, was revised down again from +3.6% to +3.1% after the initial estimate had it at +4.0%.

On the other hand, Government Spending was revised higher again from the +4.6% originally reported to +5.5% in the second estimate and to +5.8% in the final release, thus contributing about a full percentage point of the overall +4.9% rate of growth. Business Investment, the next largest component of the economy behind consumer spending, was revised up to +2.6% from +2.4% in the prior estimate but is down from +5.2% in Q2. Corporate Profits increased for the second quarter in a row, rising +3.4% to mark the largest gain in five quarters. The GDP Price Deflator was revised down to +2.6% from +2.8% in the prior estimate and down from +3.5% in the prior quarter.

U.S. Third-Quarter GDP Growth Trimmed to 4.9%

Real GDP: Percent Change from Prior Quarter

Note: Seasonally adjusted annual rate.
Source: U.S. Bureau of Economic Analysis.

Economic Review

• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment rebounded +5.4% in November, the biggest increase since July 2020 and far above expectations for +2.3%, as well as the prior month’s -5.1% drop (which was revised up from -5.4%). Durable Goods Orders Excluding Transportation were up +0.5%, beating expectations for +0.1% and the prior month’s -0.3% decline (revised down from the originally reported +0.0%). The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, jumped +0.8% following a -0.6% drop the prior month, which was revised down from -0.3%. While orders surprised to the upside in November, much of the gain was from the volatile aircraft order category, so economists will want to see sustained improvement before there is confidence in an upward trend.
• The final reading of the November University of Michigan Consumer Sentiment Index improved to a five month high of 69.7, up from the initial estimate of 69.4, and broke a four-month streak of declines. The Current Economic Conditions component dipped to 73.3 from the preliminary estimate of 74.0 but is up from 70.6 the prior month. The Consumer Expectations component rose to 67.4 from the preliminary 66.4, also a five-month high. One-year inflation expectations fell sharply to +3.1%, matching expectations. The five-year inflation expectations came in at +2.9%, just above expectations of +2.8%. Cheaper gas prices, slowing inflation, a stock-market rally, and a strong labor market have given consumers more confidence in the economy. 
• Personal Spending rose +0.2% in November, in light of expectations for +0.3% and up from the prior month’s +0.1% (revised down from +0.2%). After adjusting for inflation, Real Personal Spending was up +0.3%, up from last month’s +0.1% (revised down from +0.2%). Americans spent more last month on housing, utilities, dining, and hotels. They spent less on gasoline because of cheaper oil prices. Personal Income rose +0.4%, matching expectations and up from the prior month’s +0.3% (revised up from +0.2%). The Personal Savings Rate was up to 4.1% from 4.0% the prior month. The savings rate has fallen since the end of the pandemic, leaving households with less financial cushion. The burst of growth in the third quarter appears to have faded. Higher interest rates have sapped spending on big-ticket items such as cars and discouraged business investment.
• The Conference Board’s Consumer Confidence Index hit a five-month high of 110.7 in December, up from 101.0 the prior month (revised down from 102.0) and ahead of the 104.5 expected. A year ago, the index stood at 102.2. The Present Situation gauge rose to 148.5 from 138.5 the prior month (revised down from 138.2). The Expectations gauge — which reflects consumers’ six-month outlook — increased to 85.6 from 77.4 (revised down from 75.6). Below the 80 mark on the expectations index often signals a recession within the next year. It’s the first time the index has topped the recessionary line of 80 in four months. In good times, the index can top 120 or more. 
• Homebuilder confidence rose for the first time in five months in December, with the National Association of Home Builders (NAHB) Housing Market Index (HMI) up +3 points to 37, in line with expectations. A year ago, the index stood at 31. Builders are still offering sales incentives to boost demand, with the share of builders cutting home prices, 36%, steady from the prior month at the highest level since November 2022. The three subcomponents were mixed, with Current Sales flat for the month, Sales Expectations (in the next six months) up +6 points, and Traffic of Prospective Buyers up +3 points. Like the prior month, about 60% of builders were using incentives — other than price cuts — to improve sales. Mortgage rates have fallen from nearly 8% in October to under 7%, but that is still high for many home buyers. In response, about 36% of builders cut prices, also about the same as last month, by an average price cut of 6%. 
• The National Association of Realtors (NAR) reported that Existing Home Sales rose in November for the first time in six months, improving by +0.8% to an annual rate of 3.82 million units, up from an unrevised 3.79 million. That was above expectations for 3.78 million. Year-over-year existing sales are down -7.3%. The Median Existing Home Price was $387,600, down from $391.6 the prior month, but is up +4.0% from a year ago and was the highest price for the month of November since NAR began tracking the data. Home prices peaked in June 2022, when the median price of a resale home hit $413,800. Homes for sale were up +0.9% from last year to 1.13 million. Homes listed for sale remained on the market for 25 days on average, up from the previous month. Last November, homes were only on the market for 24 days. Around 19% of properties are being sold above list price. After falling the most the prior month, sales rose the most in the South.
• The Commerce Department reported New Home Sales plunged -12.2% in November to their lowest level since November 2022 at an adjusted annual rate of 590,000 units. That was far short of expectations for 690,000 units and the prior month’s 672,000 units (revised down from the originally reported 679,000). The Median New Home Price rose to $434,700 from $414,900 the prior month but is up +1.4% from the prior year. The inventory of new homes for sale rose for the fourth month, jumping +16.5%, which represents 9.2 months of supply at the current rate of sales, up from 7.8 months the prior month. Sales were up the most in the Midwest and Northeast but fell in the South and West. 
• November Housing Starts rose for a third straight month, surging +14.8% to a seasonally adjusted annual rate of 1,560,000 units, up from a negatively revised 1,359,000 units the prior month (originally 1,372,000) and far above expectations for 1,360,000 units. Housing starts peaked at 1,800,000 million in April 2022. Both single-family and multi-family construction increased. Single-family homes jumped +18% in the month, and multi-family units were up +8.9%. Housing starts rose most in the Northeast, and other regions reported modest increases, with the West the only region down at -0.8%. Building Permits, one of the leading indicators tracked by the Conference Board, fell -2.5% after the prior month’s +1.8% gain (revised up from +1.1%) and below expectations for a -2.5% decline. Single-unit permits were up +0.5%, while permits for buildings with at least five units or more rose by +2.2%.
• The cost of goods and services was flat in October, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) down for the first time since 2020 at -0.01%, below expectations to be flat. On a year-over-year basis, the PCE Price Index was up +2.6%, below expectations of +2.8% and down from +2.9% the prior month (revised down from +3.0%). That’s the lowest level since February 2021. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.1%, below expectations +0.2% and matching the prior month, which was revised down from the original +0.2%. Year-over-year, the Core-PCE Price Index is up +3.2%, just below expectations of +3.3% and down from +3.4% the prior month (revised down from +3.5%). The key takeaway is that inflation continues to moderate and likely played a role with the Fed leaving its key short-term interest rate unchanged at a range of 5.25% to 5.5% in December.
• Weekly MBA Mortgage Applications fell for the first time in 6 weeks, down -1.5% for the week ended December 15, following the prior week’s +7.4% jump. The Purchase Index was down -0.60% following a +3.5% increase the prior week, and the Refinance Index was down -1.8% following a +19.4% gain the prior week. The average 30-Year Mortgage Rate slipped to 6.83% from the prior week, the fourth straight weekly decline and the sixth drop in the last 7 weeks.
• Weekly Initial Jobless Claims inched up +2,000 to 205,000 for the week ended December 15, below expectations for 215,000 (the prior week was revised up from 204,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -1,000 to 1,865,000 in the week ended December 8, below consensus for 1,880,000 and last week’s reading of 1,866,000 (revised down from 1,876,000).

The Week Ahead

It will be a quiet holiday week, with markets closed on Monday for Christmas. On Tuesday, the Federal Housing Finance Agency (FHFA) and S&P CoreLogic each released their respective Home Price Indexes for October. Other housing-related data includes Pending Home Sales on Thursday. A variety of regional manufacturing releases are due, including The Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook for December on Tuesday, the Federal Reserve Bank of Richmond’s Fifth District manufacturing activity survey for December on Wednesday, and Friday brings the Institute for Supply Management’s Chicago business barometer for December.

Did You Know?

BNPL – +7.2% of all online sales were made with buy now, pay later plans over Black Friday and Cyber Week, a +25% jump from last year, according to Adobe. The shift is sounding alarms at consumer-advocacy groups that say companies like Afterpay, Affirm, and Klarna provide fewer protections than credit cards and encourage shoppers to take on more debt than they can afford (Source: Adobe, The Wall Street Journal).

FRIENDLY SKIES? – The number of in-flight disruptions so far this year increased by +71% compared with all of 2019. The 2023 incident tally of 1,987 is still lower than 2021’s unprecedented peak of 5,973 unruly passenger reports, according to the FAA. Outbursts range from disruptive (a tirade over onboard meal choices) to dangerous (opening an emergency exit). A contentious mask requirement, which airlines dropped over a year ago, was a major reason behind the 2021 surge (Source: FAA, The Wall Street Journal).

ROOM AND GORED – For the least-expensive college-dorm living arrangement, the median increase in 2023 dollars is +70% from twenty years ago. That’s according to a WSJ investigation that examined the price of residence halls going back roughly two decades at 12 public universities around the country. Housing is one of the biggest drivers of rising college prices in the U.S.—for new luxury suites as well as old windowless rooms (Source: The Wall Street Journal).

This Week in History

FRONT – On December 20, 1977, then President Jimmy Carter signed a law that reduced the rate of Social Security cost-of-living adjustments, declaring: “This legislation will guarantee that from 1980 to the year 2030, the Social Security funds will be sound.” Less than six years later, Social Security lost $20,000 a minute and required a fresh law to stabilize its fortunes (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 from 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.