Weekly Market Update – February 09, 2024

Quick Takes

• After starting the week on a down note, the S&P 500 Index rallied for four straight days to cross the 5,000 level for the first time and set a new record high. The index has now risen in 14 of the last 15 weeks, something it hasn’t done since 1972.  
• The Institute for Supply Management’s (ISM) Services PMI rebounded more than expected in January, rising to a four-month high of 53.4% from December’s brief dip to 50.5%, which was a 7-month low. 
• Unexpectedly strong economic data and more hawkish commentary from Fed Chair Jerome Powell sent Treasury yields higher and bond indexes lower. U.S. and non-U.S. bonds were both down about -0.8% for the week.

Stocks do a 5K run; bonds fall from a one-two punch

The first full week of February picked up right where January left off… with another week of healthy stock market gains. Stocks started the week on a bit of a rough patch from a combination of more strong economic data and more Powell pushback on rate cuts. Monday’s pullback came after the Institute for Supply Management reported an unexpectedly strong pickup in services sector activity in January, rebounding from a seven-month low in December. It was yet more evidence of a resilient economy — and more reason for the Federal Reserve to keep rates steady. Just the night before, in a Sunday night 60 Minutes interview, Fed Chair Jerome Powell acknowledged that the economy is growing at a solid pace and that the labor market is strong and, indicating that a March rate cut is unlikely. But investors didn’t dwell on the negatives too long as the market made gains each of the next four days. The rally took the S&P 500 Index across the 5,000 level for the first time on Thursday, although it closed just before the milestone. But the momentum couldn’t be stopped on Friday and helped by decent earnings reports, the S&P held above the 5,000 level to make its ninth record high of the year. The S&P 500 closed up 1.4% for the week, marking the 14th positive week in the last 15 weeks, the first such winning streak since 1972. It took 719 trading sessions for the index to cross the latest 1,000-point milestone, which was a gain of +25% (i.e., 4,000 to 5,000). 

As usual, the strong performance has been driven by the so-called Magnificent Seven, primarily technology companies (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). In 2024, Tesla, and to a lesser extent Apple, have actually been negative, although both rose last week to contribute to the record. The Nasdaq Composite Index, which consists of about 50% technology companies, has also risen in 14 of the last 15 weeks and gained +2.3% last week. Unlike the S&P 500, the Nasdaq still hasn’t surpassed its record high, set on 11/19/2021, but is now just a half percent from doing so. 

Small caps have been a conspicuous laggard as the S&P and Nasdaq rallied since the October lows. The Russell 2000 Index did lead last week, advancing +2.4%, but it remains nearly -18% the all-time high set on 11/8/2021. Another common theme from 2023 that has persisted into 2024 is the relative weakness of overseas stocks. Although positive last week, non-U.S. stocks continue to trail their U.S. counterparts. Developed market international stocks (as measured by the MSCI EAFE Index) were up +0.1%, while the MSCI Emerging Markets Index gained +0.7%. The U.S. dollar continues to be a headwind for non-U.S. stocks and the Bloomberg Dollar Spot Index has risen every week in 2024 and is at its highest weekly close since mid-November.

Fixed income assets struggled much of the week, down four out of five days, as they weren’t able to shrug off the hawkish Powell news and stronger than expected economic data. The 10-year U.S. Treasury yield jumped +16 basis points to close at 4.18%, while the shorter 2-year U.S. Treasury yield was up +12 basis points to finish the week at 4.48%. As a result, the Bloomberg U.S. Aggregate Bond Index and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) were both down -0.8%.

Chart of the Week

U.S. Consumer Credit imploded in December, rising just $1.5 billion after surging $23.48 billion in November (revised down from $23.75 billion). That’s a +0.4% annual growth rate in December, down sharply to the +5.7% annualized growth the prior month, the slowest pace of credit growth since a -14.4 decrease in August. The December credit growth was far short of expectations for a +$15.9 billion increase. Growth for revolving credit, such as credit cards, slowed to a +1.0%, a steep deceleration from the +16.6% jump the prior month. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, inched up +1.8% following the prior month’s +1.8% 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 borrowing rates have slowed the pace of credit usage.

Consumers slammed the brakes on borrowing in December

U.S. Consumer Credit (January 2023 through December 2023)

Source: U.S. Federal Reserve, Trading Economics.

Economic Review

• The Institute for Supply Management’s (ISM) Services PMI rebounded in January, rising to a four-month high of 53.4% from December’s brief dip to 50.5%, which was a 7-month low. Wall Street was expecting 52.0%. According to the ISM data, the U.S. nonmanufacturing sector has expanded for 13 consecutive months now and for 43 of the prior 44 months, with the lone contraction being December 2022. The New Orders index rose to 55.0% from 52.8%. The Employment index jumped back to expansion at 50.5% from 43.8% at the end of 2023, which marked a three-and-a-half-year low. The Suppliers Deliveries index increased to 52.4% from 49.5% (a reading above 50% for this component implies a slower delivery performance, which typically comes with increased demand). The Prices Paid index soared to 64.0% from 56.7%. That’s a 14-month high–a level sure to get the Federal Reserve‘s attention–and consistent with a resurgence in inflation pressures in the manufacturing survey as well as the regional Fed surveys.
• Like the ISM data, the competing S&P Global U.S. Services PMI picked up in January, expanding at the fastest rate since June 2023 with an increase to 52.5% from 51.4 the prior month, but slightly below the preliminary ‘flash’ estimate of 52.9. Contributing to the upturn was a quicker rise in New Orders. Unlike the ISM data, the S&P Global services sector data saw inflationary pressures soften as services providers raised output prices at the slowest pace in the current sequence of increase that began in June 2020, aided by slower growth of input prices, which rose at the second slowest rate since October 2020.
• According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit narrowed last year by the most since 2009. The annual trade deficit shrank nearly -19% to -773.4 billion from a record -945.7 billion in December 2022. In December, the deficit widened slightly to -$62.2 billion from -$61.9 billion the prior month (revised down from -63.2 billion). A smaller trade deficit helped contribute to economic growth. Net exports have added to Gross Domestic Product (GDP) for seven straight quarters. From the third quarter of 2020 through the start of 2022, trade subtracted from GDP. Imports fell -1.9% to $316.9 billion as consumers shift from goods consumption to services consumption. The drop in imports mostly reflected the lower cost of oil and less household demand for consumer goods such as computers and cell phones. Exports rose +1.2% to $258.2 billion.
• The Census Bureau reported Wholesale Inventories for December increased +0.4% to $897.2 billion, up from $894.0 billion the prior month (revised down from $896.23 billion), and in line with expectations. It was the first increase in inventories since February. Year-over-year inventories were down -2.7%, the fifth negative YoY reading in a row. Inventories are goods produced for sale that have yet to be sold. Businesses tend to increase inventories when sales are rising. Wholesale Trade Sales rose +0.7% for the month, more than double the expected +0.3% rise. Wholesale inventories data isn’t adjusted for inflation. Year-over-Year Wholesale Trade Sales were up +1.6%. The Inventory-to-Sales Ratio remained at 1.34 months, which is down from the 1.40 ratio a year ago. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves. The lower ratio versus last year suggests it’s taking less time for companies to sell their goods. 
• Weekly MBA Mortgage Applications rose +3.7% for the week ended February 2, following the prior week’s -7.2% drop. The Purchase Index slipped -0.6% following a +11.4% surge the prior week, and the Refinance Index increased +12.3% following a +1.6% increase the prior week. The average 30-year Mortgage Rate fell to 6.80% versus 6.78% the prior week.
• Weekly Initial Jobless Claims fell +9,000 to 218,000 for the week ended February 3, below expectations for 220,000 and the prior week’s 227,000 (revised up from 224,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell by +23,000 to 1,871,000 in the week ended January 27, below consensus expectations for 1,875,000 as well as the prior week’s reading of 1,894,000 (revised down from 1,898,000).

The Week Ahead

Most of the week’s economic data is back loaded on Thursday and a few on Friday. Inflation will be front and center with looks at both consumer and wholesale prices. The Consumer Price Index (CPI) comes early on Tuesday, and the Producer Price Index (PPI) is reported on Friday. Other inflation data includes Import and Export Prices on Thursday and the inflation expectations components of the Consumer Sentiment report on Friday. Housing data will also be heavy with weekly mortgage apps, NAHB builder confidence, as well as Building Permits and Housing Starts. Earnings season is now more than halfway complete, with about 60% of S&P 500 Index companies having announced their fourth-quarter results, and the earnings calendar remains busy next week. Companies such as Coca-Cola, Cisco Systems, Applied ­Materials, and Deere are among the more than 60 S&P 500 companies reporting profits. Additionally, there will be a number of Federal Reserve speakers, including members Bowman and Barkin on Monday, Barr on Wednesday, Waller and Bostic on Thursday, and Barr and Daly on Friday.

Did You Know?

BIG PRICE, BIG RETURNS? – In the large-cap Russell 1,000 Index, the 100 stocks that began 2024 with the lowest share prices fell an average of -7.4% in January, while the 100 stocks with the highest share prices rose an average of +2%. Additionally, the 41 Russell 1,000® stocks that began the year with a $500+ share price rose +3.2% in January, while the 25 sub-$10 stocks fell -11% (Source: Bespoke Investment Group)

TRADING PLACES – Institutional investor clients of Bank of America, which include mutual funds, pension funds, insurance companies, and banks, sold more than $5 billion in U.S. equities in the week ending 1/26/24 in what was the largest weekly outflow from those constituents since 2015. While institutions sold, corporates, retail, and hedge fund clients were all net buyers on the week (Source: Bloomberg, MFS).

NO INFLATION IN SUPER BOWL ADS – Last year’s Super Bowl had the highest share rating (77) since Super Bowl X in 1976, and the average 30-second ad cost $7 million. 30-second spots for this year’s Super Bowl between the Kansas City Chiefs and San Francisco 49ers are set to remain at the same $7 million mark as last year, which is just the 11th time in 57 years that prices haven’t increased relative to the prior year (Source: Superbowl-Ads.com).

This Week in History

TULIPMANIA – On February 5, 1637, “tulipmania” hit its peak in the Netherlands, with the price of the rare Witte Croonen tulip bulb reaching 1,345 guilders per half-pound, up 2,506% in 33 days. Over the next five years, these bulbs lost an annual average of -76% of their value until they fetched only 37.5 guilders in 1641 (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.