Weekly Market Update – April 05, 2024

Quick Takes

• U.S. stocks and bonds struggled as signs of stronger manufacturing and a robust jobs market have investors concerned that the Fed may not deliver the three rate cuts the Fed forecasts indicate. The S&P 500 fell -0.95%, the Nasdaq was down -0.8%, and the Russell 2000 dropped -2.9%.
• The 10-year U.S. Treasury yield rose +20 basis points to 4.40%, and the 2-year U.S. Treasury yield was up +13 basis points to 4.75%. With yields higher, the Bloomberg U.S. Aggregate Bond Index fell -1.1%, and the Bloomberg Global Aggregate ex U.S. Bond Index was down -0.4%.
• The monthly Employment Situation report showed hotter-than-expected hiring once again in March, with 303,000 new Non-Farm Payrolls added during the month, far above Wall Street expectations for 214,000. The Unemployment Rate dipped to 3.8% from 3.9%.

Stocks retreat from record highs as economic data heats up

U.S. stock posted their worst weekly performance of the year since the first week of January, albeit with the S&P 500 Index down a modest -0.95%. It was only the fifth negative week of 2024. The decline was primarily attributed to strong labor market data and a rally in commodities during the week, which led to a resurgence in inflation fears and increases the odds that the Federal Reserve (the Fed) will be in no hurry to cut interest rates. On Friday, nonfarm payrolls growth was far ahead of Wall Street expectations, as the economy added 303K jobs, while the unemployment rate ticked down, and the labor force participation rate inched up. Markets have dialed back the probability of a 25-basis point rate cut at the central bank’s June policy meeting. The odds of at least one rate cut by the end of the Fed’s June meeting now stand at just 49%, according to the CME’s FedWatch tool, the first time it’s been below 50% since last August. On Wednesday, Fed Chairman Jerome Powell repeated that he doesn’t expect “it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%.” However, some of the bigger points that he made stressed that the “recent data does not materially change the overall picture,” and it would be appropriate to start cutting rates “at some point this year.” Smaller companies also had their worst week since early January but with a more severe decline than their large cap brethren as the Russell 2000 Index dropped -2.9%. The Nasdaq Composite Index did the best among the primary U.S. stock indices but still slid -0.8% for the week. Markets overseas also struggled, with developed market international stocks (as measured by the MSCI EAFE Index) falling -1.4% while the MSCI Emerging Markets Index eked out a +0.2% gain.

U.S. Treasury yields increased on signs that the manufacturing sector might finally be gaining traction and the labor market remains robust. The U.S. 10-year Treasury yield was up +20 basis points, ending the week unchanged at 4.40%, while the 2-year U.S. Treasury yield was up +13 basis points to finish the week at 4.75%. With yields popping higher, the Bloomberg U.S. Aggregate Bond Index fell -1.1% for the week, while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was down -0.4%. 

Chart of the Week

The monthly Employment Situation report showed hotter than expected hiring once again in March, and this time, the revision of the prior month wasn’t materially lower than the originally reported data. On Friday, the Labor Department reported that U.S. employers added a seasonally adjusted 303,000 new Non-Farm Payrolls (NFP) during the month, far above Wall Street expectations for 214,000 and the biggest gain since May 2023. It was an acceleration from the 270,000 in February, which was revised down modestly from the initially reported 275,000. 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 also fell a tick, back to 3.8% after hitting a 25-month high of 3.9% the prior month. Inflation watchers will note that Average Hourly Earnings rose at the expected +0.3%, up just a tick from +0.2% the prior month (which was revised up from +0.1%). Year-over-year, Average Hourly Earnings decelerated to +4.1% from +4.3%, in line with expectations and marking the slowest rate since June 2021. 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 34.4 from 34.3, which is where it was expected to stay. Labor-Force Participation also ticked up to 62.7% from 62.5%, a bit more than 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 and showed increases in many aspects of the report.

Monthly Job Creation in the U.S. Jumped Again

January 2022 through 2024

Source: U.S. Bureau of Labor Statistics, CNBC.

Economic Review

• The Institute for Supply Management’s (ISM) Manufacturing PMI turned positive for the first time since October 2022, rising to 50.3% in March from an unrevised 47.8%, blowing by expectations for 48.3%. The manufacturing PMI had been stuck in contraction territory for 16 months in a row (levels below 50 indicate contracting economic activity), which is the longest monthly contraction streak since 2000-2001 following the dot com bubble crash. New Orders flipped to expansion, rising to 51.4% from 49.2%. The Production component jumped +6.2 points to 54.6% after falling into contraction the prior month. The Employment component improved +1.4 points but remains in contraction at 47.4%. The Prices Paid index, a measure of inflation, accelerated up +3.3 points to 55.8%, its highest level since July 2022 — but still well below the June 2021 peak of 92.1%. 
• Growth in the key services sector, which makes up more than two-thirds of economic activity, eased again in March. The ISM Services PMI slipped a three-month low of 51.4% after dipping to 52.6% the prior month and missing expectations for 52.8%. Still, the U.S. nonmanufacturing sector has expanded for 15 consecutive months now and for 45 of the prior 46 months, with the lone contraction being December 2022. The New Orders index fell to 54.4% from 56.1%. The Employment index inched up to 48.5% from 48.0%. The Production index crept up to 57.4% from 57.2.5% (a reading above 50% for this component implies a slower delivery performance, which typically comes with increased demand). In good news on the inflation front, and in stark contrast to manufacturing input prices, the services Prices Paid index fell -5.2 points to 53.4%, its lowest level since March 2020.
• The seasonally adjusted S&P Global U.S. Manufacturing PMI remained in expansion territory for March, its third straight month above 50, but decelerated slightly to 51.9 from 52.2 the prior month. Manufacturers recorded a solid and accelerated rise in Production in the recent month, with the rate of growth the sharpest in almost two years. Stronger demand was also evident in data for New Orders, which showed an increase for the third month running, but the pace of expansion was softer than the prior month. Firms remained confident that output will increase over the coming year, which encouraged manufacturers to expand their staffing levels, as the pace of Hiring was the most pronounced since July last year. Input Costs increased sharply, with the rate of inflation ticking up from the prior month.
• Like the ISM data, the competing S&P Global U.S. Services PMI ticked down in March to a three-month low of 51.7 from 52.3 the prior month. Still, the index remained above the 50.0 expansion/contraction delineation mark and, therefore, signaled a rise in business activity for the 14th consecutive month. Output and New Orders rose but at a slower rate. The pace of Employment Growth also moderated. Unlike the ISM results, the S&P Global data showed cost pressures spike as both Input Prices and Output Prices hit six-and eight-month highs, respectively. 
• U.S. Factory Orders rebounded in February, up +1.4% for the month, more than the expected +1.0%, and up materially from the prior month’s -3.8% drop (revised down from the originally reported -3.6%). Factory Orders Ex-Transportation were up +1.1%, more than double the +0.5% expected and up from -0.6% the prior month (revised up from -0.8%). Meanwhile, Durable Goods Orders were up +1.3%, a bit under the +1.4% expected which was also the unrevised rate the prior month. The important Core Capital Goods Orders (Nondefense Capital Goods Excluding Aircraft), a proxy for business spending, were in line with expectations at +0.7%, which is where it was the prior month, too. Shipments of Core Capital Goods Orders, which feed into Gross Domestic Product (GDP), were down -0.6% after a -0.7% drop the prior month.
• The February Job Openings Labor Turnover Survey (JOLTS) showed Job Openings inched up ever so slightly to 8.756 million from 8.748 million the prior month (revised down from 8.863 million). That was above expectations for 8.730 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 came in Finance, State & Local Government, and Entertainment. Jobs fell in the Federal Government and Information (a sector that includes the media and some high tech). The ratio of Job Openings to Unemployed Workers slipped to 1.36 from 1.43, still above prepandemic 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 was up a tick to 3.5 million from 3.4 million, which was the lowest level in a three years and far off the record 4.5 million job quitters reached in late 2021. The Quits Rate remained at 2.2% for the fourth straight month, 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 Commerce Department reported that Construction Spending fell again in February, down -0.3%, far short of expectations for an increase of +0.7% and below the prior month’s unrevised -0.2% decline, which broke a 12-month winning streak. Over the past year, construction spending is up +10.7%, versus an annual rate of 11.2% the previous month. Total Private Construction was flat for a second straight month, and total Public Construction was down -1.2%, following a -0.9% decline the prior month. Total Residential Spending increased +0.7% month-over-month while total Nonresidential Spending fell -0.9% month-over-month. The bottom line is that single-family construction remains a key component for overall construction spending, but the increase there wasn’t enough to offset the decline in nonresidential spending in both the private and public sectors.
• U.S. Consumer Credit increased by $14.1 billion in February, a bit below expectations for $15.0 billion and down from $17.7 billion the prior month (which was revised down from $19.5 billion). That’s a +3.4% annual growth rate, down from the +4.2% annualized growth the prior month. Growth for revolving credit, such as credit cards, increased by +11.3% after a +8.6% rise the prior month. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, increased +2.9% following the prior month’s +9.1% increase. 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.
• According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit widened for the third straight month in February to -$68.9 billion. That was more than the expected -$67.6 billion and the largest trade deficit since April 2023. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. Exports were up +2.3% to $263 billion, and imports rose +2.2% to $332 billion, led by mobile phones, foods, and automobiles. A wider trade deficit is expected to subtract from Gross Domestic Product (GDP) for the first time since early 2022.
• Weekly MBA Mortgage Applications slid -0.6% for the week ended March 29, following the prior week’s -0.7% dip. The Purchase Index slipped -0.7% following a -0.2% decline the prior week. The Refinance Index declined -1.6% following the same drop the prior week. The average 30-Year Mortgage Rate dipped to 6.91% versus 6. 93% the prior week.
• Weekly Initial Jobless Claims rose +9,000 to 221,000 for the week ended March 30, above expectations for 214,000. The prior week was revised up +2,000 to 212,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell by -19,000 to 1,791,000 in the week ended March 23, above consensus estimates for 1,811,000 and last week’s reading of 1,810,000 (revised down from 1,819,000).

The Week Ahead

After last week’s hot jobs report, March inflation data will be closely watched this week. On Wednesday, the Bureau of Labor Statistics’ Consumer Price Index (CPI) for March is expected to be up by +3.4% from a year earlier. Investors also get a look at minutes from the Fed’s last Federal Open Markets Committee (FOMC) policy meeting on Wednesday afternoon. Then, on Thursday, the BLS will publish wholesale inflation with the March Producer Price Index (PPI). The European Central Bank will announce a monetary policy decision on Thursday as well. Other data to watch includes the National Federation of Independent Business’ Small Business Optimism Index for March on Tuesday and the University of Michigan’s Consumer Sentiment Index for April on Friday. Next week will mark the start of the first quarter earnings season as well. Companies releasing their results next week will include Delta Air Lines and Constellation Brands on Wednesday then CarMax, Constellation Brands, and Fastenal on Thursday. However, earnings begin in earnest on Friday, with results from several big U.S. banks, such as Citigroup, JPMorgan Chase, and Wells Fargo. 

Did You Know?

MAGIC NUMBER – Americans say they need $1.46 million to retire comfortably, according to an annual Northwestern Mutual survey. The trouble is, the average amount Americans have actually set aside for retirement—$88,400—is a far cry from that. According to Northwestern Mutual’s survey, the $1.5 million cited this year is up +15% over the $1.27 million reported last year. It’s also up +53% from the $951,000 target Americans reported in 2020. Growth is much faster than the rate of inflation, which recently stood at around 3% (Source: Northwestern Mutual, The Wall Street Journal).

NOT CHILD’S PLAY – The U.S. contributed $900 toward childcare per toddler in 2019, according to the Organization for Economic Cooperation and Development. That compares with $9,000 in France and $16,100 in Sweden. A growing number of businesses are subsidizing childcare as a solution for staffing problems (Source: The Wall Street Journal).

NCAAW RECORD – According to Nielsen, 12.3 million viewers tuned in to watch Caitlin Clark and the University of Iowa’s highly anticipated rematch with Louisiana State University on Monday night, April 1. That makes it the most-watched women’s college basketball game on record. The heated Elite Eight showdown, which Iowa won 94-87, was ESPN’s second-highest audience for any basketball game since 2012, the company said (Source: Nielsen, The Wall Street Journal).

This Week in History

CAN YOU HEAR ME NOW – On April 5, 1877, the world’s first regular telephone line went into service. It connected Charles Williams’ metalworking shop in Boston with his home. Within weeks, Alexander Graham Bell began signing up his first paying customers (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.