Weekly Market Update – March 22, 2024

Quick Takes

• U.S. stocks and bond investors were encouraged by a dovish Federal Reserve and improving economic data. After surging the prior week, Treasury yields backed off somewhat after the Federal Reserve reiterated three rate cuts and Fed Chair Powell made dovish comments.
• The benchmark S&P 500 Index scored its best weekly performance of 2024, gaining +2.3% and snapping a two-week losing streak. The tech-heavy Nasdaq Composite Index gained +2.9%, ending at a record high, and the small caps Russell 2000 Index advanced +1.6%. 
• Economic data also buoyed markets. February Existing Home Sales were stronger than expected, Housing Starts and Building Permits rebounded, and the Conference Board’s Leading Economic Index rose for the first time in two years. 

U.S. stocks and bonds rally as Fed sends dovish signals

Stocks and bonds rallied last week, encouraged by a dovish Federal Reserve and improving economic data. Just a week after sinking on a bevy of data showing inflation reaccelerating, investors welcomed the news that Fed policymakers were still planning on three interest rate cuts this year. It was the Federal Open Market Committee (FOMC) policy meeting and Fed Chair Jerome Powell’s post-meeting press conference on Wednesday that helped ignite the markets and set the tone for the remainder of the week. As was widely anticipated, the FOMC left the federal funds rate unchanged, but investors seemed very encouraged by the Fed’s Summary of Economic Projections, and so-called “dot-plot,” which summarizes the outlook of individual committee members, showed expectations for three rate cuts in 2024 remain intact. After the prior week’s hotter-than-expected inflation data, markets started pricing in odds that the Fed may only deliver 2 quarter-point cuts this year. In Powell’s post-meeting press, he indicated that he was not overly concerned about the uptick in inflation data in January and February, chalking it up to “seasonal noise,” and seemed to downplay concerns over potential cracks in the labor market, like the surprise uptick in the unemployment rate in February. Economic data also buoyed markets. February Existing Home Sales were stronger than expected, Housing Starts and Building Permits rebounded, and the Conference Board’s Leading Economic Index rose for the first time in two years. 

As a result, the benchmark S&P 500 Index scored its best weekly performance of 2024, gaining +2.3% and snapping a two-week losing streak. Industrials, Consumer Discretionary, and Technology were among the strongest sectors, while Real Estate and Health Care were the only negative sectors for the week. Powered by the technology rally, the Nasdaq Composite Index gained +2.9%. Small caps trailed again, but the Russell 2000 Index still managed to advance by +1.6% for the week. Markets overseas weren’t quite as strong as in the U.S., but still made gains. Developed market international stocks (as measured by the MSCI EAFE Index) were up +1.1%, and the MSCI Emerging Markets Index rose +0.4%. U.K. inflation decelerated to the lowest level in two years and the Bank of England kept their interest rates unchanged and struck a more dovish tone. Norway’s central bank also kept rates on hold, but the Swiss National Bank surprised markets with a quarter-point rate cut. While inflation pressures eased in Europe, Eurozone business activity picked up. S&P Global reported the eurozone Purchasing Managers Index (PMI) rose to a nine-month high. In Asia, the Bank of Japan (BOJ) raised interest rates for the first time in 17 years, ending its negative interest rate policy. The BOJ was the last central bank to maintain negative interest rates, which have been in place since 2016.  

After surging the prior week, Treasury yields backed off somewhat in the wake of the dovish Fed positioning. The U.S. 10-year Treasury yield was down -11 basis points to end the week at 4.20%, and the 2-year U.S. Treasury yield dropped -14 basis points to finish the week at 4.59%. That helped the Bloomberg U.S. Aggregate Bond Index rebound +0.7% for the week. The U.S. Dollar Index rose another +1.0%, providing a hurdle for the Bloomberg Global Aggregate ex-U.S. Bond Index (non-U.S. bonds) which slipped -0.3% for the week. 

Chart of the Week

February Housing Starts rebounded after two straight months of declines, increasing +10.7% to a seasonally adjusted annual rate of 1,521,000 units, above expectations for 1,435,000 units and above the positively revised 1,374,000 units the prior month (originally 1,331,000), which was still the biggest drop since May 2022. That was the largest gain in nine months but still trails December’s level. Housing starts peaked at 1,800,000 million in April 2022. Single-family homes rose +11.6% in the month, while multi-family units were up +8.6%. Housing starts rose in the Northeast, Midwest, and South but fell in the West. Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, rose +1.9% after the prior month’s -0.3% decrease (revised up from -1.5%), exceeding expectations for +0.5%. Single-unit permits were up +1.0%, while multi-unit permits for buildings were up +2.4%. Bespoke Investment Group points out that though affordability remains a major issue in the housing market, it’s countered by what has been a chronic supply shortage in the post-Financial Crisis era. As shown in the chart below, the 12-month average of Housing Starts and Building Permits are starting to turn higher again. That’s important to a “soft landing” economic scenario. Outside of the brief Covid recession, Housing Starts do not trend higher when the economy is heading into a recession.

Housing Starts & Building Permits Turn Higher

12-Month Average, millions of units, 2010 – 2024

Source: U.S. Bureau of Labor Statistics, Bespoke.
Data as of March 19, 2024.

Economic Review

• The Conference Board’s Leading Economic Index (LEI) rose for the first time in two years, breaking the third-longest losing streak ever. It was up a scant +0.1% for the month, but easily beat the expected -0.2% drop and more than the prior month’s unrevised -0.4% drop. Breadth of the index was positive, with seven of the ten indicators tracked rising and three were negative. “Strength in weekly hours worked in manufacturing, stock prices, the Leading Credit Index, and residential construction drove the LEI’s first monthly increase in two years. However, consumers’ expectations and the ISM Index of New Orders have yet to recover,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators, adding, “despite February’s increase, the index still suggests some headwinds to growth going forward. The Conference Board expects annualized U.S. GDP growth to slow over the [second quarter to third quarter] period, as rising consumer debt and elevated interest rates weigh on consumer spending.”
• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) slipped to 52.2 in March, down from 52.5 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI climbed to a 22-month high of 52.5 from 52.2 the prior month, handily beating expectations of 51.8. The Services PMI slipped to a three-month low of 51.7 from 52.3 the prior month and shy of expectations for 52.0. The results show an economy that is still healthy with little indication of recession. New Orders, a sign of future sales, grew, but at a slower pace. Employment increased at the fastest pace this year “amid the most optimistic outlook for business activity since May 2022. On the inflation front, the Prices Paid component accelerated to the fastest pace in six months and firms raised their Selling Prices at the largest magnitude since April 2023. “Input costs rose at the fastest pace in six months, while firms increased their selling prices to the largest extent since April last year,” S&P said.
• Manufacturing in the Federal Reserve’s Third District slipped slightly in March, with the Philly Fed Manufacturing Business Outlook Survey sliding to +3.2 from +5.2, remaining in expansion territory and easily beating expectations for -2.5. Those are the first positive readings for the index since August and the first back-to-back positive readings since April and May 2022 (readings above zero indicate economic expansion). New Orders rose to +5.4 from -5.2 the prior month, its first positive level since October. The Shipments component rose to +11.4, its best level since August 2022. The Six-Month Business Outlook surged to +38.6 from +7.2 previously, the highest since July 2021. 
• Homebuilder confidence improved for a fourth straight month, with the National Association of Home Builders (NAHB) Housing Market Index (HMI) increasing 3 points to 51 and beating expectations for 49. It is the first time since July that the index has been above the 50 breakeven level, distinguishing between builders thinking conditions are good versus poor. According to NAHB, “More builders are cutting back on reducing home prices to boost sales. In March, 24% of builders reported cutting home prices, down from 36% in December 2023 and the lowest share since July 2023. However, the average price reduction in March held steady at 6% for the ninth straight month. Meanwhile, the use of sales incentives is holding firm. The share of builders offering some form of incentive in March was 60%, and this has remained between 58% and 62% since last September.” All four regions reported gains, with the Northeast up +2 points to 59, the South up +4 points to 50, the West up +5 points to 43, and the Midwest up +5 points to 41.
• The National Association of Realtors (NAR) reported that February Existing Home Sales rose the most since February 2023, gaining +9.5% to a seasonally adjusted annual rate of 4.38 million units, far above expectations for 3.92 million units and up from an unrevised 4.00 million units the prior month. Year-over-year existing sales are down -3.3% versus the -1.7% annual rate the prior month. The Median Existing Home Price was $384,500, up from $379,100 the prior month and up +5.7% from a year ago. Home prices peaked in June 2022, when the median price of a resale home hit $413,800.  Homes for sale were up +10.3% from last year to 1.07 million. Homes listed for sale remained on the market for 38 days on average, up from 36 days the previous month. Last November, homes were only on the market for 24 days. First-time buyers were 26% of sales in the month, down from 28% the month before. All-cash sales made up 33% of transactions, up from 32% the prior month and the highest since March 2011. Sales rose in the West but were up in all regions (Midwest, South, and Northeast). 
• Weekly MBA Mortgage Applications slid -1.6% for the week ended March 15, following the prior week’s +7.1% rise. The Purchase Index slipped -1.2%, following a +4.7% rise the prior week. The Refinance Index declined -2.5% following a +12.2% surge the prior week. The average 30-Year Mortgage Rate rose to 6.97% versus 6.84% the prior week, the first weekly increase after three consecutive declines. 
• Weekly Initial Jobless Claims fell -2,000 to 210,000 for the week ended March 16, below expectations for 216,000. The prior week was revised up +3,000 to 212,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +4,000 to 1,807,000 in the week ended March 9, below consensus estimates for 1,820,000 and last week’s reading of 1,803,000 (revised down from 1,811,000).

The Week Ahead

The final week of the first quarter will be shortened by a stock exchange closure on Friday and an early close for bonds in observance of the Good Friday holiday. Despite the abbreviated market hours, the economic calendar is full, with several economic releases that could potentially impact interest rate expectations. Monday brings February’s New Home Sales and the Chicago Fed’s National Activity Index. Tuesday gets busy with the Census Bureau’s Durable Goods report for February and the Conference Board’s Consumer Confidence update for March. Thursday is also full, with a final estimate for fourth-quarter Gross Domestic Product (GDP) and the University of Michigan’s final read on Consumer Sentiment. Although Friday is an exchange holiday, the Bureau of Economic Analysis releases its Personal Consumption Expenditures Price Index (PCE) price index for February. Excluding food and energy components, the Core PCE is the Fed’s preferred inflation measure and will be closely watched after the higher-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) that were reported for January and February. Core PCE is forecast to have climbed +2.8% year over year, which would match the January reading.

Did You Know?

SWISS SURPRISE – In a surprise move, Switzerland became the first major economy to cut interest rates. On Thursday, the Swiss National Bank (SNB) surprised markets with a decision to lower its main policy rate by 0.25 percentage points to 1.5%. Economists had expected the Swiss central bank to hold rates at 1.75%. The SNB also reduced its annual inflation forecasts 1.4% in 2024, down from its 1.9% estimate in December and 1.2% for 2025, trimmed from the previous 1.6% estimate (Source: Bloomberg).

HYBRID HYPE – U.S. sales of hybrid vehicles increased 50% in the first two months of the year. Compare that with electric-vehicle (EV) sales, which grew 13% in both growth and volume, according to research site Edmunds. Despite the recent focus on EVs, automakers have added hybrid models to their lineups. Increased selection plus some EV hesitancy makes hybrids a popular choice for shoppers (Source: Edmunds, The Wall Street Journal).

HAPPINESS DIPS – The U.S.’s rank in the Gallup World Poll for the World Happiness Report 2024 was 23. This marks the first time since the global survey began in 2012 that the U.S. wasn’t in the top 20, largely due to a drop in happiness among younger adults. Costa Rica and Lithuania were among the countries that reported being happier than the U.S. (Source: Gallup, The Wall Street Journal).

This Week in History

INTEL INSIDE BEFORE AI – On March 22, 1993, Intel began shipping its first Pentium chips. The new microprocessor was five times more powerful than the company’s popular 486 chips, which debuted in 1989. Hewlett-Packard and Compaq both announced that they would use the semiconductor in their new lines of servers. This past week, Nvidia unveiled its next generation of artificial intelligence chips at its annual conference, which one analyst dubbed “AI Woodstock.” The company’s graphics-processing unit has become the computational workhorse of the generative AI boom (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.