Weekly Market Update – March 08, 2024

Quick Takes

• The S&P 500 posted just its third weekly decline since late October, with a mild -0.3% loss. The Nasdaq, with a heavy weighting in tech companies, fell -1.2%. The small cap Russell 2000 Index bucked the trend with a +0.3% gain, its fourth positive week in the past five.  
• Treasury yields fell over the week with the U.S. 10-year Treasury yield down -10 basis points to end the week with a yield of 4.07%. The Bloomberg U.S. Aggregate Bond Index was up +0.8% for the week, and the Bloomberg Global Aggregate ex U.S. Bond Index was up +1.8%.
• U.S. employers added a seasonally adjusted 275,000 new Non-Farm Payrolls in February, far above Wall Street expectations for 200,000. However, January was revised sharply lower to 229,000 from 353,000, and December was also revised down by 43,000 payrolls.

Stocks slipped from record territory while bonds advanced

After reaching record levels earlier in the day, stocks retreated Friday afternoon to finish the week with modest losses. The S&P 500 Index and Nasdaq Composite Index reversed sharply from all-time highs as semiconductor companies sold off hard, weighing down the Technology sector and overshadowing what was a relatively healthy Employment report. The Labor Department’s monthly Nonfarm Payrolls release reported a stronger-than-expected 275,000 new jobs in February but also revised the previous two months down by a combined -167,000 jobs. In his midweek testimony to Congress, Fed Chairman Jerome Powell said, “labor demand still exceeds the supply of available workers,” but was largely seen as reiterating previous Fed talking points. Overall, Powell’s testimony and the employment data should keep the Federal Reserve on track for its first rate cut in June. That’s how traders are pricing odds based on the CME FedWatch Tool, which ended the week with a 71.0% chance of a cut at the Fed’s policy meeting by June. 

For the week, the S&P 500 posted just its third weekly decline since late October, with a mild -0.3% loss. The Nasdaq, with about half its weight in tech companies, fell -1.2%. The small cap Russell 2000 Index bucked the trend with a +0.3% gain, its fourth weekly gain in the past five weeks. Moving overseas, developed market international stocks (as measured by the MSCI EAFE Index) were up +2.3%, while the MSCI Emerging Markets Index gained +1.2%. 

A decline in Treasury yields helped boost bonds. The U.S. 10-year Treasury yield shed -10 basis points to yield 4.07%, and the shorter 2-year U.S. Treasury yield dropped -6 basis points to finish the week at 4.47%. The Bloomberg U.S. Aggregate Bond Index was up +0.8% for the week, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was up +1.8%.

In other markets, the U.S. dollar index was down for six consecutive days and touched its weakest level since mid-January. The index dropped -1.1% for the week. Gold and Bitcoin continued to rally, with the digital currency hitting a new intraday high above $70,000.

Chart of the Week

The monthly Employment Situation report showed hotter than expected hiring again in February, but the revisions of prior data was sharply lower than the previously reported data. On Friday, the Labor Department reported that U.S. employers added a seasonally adjusted 275,000 new Non-Farm Payrolls (NFP) during the month, far above Wall Street expectations for 200,000 and an acceleration from the 229,000 in January. However, the January result was revised sharply lower from the initially reported 353,000 and December was also revised down another 43,000. Employment gains were led by Health Care with 67,000 new jobs. Government was again a big contributor, with 52,000 jobs, while Restaurants and Bars added 42,000. The Unemployment Rate rose to a 25-month high of 3.9%, from 3.7% in the prior month, where it was expected to remain. Inflation watchers will note that Average Hourly Earnings rose at a scant +0.1%, far slower than the +0.6% rate the previous month, which was the largest increase in nearly two years. Year-over-year, Average Hourly Earnings were up +4.3%, in line with expectations but down from the prior month’s +4.4% (revised down from +4.5%). The Fed would like to see wage growth slow to around +3% annually or less, a level it sees as consistent with low inflation. Average Weekly Hours ticked up to 34.3 from 34.2 the prior month, matching expectations. Labor-Force Participation held steady at 62.5%, a tick below expectations for 62.6%. It remains well below the February 2020 prepandemic level of 63.3%. The key takeaway from the report is that the U.S. labor market remains healthy but saw some softening in February but likely not enough for the Fed to change course on rates.

U.S. unemployment rate hits 25-month high

January 2021 through February 2024

Source: U.S. Bureau of Labor Statistics, CNBC.
Data as of March 8, 2024.

Economic Review

• The January Job Openings Labor Turnover Survey (JOLTS) showed Job Openings slipped to 8.863 million from 8.889 million the prior month (revised down from 9.026 million). That was above expectations for 8.850 million but 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. Job openings fell in the trade and transportation sectors, as well as retail trade and government, while vacancies rose in leisure and hospitality, professional and business services, and health care. The ratio of Job Openings to Unemployed Workers inched up to 1.45 from 1.44, still above pre-pandemic 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, at 3.4 million, was unchanged at the lowest level in three years and is far off the record 4.5 million job quitters reached in late 2021. The Quits Rate ticked down to 2.1% from 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 fell to 5.69 million from 5.79 million the month before. The Hiring Rate ticked down to 3.6% from 3.7%. This JOLTS release included the agency’s annual revision of monthly data back to January 2019, and job openings were revised slightly lower for most of 2023.
• The Institute for Supply Management’s (ISM) Services PMI slipped in February to 52.6% from a four-month high of 53.4% the prior month, missing expectations for 53.0%. According to the ISM data, the U.S. nonmanufacturing sector has expanded for 14 consecutive months now and for 44 of the prior 45 months, with the lone contraction being December 2022. The New Orders index rose to 56.1% from 55.0%. The Employment index contracted for the second time in three months, falling to 48.0% from expansion at 50.5% the prior month. 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 fell to 58.6% after surging to 64.0% the prior month, which was a 14-month high. The services sector makes up more than two-thirds of economic activity, and while the pace of growth isn’t strong, it’s been steady. 
• Like the ISM data, the competing S&P Global U.S. Services PMI ticked down in February, expanding at the second fastest rate in the past seven months with an increase to 52.3%, a bit below the unrevised 52.5% the prior month, but above the preliminary ‘flash’ estimate of 51.3%. Cost pressures eased, but selling prices rose at a faster pace. Employment growth dipped amid a cautious outlook. 
• Orders for manufactured goods sank in January, as U.S. Factory Orders fell +3.6% for the month, far more than expectations for a -2.9% drop and down from the prior month’s -0.3% dip (revised down from the originally reported +0.2% increase). Fewer contracts for Boeing passenger planes were largely responsible for the drop and Ex-Transportation orders were down a more modest -0.8%, down from -0.3% the prior month (revised sharply down from +0.4%). Meanwhile, Durable Goods Orders were down -6.2%, a bit more than the -6.1% drop expected which was also the rate the prior month. The important Core Capital Goods Orders (Nondefense Capital Goods Excluding Aircraft), a proxy for business spending, were flat, missing expectation for a +0.1% rise, which is where it was the prior month, too. Shipments of Core Capital Goods Orders, which feeds into Gross Domestic Product (GDP), were up +0.9% after a +0.8% gain the prior month.
• U.S. Consumer Credit rose $19.5 billion in January, nearly double expectations for $10.0 billion, and up massively from the paltry $919 million in December (which was revised down from $1.56 billion). That’s a +4.7% annual growth rate, up from the snail’s pace of +0.2% annualized growth the prior month. Growth for revolving credit, such as credit cards, accelerated to a +7.7% after a +2.4% rise prior month. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, was up +3.6% 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 interest rates may be a hurdle for further consumption, which is a major contributor to economic growth. 
• On Wednesday, the Federal Reserve released its Beige Book, which is a collection of business anecdotes from the 12 Federal Reserve districts used by policymakers to prepare for their next monetary policy decision. According to the latest book, the U.S. economy accelerated slightly in early 2024, and it noted that the outlook for the rest of the year was “generally positive.” Eight of the Fed’s 12 regional banks reported a pickup in growth, and one district found a “slight softening” in economic activity. Consumer spending slowed a bit as poor weather may have hampered activity, but higher prices due to inflation also played a role. Shipping disruptions in the Red Sea tied to attacks by Yemen’s Houthi rebels did not have much impact. The creditworthiness of U.S. households and businesses was healthy, the Fed said, despite rising delinquencies in paying loans back. Businesses have also found it harder to pass their own higher costs onto customers, “who became increasingly sensitive to price changes.”  The survey showed the labor market continued to soften as companies found it easier to hire or retain current employees. Only very highly skilled employees were particularly difficult to find. Wages rose at a slower pace, and employees’ expectations of future pay hikes were more in line with historical increases.
• U.S. Household Net Worth rebounded to a record high in the fourth quarter as rising stock prices were only partially offset by a slight drop in real estate values. Wealth was up $4.8 trillion to $156 trillion following a $1.4 trillion gain in the third quarter (revised up from $1.3 trillion). Household Net Worth increased on a year-over-year basis by +8% after +5.5% gain in the second quarter (revised down from +5.7%). Housing wealth declined after two quarters of increases, and the components of wealth tied to the stock market rose sharply as stocks ended the year near all-time highs. Household liabilities rose modestly but more slowly than in the third quarter.
• According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit widened +5.1% in January to -$67.4 billion. That was more than the expected -63.5 billion and the largest trade deficit since April 2023. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. Exports were nearly flat, and imports rose +1.1%, led by technology equipment and automobiles. Trade helped boost GDP in 2023, but Capital Economics estimates that the deficit might reduce first quarter GDP by about 0.5 percentage points.
• Weekly MBA Mortgage Applications jumped +9.7% for the week ended March 1, following the prior week’s -5.6% drop. The Purchase Index surged +10.6% following five weeks of declines and the Refinance Index was up +8.1% following a -7.3% drop the prior week. The average 30-Year Mortgage Rate slipped to 7.02% versus 7.04% the prior week, the second consecutive decline after five straight weekly increases. 
• Weekly Initial Jobless Claims were unchanged at 217,000 for the week ended March 2, above expectations for 216,000. The prior week was revised up to 217,000 from 215,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +8,000 to 1,906,000 in the week ended February 24, above consensus estimates for 1,880,000 and last week’s reading of 1,898,000 (revised down from 1,905,000).

The Week Ahead

Inflation and the consumer will be the focus this week. Tuesday brings the release of the Consumer Price Index (CPI), and on Thursday, the Producer Price Index (PPI) is reported. The checks on consumer and wholesale inflation will be watched closely by investors who are just getting comfortable with the idea that the Fed won’t be cutting rates until June rather than this month, which was the expectation just a couple of months ago. The federal government also releases Retail Sales data on Thursday, and then on Friday, Consumer Sentiment is reported. Earnings season is winding down, but there are still some big names like Adobe, Oracle, and Lennar as well as a bunch of retailers such as Dollar Tree, Dollar General, Williams-Sonoma, Dick’s Sporting Goods, Ulta Beauty, and Kohl’s. 

Did You Know?

CHINA GROWTH CONUNDRUM – On Tuesday, China’s ruling Communist Party announced this year’s economic growth target of +5%. How will China achieve that target with a collapsing property market and a declining population? It probably won’t. Last year China forecast nominal growth of about +7% in 2023. Instead, growth was reported at +5.2%. NY-based Rhodium Group has studied China’s data for years and concludes it vastly overstates growth. It puts growth last year at around only +1.5% (Source: Rhodium Group, The Wall Street Journal).

HELP WANTED, MUST SPEAK AI – Maybe horsing around with ChatGPT is good for your career, after all. U.S. companies are stepping up recruitment of Artificial Intelligence (AI) professionals and paying extra for the privilege. New AI-related job listings are up +42% in 15 months, coinciding with the rollout of the popular tool (Source: The Wall Street Journal).

RENTAL DEFLATION – The current average nationwide price per day to rent a car is $38, according to travel-search company Hopper, down -8% from last year. It’s a significant turnaround for travelers, who just a few years ago witnessed rental-car prices soar roughly +80% higher than prepandemic levels (Source: Hopper, The Wall Street Journal). 

This Week in History

SLIGHTLY OFF – On March 7, 2001, Abby Joseph Cohen, Chief Investment Strategist at Goldman Sachs, forecasted that the S&P 500 Index would close the year at 1,650 and that the Dow Jones Industrial Average would finish at 13,000 and recommended that investors boost their holdings of U.S. stocks. The S&P 500 closed 2001 at 1,148, a loss of -13.0% for the year, following the -10.1% drop in for the calendar year 2000. The Dow closed out 2001 at 10,022, which was a drop of -7.1% for the year after falling -6.2% in 2000 (Source: The Wall Street Journal, Bloomberg).

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.