Weekly Market Update – February 16, 2024

Quick Takes

• Inflation reports surprised investors with higher-than-expected consumer and wholesale prices. As a result, traders are now pricing a March rate cut by the Fed at just an 11% probability, down sharply from the 90% odds coming into the year.  
• With expectations for rate cuts now coming later in the year and fewer in number, U.S. stocks and bonds fell. The S&P 500 Index and Nasdaq Composite Index broke five-week win streaks, falling -0.4% and -1.3% respectively. 
• The U.S. 10-year Treasury yield spiked above 4.30% on Friday following the hot CPI and PPI reading and closed the week at 4.28%, its highest level since early December. The Bloomberg U.S. Aggregate Bond Index dropped -0.6% for the week and is down -2% in 2024.

Stocks and bonds fall with the inflation fight not yet over

U.S. stocks and bonds fell for the week following inflation reports that sparked concerns the Federal Reserve may not cut interest rates until later this year. The January consumer (CPI) and producer (PPI) price indexes both rose more than expected, showing the Fed’s battle against inflation is far from over. In addition to the CPI and PPI reports, regional Fed reports and import prices also showed inflation pressures reemerging. Investors didn’t like the inflation news. According to the CME FedWatch tool, the odds of a 25 basis point rate cut by the Fed in March is now only 11%, down from 16% a week ago and off from 63% a month ago. Traders are now pricing in a 25% chance the Fed will keep interest rates steady through the June meeting. That’s up from 7.8% a week ago. The pushback in rate cut expectations led the major U.S. stock market indexes to break their five-week winning streaks. The S&P 500 Index closed down -0.4%, and the Nasdaq Composite Index dropped -1.3%. However, small caps, which have been conspicuous laggards in 2024, bucked the trend last week as the Russell 2000 Index managed to advance +1.1%. 

Non-U.S. stocks weren’t burdened by the U.S. inflation data and outperformed their U.S. counterparts. Developed market international stocks (as measured by the MSCI EAFE Index) were up +1.4%, while the MSCI Emerging Markets Index gained +2.1%. The U.S. dollar has risen every week in 2024 but was relatively mild last week, up just +0.16% – the lowest increase in three weeks.

Of course, bonds also struggled with the higher inflation data. The U.S. 10-year Treasury yield spiked above 4.3% on Friday following the hot PPI reading before settling down a bit at 4.28%–up +10 basis points for the week. The shorter 2-year U.S. Treasury yield was up +16 basis points to finish the week at 4.64%. As a result, the Bloomberg U.S. Aggregate Bond Index dropped -0.6% for the week and is down -2% in 2024. The Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was down -0.2% for the week, putting it down -4% in 2024.

Besides the hotter-than-expected inflation data, lukewarm earnings reports may also be weighing on investors. With nearly 80% of companies in the S&P 500 having reported fourth-quarter results, 75% have beaten estimates. According to FactSet, that is below the five-year average of 77%. Companies have reported earnings that are +3.9% above estimates, also below the five-year average of +8.5%.  

Chart of the Week

Inflation unexpectedly rose again in January, 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 +0.2% uptick (revised down from +0.3%). Year-over-year (YoY) CPI grew at a 3.1% rate, down from an unrevised +3.4% rate the prior month and above expectations for +2.9%. It hasn’t been below 3% since March 2021. Core CPI, which excludes the more volatile food and energy prices, was also higher than expectations at +0.4%, above the prior month and expectations which were both +0.3%. YoY Core CPI was +3.9%, higher than expectations for +3.7%, and unchanged from the prior month. Though both measures are well off their 2022 peak levels, they still remain stubbornly higher than the Fed’s +2% target. Seasonal adjustments may have contributed to the higher-than-expected readings, though it may take another month or two to determine if and how much the impact was. Like December, most of the CPI increase came from shelter costs tied to rent and housing. Without shelter costs, which constitutes about 25% of the Consumer Price Index (CPI), the year-over-year change in the CPI would have stood at 1.6%. YoY, shelter costs increased +6.0%. Transportation costs were up +9.5% YoY, and Food away from Home prices were up +5.1% YoY. The report is likely to discourage the Fed to start cutting rates until there’s a clearer deceleration in the rate of inflation. The Fed also tends to pay more attention to the core version of the Personal Consumption Expenditure (PCE), which it views as a more accurate gauge of inflation and is released at the end of the month.

The Inflation Battle Isn’t Over Yet

Consumer Price Index (CPI), year-over-year % change

Note: Core excludes food and energy items.
Source: Bureau of Labor Statistics, The Wall Street Journal.

Economic Review

• The final reading of the January University of Michigan Consumer Sentiment Index shot up to 79.6, the highest level since July 2021. That was a slight bump higher than the preliminary mid-month estimate of 79.0 and well above the 69.7 reading in December. The Current Economic Conditions component dipped to 81.5 from the preliminary estimate of 81.9 but is up from 67.4 the prior month. The Consumer Expectations component rose to 78.4 from the preliminary 77.1 and is up from 67.4 the prior month. One-year inflation expectations are +3.0%, matching expectations, a tick above expectations for +2.9%. The five-year inflation expectations also came in at +2.9%, just above expectations of +2.8%. The bottom line, cheaper gas prices, low unemployment, and a stock-market rally have given consumers more confidence in the economy. However, it also makes it harder for the Fed to hit its 2% inflation target and may push interest rate cuts further down the road.
• Like consumer inflation, wholesale inflation rose more than expected in January. The headline Producer Price Index (PPI) was up +0.3%, above the prior month’s unrevised -0.1% decline and above Wall Street expectations for a +0.1% increase. That was the fastest pace in five months. Year-over-year (YoY) PPI accelerated to +0.9%, above expectations for +0.6%, but down from the +1.0% unrevised annual rate the prior month. Core PPI, which strips out volatile Food and Energy costs, was up +0.5%, also above expectations for +0.1% and the -0.1% decrease the prior month (revised lower from 0.0%). That was the biggest increase in a year. Year-over-year (YoY) Core PPI was up +2.0%, above expectations for +1.6% and up from the +1.7% annual rate the prior month. The cost of services — the main driver of U.S. inflation — climbed +0.6% in the month. Wholesale prices for medical care, financial advice, legal services, and travel all rose. The cost of wholesale goods, meanwhile, fell for the fourth month in a row and is down -1.7% in the past 12 months. The decline was led by gasoline. Both the CPI and PPI reports feed into the Fed’s preferred inflation tracker, the Personal Consumption Expenditures (PCE) index, so it’s likely it will be elevated when released at the end of the month.
• January Import Prices jumped +0.8% after being down -0.7% the prior month, which was revised down from a flat reading where it was expected to remain. It was the first increase since last fall and the biggest rise in almost two years. Imported fuel prices were a big contributor for the increase, but most categories were up, which may have been tied to the shipping disruption in the Middle East. Nonfuel import prices were still up +0.6% after being unchanged the prior month. Year-over-year, import prices were down -1.3%, in line with expectations but up from the -2.4% annual rate of decline the prior month’s (revised down from -1.6%). Export Prices were also up +0.8%, above the prior month’s -0.7% drop (revised up from -0.9%) and above expectation for a -0.1% fall. Export prices are down -2.4% over the past year, up from the -2.9% annual rate the prior month (revised up from the originally reported -3.2% decline).
• The Commerce Department reported that U.S. Retail Sales fell -0.8% in January, the largest drop in 10 months, following the prior month’s +0.4% gain (revised down from +0.6%) and below expectations for a -0.2% fall. Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Spending on Autos, down -0.6%, was the biggest contributor to the drop. Consumers pulled back on spending following the holiday season and amid a big cold spell across the country. Sales ex-autos and gas were down -0.5% versus the prior month’s +0.6% jump, which was far short of expectations for a +0.2% gain. The Control Group, a figure used to calculate GDP, sank -0.4%, far below expectations for +0.2% and the +0.8% unrevised increase the prior month. 
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index fell -1.3 points in January to 89.9, below expectations of 92.3 and the lowest level in eight months. Plans to Increase Employment plans deteriorated, slipping -2 from the prior month to a net 14% of small business owners that plan to create new jobs in the next three months, the lowest level since May 2020. Current Job Openings also were down -1 to a net 39%, with the fewest openings in professional services and finance. Reports of Earnings Trends dropped -5 points to a net 30%. Many owners (32%) blamed weaker sales, while 15% cited the usual seasonal change. Concerns over inflation remained the most cited concern, with 22% of business owners noting it. Labor Quality was the second biggest concern in operating business.
• The Treasury Department reported that the U.S. Federal Budget Deficit narrowed to $22 billion in January, down from $39 billion the same month last year and only slightly higher than expectations for $21 billion. For the four months in fiscal 2024 (October through January), the deficit widened to $532 billion, up from $460 billion for the same period last year. Last month, the total Government Debt pushed past $34 trillion for the first time.  Year-over-year (YoY) Government Receipts rose at a faster pace than Government Spending, with receipts up $20 billion to $477 billion while spending rose $13 billion to $499 billion. 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. Interest on the federal debt was $96 billion higher over the first four months of the fiscal year than from the same period a year earlier. 
• January Housing Starts fell for a second straight month, dropping -14.8% to a seasonally adjusted annual rate of 1,331,000 units, down from an upwardly revised 1,562,000 units the prior month (originally 1,460,000) and well short of expectations for 1,460,000 units. That’s how many houses would be built over an entire year if construction took place at the same rate every month as it did in January. That was the lowest level since August 2023 and the sharpest drop since April 2020 during the pandemic when starts plunged -27%. Outside the pandemic drop, it was the worst drop in housing starts since 2015. Housing starts peaked at 1,800,000 million in April 2022. Single-family homes fell -4.7% in the month but multi-family units were down -35.8%. Housing starts only rose in the Northeast while dropping in the West, Midwest, and South. Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, fell -1.5% after the prior month’s +1.9% increase (revised up from +1.8%), falling short of expectations for +1.3%. Single-unit permits were up +1.6%, while multi-unit permits for buildings fell -9%. Multi-family construction is likely to be a drag on new development in 2024 due to the large number of multi-family units already under construction.
• Homebuilder confidence improved for a third straight month, with the National Association of Home Builders (NAHB) Housing Market Index (HMI) jumping to a five-month high of 48, up +4 from the prior month and beating expectations for 46. A year ago, the index stood at 42. Builders are scaling back on price cuts and other sales incentives, with the share of builders cutting home prices at 25%, down from 31% the prior month. The average price cut was 6%. The three subcomponents of the index all rose, with Current Sales up +4 to 52, Sales Expectations (in the next six months) up +3 points to 60, and Traffic of Prospective Buyers up +4 points to 33.
• January Industrial Production fell -0.1%, short of expectations for a +0.2% improvement and the prior month’s flat reading (revised down from +0.1%).  Manufacturing fell -0.5%, following the prior month’s +0.1% gain. Capacity Utilization, a measure of potential output, slipped to 78.5% from 78.7% the prior month, short of expectations for 78.8%. The current levels have been soft and remain below the historic average.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, rebounded +41 points in February to -2.4 from -43.7 the prior month and well above expectations to come in at -13.5. Though that was the third straight month in negative territory, the February surge helped offset some of the -58.2 points it plummeted over the prior two months. Reading below zero indicates worsening conditions. New Orders rose +43.1 points to -6.3 after plunging -38.1 points the prior month. Shipments also jumped, up +34.1 points to +2.8 after the prior month’s -31.3 drop. Expectations for six months ahead improved to the highest since October, up +3 points to +21.5.  The Prices Paid component picked up for the second straight month to the highest level since May, corroborating a pickup in inflation pressures seen in many other regional and national inflation gauges.
• Manufacturing in the Federal Reserve’s Third District improved slightly in February, with the Philly Fed Manufacturing Business Outlook Survey accelerating to +5.2, up from -10.6 the prior month, easily beating expectations for -8.1. That was the first positive reading for the index since August (readings above zero indicate economic expansion). New Orders rose to -5.2 from -17.9 the prior month. The Shipments component rose to +10.7 from -6.2 the prior month. The Six-Month Business Outlook improved to +7.2 from -4.0 previously. Prices Paid also inflated to +16.6 from +11.3 the prior month, while Prices Received slipped to +6.2 from +6.3. The Employment index fell deeper into negative territory, down to -10.3 from -1.8 the prior month.
• Weekly MBA Mortgage Applications fell -2.3% for the week ended February 9, following the prior week’s +3.7% gain. The Purchase Index fell -2.5% following a -0.6% slip the prior week and the Refinance Index fell -2.1% following a +12.3% increase the prior week. The average 30-Year Mortgage Rate fell to 6.87% versus 6.80% the prior week.
• Weekly Initial Jobless Claims fell -8,000 to 212,000 for the week ended February 10, below expectations for 220,000 and the prior week’s 220,000 (revised up from 218,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +30,000 to 1,895,000 in the week ended February 3, above consensus expectations for 1,880,000 as well as the prior week’s reading of 1,865,000 (revised down from 1,871,000).

The Week Ahead

There will not be much on the economic calendar in the holiday-shortened week (U.S. stock and bond markets were closed on Monday for Presidents Day). Economic reports include the Conference Board’s Leading Economic Index for January on Tuesday and Thursday, brings the S&P Global U.S. Manufacturing and Services Purchasing Managers’ Indexes (PMIs) for February as well as the Existing Home Sales for January from the National Association of Realtors. On Wednesday afternoon, the Federal Reserve will release the minutes from the Federal Open Market Committee‘s late-January monetary policy meeting. Fed officials left interest rates unchanged at the meeting, but the report may provide clues on conditions for lowering them later in 2024. Unlike economic reports, earnings reports will be busy. Defensive play Walmart reports Tuesday, and AI superstar Nvidia reports Wednesday. Other companies reporting include Diamondback Energy, Home Depot, Medtronic, Palo Alto Networks, Analog Devices, Etsy, Rivian Automotive, Vertiv Holding, Block, Booking Holdings, Intuit, Keurig Dr Pepper, Moderna, Newmont and Warner Bros. Discovery.

Did You Know?

NO B.A. – 62% of Americans over the age of 25 don’t have a bachelor’s degree. Some employers, such as IBM and Delta, are dropping their degree requirements to expand applicant pools for people traditionally ineligible for many managerial and technical positions. Progress is slow, though. Automated screening tools favor college grads, and hiring managers aren’t changing long-held beliefs about a degree’s value (Source: The Wall Street Journal)

EARLY RETIREMENT – The average age of retirement is just 60 years old, according to a survey done on behalf of Nationwide Financial, compared with an average expected age of retirement of 67. More than six out of 10 respondents stopped working earlier than planned, often due to unforeseen layoffs or illness or to care for a loved one. But the rising cost of living, combined with restlessness, means many older Americans are considering coming out of retirement and going back to work (Source: The Wall Street Journal).

GREEN LIGHT – In 2023 U.S. teenagers have $20 million invested using the financial app Greenlight, up from around $10 million in 2021. Teens generally can’t open their own brokerage accounts until they turn 18, but adults can set up custodial investment accounts for minors, and these accounts have surged in popularity (Source: The Wall Street Journal).

This Week in History

LOOKS FAMILIAR – On February 16, 1990, Cisco Systems went public on the Nasdaq, selling 2.8 million shares at $18 apiece. The stock increased in value by more than 30,000% by the end of the decade before deflating in the dot-com bust. It has yet to regain its peak. Many people are comparing Cisco’s stock performance of the dot-com era to Nvidia’s performance today (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.