Weekly Market Update – January 12, 2024

Quick Takes

• After starting on a down note in the first week of the year, U.S. stocks and bonds rebounded in the second. The S&P 500 Index was up +1.8% while the tech-heavy Nasdaq Composite was up +3.1%. However, small caps lagged, with the Russell 2000 Index slipping -0.01%.
• Bonds were able to shrug off a higher-than-expected consumer inflation report on Thursday, and saw yields drop over the week, particularly for the short end of the curve. As a result, the Bloomberg U.S. Aggregate Bond Index gained +0.9% for the week.
• Two surveys released during the week indicated that both small business owners and consumers remained pessimistic about the economic outlook, although somewhat less so than in recent months.

U.S. stocks and bonds rebound in second week of 2024

Last week was the start of the 2023 fourth-quarter earnings season, which had some rough spots, but didn’t prevent a rebound for U.S. stocks and bonds. Earnings season kicked off on Friday, with eight S&P 500 companies reporting results for the December-ending quarter. Six of the reporting companies were in the Financials sector and one each were from the Healthcare and Industrials sectors. Five of those stocks ended down for the day. The worst was Delta Air Lines, whose shares plunged nearly -9% after the company lowered its earnings forecast for this year, despite beating Wall Street analysts’ estimates for the quarter. The banks stocks also had a rocky start with the share prices of JPMorgan Chase, Wells Fargo, and Bank of America all dropping following their earnings results. Citigroup managed to buck the trend with a gain of less than +1% after announcing plans to cut 20,000 jobs. In other notable company-specific news, at the closing bell for the week, Microsoft officially passed Apple as the world’s largest company by market value. Microsoft is now worth $2.89 trillion, while Apple sits at $2.87 trillion. The battle for the title of world’s largest company will be worth watching in the coming weeks as both companies report earnings. 

In the end, the bumpy earnings reports didn’t keep the S&P 500 down for the week. The index closed up +1.8% on the week after falling in the first week of 2024. Late in the week, the S&P briefly surpassed its record closing high of 4,797, set on January 3, 2022, before drifting below the milestone to finish the week at 4,783.8. The Technology sector led the market higher, fueling the Nasdaq Composite Index to a +3.1% gain for the week. Small cap stocks, on the other hand, were laggards with the Russell 2000 Index slipping -0.01%. Overseas stocks were also mixed. Developed market international stocks (as measured by the MSCI EAFE Index) advanced +0.9%, but the MSCI Emerging Markets Index declined -0.6%. 

Fixed income investors appeared unbothered by modest upside surprises in consumer inflation reported on Thursday. The Consumer Price Index (CPI) rose a more-than-expected +0.3% in December, up from +0.1% in November. On a year-over-year basis, CPI rose +3.4%, up from +3.1% in November. However, on Friday wholesale inflation came in softer than expected. For the week, the yield on the benchmark 10-year U.S. Treasury note fell -11 basis points back below 4% over the week (bond prices and yields move in opposite directions.) The shorter end 2-year U.S. Treasury yield fell even more, by -24 basis points, to close at 4.14%. As a result, the Bloomberg U.S. Aggregate Bond Index returned +0.9% for the week. But non-U.S. bonds had a slight dip, with the Bloomberg Global Aggregate ex U.S. Bond Index slipping -0.05%. 

Chart of the Week

Inflation unexpectedly rose in December, with the headline Consumer Price Index (CPI) increasing +0.3% for the month, above Wall Street expectations for a +0.2% advance and the prior month’s unrevised +0.1% uptick. Year-over-year (YoY) CPI grew at a 3.4% rate, up from 3.1% the prior month and above expectations for +3.2%. Core CPI, which excludes the more volatile Food and Energy prices, was in line with expectations of +0.3%, matching the prior month. YoY Core CPI was +3.9%, a tick higher than expectations for +3.8%, but down from 4.0% the prior month and the lowest YoY reading since May 2021. Though both measures are well off their 2022 peak levels, they still remain stubbornly higher than the Fed’s +2% target. Shelter costs contributed about half of the Core CPI increase, with the category up +0.5% for the month. YoY, Shelter costs increased +6.2%, or about two-thirds of the rise in inflation. Food costs were up +0.2%, the same as the prior month, while Energy was up +0.4%, after dropping -2.3% the prior month. Vehicle Insurance was up +1.5% and Used Vehicles were up +0.5%. Medical Care accelerated by +0.6%. The report is likely to discourage the Fed to start cutting rates until there’s a clearer deceleration in the rate of inflation.

Inflation Higher Than Expected in December

Consumer Price Index (CPI) year-over-year percent change

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

Economic Review

• Unlike consumer inflation, wholesale inflation unexpectedly declined in December. The headline Producer Price Index (PPI) fell -0.1%, matching the prior month’s downward revision (originally 0.0%) and lower than Wall Street expectations for a +0.1% increase. Year-over-year (YoY) PPI decelerated to +1.0%, under expectations for +1.3%, but up from the prior month’s +0.8% (revised down from +0.9%). Core PPI, which strips out volatile Food and Energy costs, was unchanged, like the prior month, and below expectations for +0.2%. Year-over-year (YoY) Core PPI was up +1.8%, under expectations for +2.0% and down from +2.0% the prior month. Diesel Fuel tumbled -12.4%, even though Gasoline increased +2.1%. On the services side, where inflation has been running the hottest and the Fed has been following more closely, prices were unchanged for the third straight month. Financial Advice rose +3.3%, while Machinery and Vehicle costs dipped -5.5%. The decline in wholesale inflation last month offers a bit of relief after a hotter-than-expected increase in the consumer price index.

• U.S. Consumer Credit exploded higher in November, to $23.7 billion from a $5.8 billion rise the prior month (revised up from +$5.2 billion), and far higher than expectations for a +$8.6 billion increase. That put total consumer credit outstanding above $5 trillion for the first time ever ($5.0034 trillion). Growth for revolving credit, such as credit cards, was up +17.7%, a steep acceleration from the +2.7% 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 +1.5% following the prior month’s +0.7% uptick. 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 National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index rose +1.3 points in December to 91.9, above expectations to come in at 91.0. December marked the 24th consecutive month the index was under the 49-year average of 98. The decline was led by a -5 percentage point decline in Current Inventories, dropping it to -5%, as well as -2% drops in the Plans to Increase Inventories and Plans to Increase Employment indexes. Earnings Trends rose the most, up +7 points, but is still at a net negative -25%. The Expect Economy to Improve index was up +6 points but remains the most negative of the 10 component indexes at a net -36%.  Concerns over inflation returned to the most cited concern in December, replacing Labor Quality.

• The Census Bureau reported Wholesale Inventories for November decreased -0.2% to $896.23 billion, down from $897.86 billion the prior month, and in line with expectations. Inventories haven’t seen a month of increases since February. Year-over-Year inventories were down -3.1%, the fourth negative YoY reading in a row. Wholesale Trade Sales were flat for the month, below expectations for a +0.4% rise. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio returned to 1.34 months from 1.35 months the prior reading. 

• According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit unexpectedly narrowed in November, shrinking -2% to $63.2 billion. Higher deficits subtract from Gross Domestic Product (GDP), the official scorecard for the U.S. economy. The U.S. trade deficit in 2023 is likely to be the smallest in three years, making it a likely positive contributor to GDP, after record deficits in 2021 and 2002 acted as a big drag on GDP. Imports fell -1.9% to $316.9 billion, as consumers shift from goods consumption to services consumption. Exports also fell -1.9%, to $253.7 billion, but they remain near record high levels.

• The Treasury Department reported that the U.S. Federal Budget Deficit widened to $510 billion so far for fiscal 2024 (October through December). December’s shortfall was -$129.4 billion alone, much higher than expectations for -87.5 billion, and up +52% from the prior year. The increase in the Budget Deficit pushed total Government Debt past $34 trillion for the first time.  Year-over-year (YoY) Government Receipts fell -5.6% to $429.3 billion but Government Spending was up +3.5% to 558.7 billion YoY. At the current pace, the 2024 fiscal year would end with a deficit of more than $2 trillion, compared to 2023, which saw a final deficit of $1.7 trillion. The deficit is projected to remain upward of $2 trillion per year for the next decade, if no legislative changes are enacted.

• Weekly MBA Mortgage Applications rose sharply in the first week of 2024, up +9.9% for the week ended January 5, following the prior week’s -10.7% drop. The Purchase Index was up +5.6% following a -7.6% decline the prior week and the Refinance Index rose +18.7% following a -18.1% plunge the prior week. The average 30-Year Mortgage Rate increased to 6.81% from the prior week, the second straight increase after six consecutive weeks of declines.

• Weekly Initial Jobless Claims fell -1,000 to 202,000 for the week ended January 6, below expectations for 210,000 and the prior week’s 203,000 (revised up from 202,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell by -54,000 to 1,834,000 in the week ended December 30, below consensus expectations for 1,870,000 and the prior week’s reading of 1,868,000 (revised up from 1,855,000).

The Week Ahead

U.S. stock and bond markets were closed Monday in observance of Martin Luther King Jr. Day.  Despite another holiday-shortened week, the economic calendar is the busiest it’s been in weeks.  Housing data is prevalent with the typical weekly Mortgage Applications plus NAHB Housing Market Index, Housing Starts, Building Permits and Existing Home Sales. Wednesday morning brings Retail Sales data for December from the Census Bureau. That afternoon, the Federal Reserve will release its first Beige Book of 2024. On Friday, the University of Michigan will publish its Consumer Sentiment survey for January. It will also be a busy week of fourth-quarter earnings reports, with quarterly results from 22 S&P 500 companies, starting with banking giants Morgan Stanley and Goldman Sachs on Tuesday. Wednesday will bring results from TSMC, Charles Schwab, U.S. Bancorp and Alcoa. Reports on Thursday include Truist Financial, KeyCorp, and Birkenstock. Friday earnings include Ally Financial, Comerica, and Travelers. Fed Officials will also be out and about during the week. Fed Governor Christopher Waller speaks on Tuesday morning, Fed Vice Chair for Supervision Michael Barr and Fed Governor Michelle Bowman speak Wednesday morning, Atlanta Fed President Raphael Bostic speaks Thursday morning at noon, and on Friday Fed Vice Chair for Supervision Michael Barr and San Francisco Fed President Mary Daly have appearances after noon. And if that wasn’t enough, the crypto market could also see another high-volume week of big swings in the second week of trading for eleven new spot Bitcoin ETFs.

Did You Know?

JANUARY FADING – Since 1928, the S&P 500’s average January gain of +1.2% ranks as the fourth best month of the year behind July (+1.7%), December (+1.3%) and April (+1.3%). However, over the last 25 years, January hasn’t been as friendly to bulls as the S&P 500 has averaged a decline of -0.1% which ranks as the fourth worst month behind September (-1.7%), February (-0.8%) and June (-0.2%) (Source: Bespoke Investment Group).

MORE CHEESE PLEASE – Americans are eating more cheese and butter. That has dairy farmers scrambling to get their cows to produce fattier milk. The efforts include using different cow breeds and feed mixes, and making sure animals are comfortable and don’t get too hot. The result is that the average amount of butterfat in milk produced by U.S. dairy herds has climbed past 4%, which is above the previous record set during World War II (Source: 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 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.