Weekly Market Update – January 26, 2024

Quick Takes

• After starting on a down note in the first week of the year, U.S. stocks have rallied for three straight weeks, propelling the S&P 500 Index up another +1.0% to yet more all-time highs. The tech-heavy Nasdaq Composite was up +0.9%, and the small cap Russell 2000 Index gained +1.8%. 
• Bonds were also able to make modest gains as rates were little changed during the week. The 10-year U.S. Treasury yield rose +1 basis points to close at 4.14%, with the Bloomberg U.S. Aggregate Bond Index returning +0.1% for the week.
• The week’s economic calendar was also relatively light but mostly positive. The S&P Global flash U.S. Manufacturing and Services PMIs produced upside surprises. The advance estimate of GDP showed U.S. economic growth for the Q4 was +3.3%, above expectations of +2.0%. The Fed’s preferred inflation measure, Core PCE, was in line with expectations and the Fed’s long-term target.

The S&P 500 continues to rally and set record highs

Global stock and bonds had another winning week. On Friday, the S&P 500 Index snapped a five-day streak of making record highs but still finished the week up +1.1%. The small cap Russell 2000 Index was also up, gaining +1.8%, but is still down for the year. The tech-heavy Nasdaq Composite leads the U.S. indices for the year with a +3.0% return but lagged for the week with a +0.9% return. The technology sector is up +5.9% to lead the S&P 500 to record highs after two years, yet it is the only one of the index’s 11 sectors to also trade at all-time highs. The other ten sectors are trading an average of -15% below their all-time highs. Before making a new record high earlier this January, it was January 3, 2022, that the S&P last traded at record highs. Back then, seven other sectors—industrials, financials, consumer staples, real estate, healthcare, utilities, and materials—joined technology at new highs in the weeks preceding the S&P 500’s January 2022 record. The technology sector’s weight in the S&P just crossed above +30% for the first time since 2000. The narrow leadership matters because it can be a two-way street. An analysis by Bespoke Investment Group shows that if just six of the largest technology stocks pull back to their 200-day moving average (a widely watched technical indicator used to gauge longer-term price trends), it would knock about -5% off the S&P 500.

The market action overseas was positive as well. Developed market international stocks (as measured by the MSCI EAFE Index) were up +2.0%, while the MSCI Emerging Markets Index gained +1.5%. The gains overseas came in spite of more gains by the U.S. dollar, which has been a headwind for non-U.S. assets all month. The Bloomberg U.S. Dollar Spot Index is up each week in 2024 so far, but it only advanced +0.1% last week. 

Fixed-income investors also had gains for the week, albeit much more moderate gains. Unlike the previous week, last week Federal Reserve officials were not making any comments or speeches ahead of the upcoming policy meeting this week, and yields were relatively unchanged. The 10-year U.S. Treasury yield rose +1 basis points to close at 4.14%. The shorter 2-year U.S. Treasury yield fell -4 basis points to finish the week at 4.35%. Likewise, bonds were little changed, with the Bloomberg U.S. Aggregate Bond Index adding +0.10% for the week, and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) was up +0.07%. 

The week’s economic calendar was also relatively light but mostly positive. On Wednesday, the S&P Global flash U.S. Manufacturing Index produced an upside surprise and jumped back into expansion territory (barely) for the time since April 2023. The S&P Global U.S. Services Index also beat expectations and hit its best level since June. On Thursday, the Commerce Department issued its advance estimate of Gross Domestic Product, which showed U.S. economic growth for the fourth quarter was +3.3%, well above consensus expectations of +2.0%. On Friday, the Core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation measure, rose an annualized +2.0% in the fourth quarter, in line with expectations and the Fed’s long-term target. So overall, the widely focused economic reports showed decent growth with reduced inflation pressures. Futures for the Fed Fund Rate are now implying about a 48% probability that the Fed will cut rates at the March 20 Fed Meeting, which is down from about an 80% chance on Jan 1. The market is expecting the Fed to deliver five 25-basis point cuts in 2024 and for big tech companies to deliver strong earnings. A shortcoming on either front would be a big challenge for more market gains.

Chart of the Week

U.S. economic growth for the fourth quarter was much 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 +3.3% annual rate for Q4-2023, down from +4.9% the prior quarter, but much better than the +2.0% forecast by Wall Street economists. The back-to-back Q3 and Q4 readings were the strongest since 2014, outside of the sharp recovery after the pandemic. Personal Consumption drove the increase, rising +2.8%, down from +3.1% the prior quarter but ahead of expectations for a +2.5% increase. But Government Spending also remains an unusually large contributor, rising +3.3%. That’s down from +5.8% the prior quarter but well above the 10-year average of +1.8% and represents nearly 20% of the quarter’s GDP growth. Business Investment grew at a slower +2.1% rate following the +10.0% rate the prior quarter. Inventories rose at a small +0.07%, down from +1.3% the prior quarter, reflecting a slower production of goods. Exports increased +6.3%, following a +5.4% gain the prior quarter. The GDP Price Deflator ticked up +1.7% from +2.6% in the previous quarter, a welcome sign of easing inflationary pressure despite stronger-than-expected overall economic growth. For the full calendar year 2023 GDP growth was +3.1%. Economists polled by The Wall Street Journal last January had forecast that 2023 GDP would be up just +0.2% on the year. Unfortunately, the U.S. Federal Debt grew by $2.581 trillion in 2023, meaning every $1.00 in GDP cost $1.69 in additional debt. 

U.S. Economic Growth Actually Accelerated in 2023

Annual change in U.S. Gross Domestic Product (GDP)

Note: Seasonally adjusted fourth-quarter change from a year earlier. Forecasts are the average of survey responses.
Sources: Commerce Department (actual); WSJ survey of economists (forecasts).

Economic Review

• The Conference Board’s Leading Economic Index (LEI) fell for the 21st month in a row in December, slipping -0.1%, better than expectations for a -0.3% decline and the smallest decline since the stretch of negative readings first started in March 2022. The leading index slid -0.5% last month. At 103.1, the LEI is the lowest level since May 2020. The last time the index fell so many times in a row was during the Great Recession from the end of 2007 through 2009. The breadth of the index improved, with six of the ten indicators tracked by the Conference Board positive, one unchanged, and just three negative. Non-Financial components, specifically New Orders and Consumer Expectations for Business Conditions, were the largest detractors for the third month. Among three Financial Component indicators, the Leading Credit Index and the S&P 500 Index turned positive while the Interest Rate Spread remained negative. “Overall, we expect GDP growth to turn negative in [the second and third quarters] of 2024 but begin to recover late in the year,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators at the Conference Board.
• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) jumped to 52.3 in January, up from 50.9 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI climbed to a fifteen-month high of 50.3 from 47.9 the prior month, handily beating expectations of 47.6. The manufacturing index has been in negative territory since last spring. The Services PMI rose to a six-month high of 52.9 from 51.4 the prior month, beating expectations for 51.5. The results show a bifurcated economy in which Services have flourished as people go out to eat more and spend more on travel and entertainment while Manufacturing has seen a drop in demand. New Orders, a sign of future sales, rose for both manufacturing and services in January. Business Confidence also hit a 20-month high. Employment also increased, though not as much as in December.
• Personal Spending rose +0.7% in December, above expectations for +0.5% and up from the prior month’s +0.4% (revised up from +0.2%). After adjusting for inflation, Real Personal Spending was up +0.5%, in line from last month (revised up from +0.3%). Americans spent more last month on new cars, drugs, health care, and financial services. Meanwhile, Personal Income rose +0.3%, matching expectations and up from the prior month’s unrevised +0.4%. The Personal Savings Rate fell to 3.7% from 4.1% the prior month, its lowest level in a year. 
• The cost of goods and services rose mildly in December, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.2%, matching expectations and above the -0.1% rate the prior month. On a year-over-year basis, the PCE Price Index was up +2.6%, also matching expectations of +2.6% and the prior month. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.2%, in line with expectations and slightly above the prior month’s +0.1%. Year-over-year, the Core-PCE Price Index is up +2.9%, just below expectations of +3.0% and down from +3.2% the prior month. The key takeaway is that inflation continues to moderate, and the Fed is all but certain to cut interest rates this year. The question is when and by how much and the stronger-than-expected economic growth may keep the Fed on the sidelines as the risk of recession recedes.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment were flat in December, down from the hot +5.5% pace the prior month and below expectations for +1.5%. Durable Goods Orders Excluding Transportation were up +0.6%, beating expectations for +0.2% and the prior month’s +0.5% gain (revised up from the originally reported +0.4%). The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, increased +0.3% following a +1.0% jump the prior month, which was revised up from +0.8%.
• The Richmond Fed Manufacturing index sank to -15 in January from an unrevised -11 the previous month, well below expectations for an improvement -8. Of its three component indexes, Shipments edged up from −17 to −15, New Orders edged down from −14 to −16, and Employment fell notably from −1 to −15. The Employment index had spent the three months prior to December at neutral or better.
• The Kansas City Fed Manufacturing Survey sank in January, with the index dropping to -9 from -1 the month before, worse than expectations for a -3 reading. All month-over-month indexes were negative and decreased from previous readings, except the price indexes. The Production component plunged to -17 from -5 the prior month. The Prices Paid jumped to +24 from +11 the prior month, while Prices Received were up to +7 from +3. Shipments, New Orders, and Order Backlogs all sank as well to double-digit negative levels. 
• The Commerce Department reported New Home Sales surged +8.0% in December, nearly offsetting the -9.0% drop the prior month (revised up from -12.2%) but was short of expectations for a +10.0% increase. That equates to 664,000 units versus the prior month’s 615,000 units (revised up from the originally reported 590,000). The December sales were the largest in a year, but new-home sales are still far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes are up +4.4%. The Median New Home Price fell to $413,200 from $426,000 the prior month. The inventory of new homes for sale shrank, down to 8.2 months of supply at the current rate of sales from 8.8 months the prior month. Sales were up the most in the Northeast (+32%), and the Midwest (+9.2%) and South (+10.6%) also saw gains, while sales in the West (+-3.4%) declined.  
• The National Association of Realtors (NAR) reported that Pending Home Sales jumped the most since June 2020, up +8.3% versus a -0.3% decline the prior month and well above expectations of +2.0%. Year-over-year sales were down -1.0%, better than the -4.3% drop expected and the prior month’s -5.5% decline (revised down from -5.1%). From a regional perspective, the West and South saw the biggest gains, up +14% and +12%, respectively. The Midwest was up +5.6%, while the Northeast was the only region to fall, dropping -3.0%. Pending home sales tend to lead existing home sales by a month or two.
• Weekly MBA Mortgage Applications moderated to +3.7% for the week ended January 19, following the prior two week’s big gains of +9.9% and +10.4%. The Purchase Index was up +7.5% following a +9.2% gain the prior week, and the Refinance Index fell -7.0% following a +10.8% jump the prior week. The average 30-Year Mortgage Rate fell to 6.78% from 6.75% a week ago versus 6.20% a year ago.
• Weekly Initial Jobless Claims rose +25,000 to 214,000 for the week ended January 20, above expectations for 200,000 and the prior week’s 189,000 (revised up from 187,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +27,000 to 1,833,000 in the week ended January 13, above consensus expectations for 1,823,000 and the prior week’s unrevised reading of 1,806,000.

The Week Ahead

Next week will be packed with economic and earnings reports. On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) is expected to show 8.7 million job openings for December. Tuesday also brings the Conference Board report on Consumer Confidence for January and the S&P Global CoreLogic Case-Shiller National Home Price Index and Federal Home Financing Agency (FHFA) HPI for November. The Federal Open Market Committee (FOMC) will announce the Fed’s monetary policy decision on Wednesday afternoon, followed by a press conference with Fed Chairman Jerome Powell. Wall Street expects no change in the federal-funds rate at this meeting but will be watching for clues about when cuts may be coming. On Thursday, the January Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) is released. A heavily focused report will be the January Employment Report on Friday morning, in which 175,000 new nonfarm payrolls are expected and an unemployment rate of 3.8%. It is a huge week of earnings with many mega tech companies due to report, including Apple, Amazon, Microsoft, Alphabet, and Advanced Micro Devices. Beyond tech, Boeing is also reporting earnings along with Exxon Mobil, Chevron, Bristol Myers Squibb, Nucor, Pfizer, General Motors, Starbucks, and Mastercard. 

Did You Know?

REMOTE (LESS) CONTROL – Fully remote employees last year were 35% more likely to be laid off than their peers who put in office time, new data show. An analysis of two million white-collar workers conducted by employment-data provider Live Data Technologies showed 10% of fully remote workers were laid off last year, compared with 7% of those working in an office full-time or on a hybrid basis (Source: The Wall Street Journal).

LESS IS MORE – Consumers were willing to pay $6.39, on average, for a simply designed bag of trail mix versus $5.56 for one with complex packaging, according to new research. When people see food packaging with minimal text, fewer colors, and plain white or neutral boxes, they infer that the product inside contains few ingredients and is purer than similar products in busier packaging—and, therefore, worth a premium. Generic store brands and tasty junk food are exceptions to the “less is more” rule (Source: The Wall Street Journal).

BAD BREADTH – So much for the market broadening out. In the 18 trading days in 2024 through January 26, the S&P 500 Index has outperformed (total return with dividends) the small-cap Russell 2000 Index by +5.0 percentage points (+2.6% vs. -2.4%) in what was the widest margin of underperformance for the Russell 2000 history since 1979. Relative to the S&P 500 Equal Weight Index, which has a -0.2% total return in 2024, the cap-weighted S&P 500 Index is also outperforming by a record margin dating back to 1989 (Source: Bespoke Investment Group, Bloomberg).

This Week in History

FULL DISCLOSURE – On January 26, 1853, basic financial disclosure became mandatory for all companies seeking to list their stock for trading on the New York Stock & Exchange (NYSE) Board (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.