Weekly Market Update – January 05, 2024

Quick Takes

• Stocks and bonds started the new year on a down note. The S&P 500 Index was off -1.5% in the first week of 2024, while the Bloomberg U.S. Aggregate Bond Index fell -1.2%. The losses extended overseas, with the MSCI EAFE Index losing -1.3% and the Bloomberg Global Aggregate ex U.S. Bond Index down -1.6%.
• Investors may have been taking profits after the 2023 end-of-year winning streak but also seemed to be spooked by economic data that could keep the Fed from cutting interest rates as soon, and as much, as investors were expecting. 
• The December Employment Situation report showed hotter-than-expected hiring in the U.S. as employers added 216,000 new Non-Farm Payrolls (NFP) during the month, well ahead of Wall Street expectations for 175,000, and an acceleration from the 173,000 in November.

Stocks and bonds data

The first week of 2024 started on a down note, a stark contrast to the last few weeks of 2023. Markets were closed on Monday in observance of the New Year’s Day holiday and slid steadily throughout most of the week after peaking about mid-day Tuesday. The S&P 500 Index and Nasdaq Composite Index snapped their nine-week winning streaks as investors took profits from the impressive win streak but also seemed to be reassessing their outlook for interest rate cuts. On Wednesday afternoon, the Federal Reserve released the minutes from their December 12-13 FOMC policy decision meeting, and it showed that officials still haven’t ruled out further rate hikes, although almost all of the top officials are expecting some easing in 2024. Overall, Fed officials stressed the need to move carefully as their forecasts were associated with an “unusually elevated degree of uncertainty.” The minutes showed that “several” officials said that the Fed might have to hold its benchmark rate steady “for longer than they currently anticipated,” while “a number” of officials pushed for some easing. Investor expectations for rate cuts were further dampened on Friday when the December employment report showed much stronger jobs growth than anticipated. Before the release of the Fed meeting minutes on Wednesday, traders were expecting as many as seven quarter-point rate cuts in 2024, and Fed-funds futures reflected a 79% probability the Fed will cut rates by at least a quarter point by the Fed’s March meeting. But by Friday afternoon, the odds of a March rate cut fell to 60%. Fed-funds futures ended 2023, reflecting a 100% probability of a rate cut by the March meeting. 

For the week, the S&P 500 slid -1.5%, but the technology-heavy Nasdaq Composite dropped -3.3%, and the small cap Russell 2000 Index was down -3.8%. Stocks also fell overseas, but less than the U.S., with developed market international stocks (as measured by the MSCI EAFE Index) down -1.3% for the week while the MSCI Emerging Markets Index declined -2.1%. 

Of course, the reset in rate expectations took a toll on bonds as the benchmark 10-year U.S. Treasury yield jumped +17 basis points for the week to close back above 4% at 4.05%. The shorter end 2-year U.S. Treasury yield rose +13 basis points to close at 4.38%. With yields popping higher, bond indices were lower, with the Bloomberg U.S. Aggregate Bond Index shedding -1.2% and the Bloomberg Global Aggregate ex U.S. Bond Index down -1.6% for the week. 

It should be noted that although the headline December Nonfarm Payrolls jobs growth number was stronger than expected, much of the week’s data was softer than forecasts. Job Openings, the Quits Rate, and the Hiring Rate were all lower than anticipated. In addition, the ISM Services PMI was far lower than expected, Factory Orders excluding Transportation were muted, and Construction Spending was light of consensus expectations. That all has the potential to set up this week’s Consumer Price Index (CPI) on Thursday to have a big impact on markets. An uptick in inflation may further spook stock and bond markets as odds for rate cuts get reduced even more, while a downtick in inflation would provide relief that the Fed can continue on its recent dovish pivot.

Chart of the Week

The monthly Employment Situation report showed hotter-than-expected hiring in December but also more big downward revisions for prior months. On Friday, the Labor Department reported that U.S. employers added a seasonally adjusted 216,000 new Non-Farm Payrolls (NFP) during the month, well ahead of Wall Street expectations for 175,000 and an acceleration from the 173,000 in November. Only two of the 67 Wall Street estimates in the Bloomberg survey forecasted a higher December payrolls gain. The November result was revised lower from the initially reported 199,000, and the October data was revised down to 105,000 from the initially reported 150,000. As shown in the Chart of the Week below, that means every initial Non-Farm Payrolls release for every month in 2023 except for July was revised lower afterward. We won’t know the fate of a December revision until next month, but a clear trend is in place… a big upside surprise headline jobs gain that subsequently gets revised sharply lower. Employment gains were driven by continued strength in Government, Hospitality, and Healthcare, which contributed 52,000, 40,0000, and 38,000 of the 216,000 jobs added. Shipping and Transportation saw jobs cut again, each shedding 23,000 payrolls, and likely a boost from mild winter weather. The Unemployment Rate remained at a four-month low of 3.7%, versus expectations to inch up to 3.8%. Inflation watchers will note that Average Hourly Earnings held at last month’s +0.4% rate, which was the largest in four months, versus expectations to ease to +0.3%. Year-over-year, Average Hourly Earnings were up +4.1%, above expectations of +3.9% and the prior month’s +4.0%. Average Weekly Hours slipped slightly to 34.3 from 34.4 the prior month, where they were expected to stay. Labor-Force Participation ticked down 62.5% compared to 62.8% the prior month, where it was expected to remain. It remains well below the February 2020 prepandemic level of 63.3%. The key takeaway from the report is that it was stronger than expected with an inflationary bias, which may mean that the Fed will not cut rates as soon or as many times as the market was pricing in as we entered the year.

Strong Initial Headlines, Not-So-Strong Subsequent Revisions

U.S. Employees on Nonfarm Payrolls (Month-over-Month Net Change)

Note: Seasonally Adjusted
Source: Bureau of Labor Statistics, Bloomberg.

Economic Review

• The November Job Openings Labor Turnover Survey (JOLTS) showed Job Openings fell for a third straight month to 8.79 million, the lowest level since March 2021, down from 8.85 million the prior month (revised up from 8.73 million). That was shy of expectations for 8.82 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 Transportation, Warehousing, Utilities, and the Federal Government and gained the most in Wholesale Trade. Regionally, job openings fell in the South (-128,000), the Northeast (-29,000), and the West (-7,000), only rising in the Midwest (+102,000). The ratio of Job Openings to Unemployed Workers remained at 1.4, 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 Number of People Quitting Jobs dropped to a 33-month low of 3.5 million and is far off the record 4.5 million job quitters reached last year. That resulted in the Quits Rate sinking to 2.2%, which, outside the pandemic period, is the lowest since March 2018. People tend to quit less often when the economy softens and jobs become harder to find. The Number of People Hired in the month dropped to 5.5 million, which is the smallest increase since April 2020 during the COVID shutdown. As a result, the Hiring Rate dropped from 3.7% to 3.5%, which is the lowest since August 2014 outside the COVID shutdown period.
• The Institute for Supply Management’s (ISM) Manufacturing PMI rose to 47.4% in December from 46.7% the prior month, above expectations of 47.1. The manufacturing PMI has remained in contraction territory for 14 months in row (levels below 50 indicate contracting economic activity), which is the longest monthly contraction streak since 2000-2001 following the dot com bubble crash. New Orders remained in contraction–for 16 months straight now, the longest streak since 1981–and fell to 1.2 points to 47.1%. The Production component rebounded +1.8 points to 50.3%. The Employment component also picked up, improving by 2.3 points to 48.1%. The Prices Paid index, a measure of inflation, fell 4.7 points to 45.2%. In terms of industries, 16 reported contraction, with only primary metals reporting growth. The bottom line is that the ISM manufacturing activity improved but stubbornly remains in contraction. In a bit of role reversal, the ISM Services PMI fell in December, dropping to 50.6% from 52.7% the prior month, far below expectations of 52.5%. November marked the eleventh consecutive month of growth for the services sector. The New Orders index dropped -2.7 points to 52.8%. The Employment index fell to 7.4 points to 43.3%. The Prices Paid index slipped a bit to 57.4% from 58.3%, a bit of relief on the inflation front. Anthony Nieves, head of the ISM services survey committee, said, “The services sector had a pullback in the rate of growth in December, attributed to the decrease in the rate of growth for new orders and contraction in employment.” 
• The seasonally adjusted S&P Global U.S. Manufacturing PMI slipped further into contraction in December, falling to 47.9 from 49.4 the prior month, below the earlier flash estimate of 48.2. Contributing to the overall decline in operating conditions was a sharper fall in New Orders during the month. The S&P Global U.S. Services PMI picked up in December, rising to 51.4 from 50.8 the prior month, a tick ahead of the earlier flash estimate of 51.3. The latest data signaled the fastest expansion in new business since June. Together, the S&P Global U.S. Composite PMI was up slightly to 50.9 from 50.7, signaling a marginal expansion in overall business activity.
• Orders for manufactured goods rose in November, helped by the Transportation sector. U.S. Factory Orders were up +2.6% for the month, more than the +2.4% gain forecasted and sharply higher than the prior month’s -3.4% decline (revised up from -3.6%). Ex-Transportation, orders were much more muted with a mere +0.1% gain, but nicely higher than the prior month’s -1.3% drop (revised down from -1.2%). Meanwhile, Durable Goods Orders rebounded +5.4, unrevised from the initial estimate late last month, from the -5.1% fall the prior month (which was positively revised from -5.4%). Non-Durable Goods Orders were flat at -1.8% (revised up from -1.9%). The important Core Capital Goods Orders (Nondefense Capital Goods Excluding Aircraft), a proxy for business spending, rebounded +0.8% following a -0.6% decline the prior month (revised down from -0.3%). Shipments of Core Capital Goods Orders, which feeds into Gross Domestic Product (GDP), were down -0.2% after a -0.1% dip the prior month. The bottom line from the report is that excluding transportation, factory orders were still muted in November following the large October contraction, which was the biggest monthly and annual decline since the 2020 pandemic.
• The Commerce Department reported that Construction Spending rose for the eleventh month in a row, up +0.4% in November to a seasonally adjusted annual rate of just $2.04 trillion, below expectations for +0.6% and the prior month’s +1.2%, which was revised sharply higher from originally reported as +0.6%. Year-over-year (YoY), total construction spending was up +11.3%, compared to +11.0% the prior month. Total Private Construction was up +0.7% month-over-month, and total Public Construction was down -0.7%. Total Residential Spending increased +1.1% month-over-month while total Nonresidential Spending rose +0.2% month-over-month. Single-Family construction rose +2.9%, while Multi-Family construction was up +0.1%. 
• Weekly MBA Mortgage Applications declined sharply, as expected, in the final week of the year, dropping -10.7% for the week ended December 29, following the prior week’s +1.4% gain. The Purchase Index was down -7.6% following a +2.4% increase the prior week, and the Refinance Index was down -18.1% following a -0.1% slip the prior week. The average 30-Year Mortgage Rate increased to 6.76% from the prior week, ending six straight weeks of declines.
• Weekly Initial Jobless Claims fell -18,000 to 202,000 for the week ended December 30, below expectations for 216,000 and the prior week’s 220,000 (revised up from 218,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell by -31,000 to 1,855,000 in the week ended December 23, below consensus expectations for 1,881,000 and the prior week’s reading of 1,886,000 (revised up from 1,875,000).

The Week Ahead

After back-to-back holiday-shortened weeks, the coming week’s economic calendar will start slowly and only pick up modestly on Wednesday and Thursday. Though the calendar is light on volume, the focus on data may be intense, with the U.S. Bureau of Labor Statistics reporting the Consumer Price Index (CPI) on Thursday and wholesale inflation on Friday (the Producer Price Index, or PPI). The markets are still betting that the Federal Reserve could begin cutting the federal-funds rate by March, but that has come down materially after Friday’s headline upside surprise of jobs growth in December. Any upside surprise in the inflation data could spark more choppiness in the markets if rate cut expectations are further diminished. This week also brings the first batch of fourth-quarter corporate earnings reports from the big U.S. banks, including Bank of America, JPMorgan, and Wells Fargo.

Did You Know?

BIGGER THAN MOST COUNTRIES – The five largest stocks in the U.S. (Apple, Microsoft, Alphabet, Amazon, and NVIDIA) not only make up 24.2% of the S&P 500 Index, but they also now exceed the total market capitalization of many countries. In the MSCI All World Index, the five U.S. mega-cap tech stocks had the same weighting (15%) as the combined weighting of Japan, China, France, and the U.K. (Source: MSCI, The Wall Street Journal).

STEP ON THE GAS – The U.S. auto industry stepped on the gas in 2023, with many car companies reporting double-digit sales gains, marking a return to normalcy for a sector that has been on a roller coaster since the pandemic. Industrywide sales of new cars in the U.S. reached 15.5 million vehicles in 2023, a +12.4% increase from the prior year. Automakers could confront more difficulties in 2024, with industrywide sales expected to level off (Source: Wards Intelligence, The Wall Street Journal).

CAN MONEY BUY HAPPINESS? – 59% of Americans surveyed said that money can buy happiness, and the price tag to be happy is an average of $1.2 million. While the average Gen Z American says that it would take only $488,000 to make them happy, the average Millennial would need more than three times that at $1.7 million (Source: EMPOWER).

This Week in History

APPLE SEED – On January 3, 1977, Apple Computer was incorporated by Steve Jobs and Steve Wozniak. The company, now known as Apple, ended last year with a market capitalization just shy of $3 trillion (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.