Weekly Market Update – May 03, 2024

Quick Takes

• Global stocks and bonds rallied last week, with investors very encouraged by dovish comments from Fed Chairman Jerome Powell and an April employment report that struck Goldilocks tones with slower jobs growth and weaker wage increases.
• The S&P 500 Index advanced +0.6% for the week, spurred by a +1.4% gain by the Technology sector. The Technology strength helped the Nasdaq Composite Index to a +1.4% gain. The small cap Russell 2000 Index led the major U.S. indices with a +1.7% increase.
• The yield on the 2-year U.S. Treasury yield dropped -18 basis points to finish the week at 4.82%, while the 10-year U.S. Treasury yield was down -16 basis points, ending the week at 4.51%. U.S. bonds were up +1.2% for the week, while the Global Bonds rose +1.4%. 

Stocks and bonds rally on ‘Goldilocks’ economic data

It appears that bad news is good news again.  As detailed in the summaries found in the Economic Review section below, economic data throughout the week was weaker than expected, capped by Friday’s Employment Situation Report for April. That was widely regarded by market watchers as the quintessential Goldilocks result with weaker-than-expected job growth, slower-than-expected wage growth, and an unexpected rise in the unemployment rate. And the markets loved it! The report sent stocks higher and bond yields sharply lower (bond yields move in the opposite direction of bond prices). The results were considered cool enough to revive hopes that the Federal Reserve (Fed) will cut rates sooner rather than later, but not too cold that the economy can’t still achieve a soft landing. It came after dovish comments by Fed Chairman Jerome Powell following the Fed’s widely expected decision to hold rates steady on Wednesday. The market also got a boost from Apple, which surged +6% on Friday from its latest earnings report and the announcement of an $110 billion (yes, billion) share buyback—the largest buyback in history.

It was all good to send global stocks and bonds higher. The S&P 500 Index advanced +0.6% for the week, spurred by a +1.4% gain by the Technology sector. The Technology strength helped the Nasdaq Composite Index to a +1.4% gain. The small cap Russell 2000 Index led the major U.S. indices with a +1.7% increase, enough to lift it back into positive territory for the year-to-date period. Overseas stocks rallied, too, likely buoyed by a positive surprise by Eurozone Gross Domestic Product (GDP). Developed market international stocks (as measured by the MSCI EAFE Index) were up +1.5%, while the MSCI Emerging Markets Index rose +1.9%.

As mentioned, bond yields were sharply lower over the week on the softer jobs growth and slower wage increases. For the week, the yield on the 2-year U.S. Treasury yield dropped -18 basis points to finish the week at 4.82%, while the 10-year U.S. Treasury yield was down -16 basis points, ending the week at 4.51% after both hit their highest weekly closes since mid-November the prior week. The Bloomberg U.S. Aggregate Bond Index was up +1.2% for the week, while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) improved +1.4%. 

Chart of the Week

The monthly Employment Situation report showed much weaker than expected hiring in April. On Friday, the Labor Department reported that U.S. employers added just 175,000 new Non-Farm Payrolls (NFP) during the month, a six-month low and far below Wall Street expectations for 240,000. 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 edged back up to 3.9% from 3.8% the prior month. That marks the 27th month in a row it’s been below 4%, which is the longest such streak since the 1960s. Inflation watchers noted that Average Hourly Earnings rose +0.2% for the month, below expectations for +0.3%, which was where it was the prior month. Year-over-year, Average Hourly Earnings decelerated to +3.9% from +4.1%, which was lower than the +4.0% expected. 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 the prior month, where it was expected to stay. Labor-Force Participation held steady at 62.7%, as expected. The report was generally described as a Goldilocks result in which new job creation was slower but still adequate, and wage growth was weaker but not weak. That may be suitable to validate Fed Chairman Jerome Powell’s position that the Fed’s next policy move will be a cut, not a hike.

Monthly Job Creation in the U.S. Fell

January 2022 through April 2024

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

Economic Review

• The Institute for Supply Management’s (ISM) Manufacturing PMI reversed in April, falling -1.1 points to 49.2% from an unrevised 50.3% the prior month, missing expectations of 50.0%. The manufacturing PMI has been stuck in contraction territory for 17 of the last months (levels below 50 indicate contracting economic activity). Like the headline index, the New Orders component dipped back into contraction, falling to 49.1% from 51.4%. The Production component fell to 51.3% from 54.6%. The Employment component improved to 48.6% from 47.4%. The Prices Paid index, a measure of inflation, accelerated up +60.9% from 55.8%, its highest level since June 2022 — but still well below the June 2021 peak of 92.1%.  Meanwhile, the Institute for Supply Management’s (ISM) Services PMI fell sharply in April to 49.4%, its lowest level since December 2022, down from 51.4% the prior month. That was well below expectations for 52.0%. The U.S. nonmanufacturing sector had expanded for 15 consecutive months and for 45 of the prior 46 months, with the previous lone contraction occurring in December 2022. The New Orders index fell to 52.2% from 54.4%. The Employment index dropped to 45.9% from 48.5%. The Production index dived to 50.9% from 57.4%. On the services inflation front, the Prices Paid index jumped to 59.2% from 53.4%. The services sector makes up more than two-thirds of economic activity, so the report continued a concerning trend of weaker economic activity but a pickup in prices. 
• The seasonally adjusted S&P Global U.S. Manufacturing PMI stalled in April, in line with the 50.0 no-change mark, a slight improvement from 49.9 from the prior month and ending a three-month sequence of improving operating conditions. Manufacturers signaled caution among clients and a reluctance to commit to new business amid subdued market conditions. New Orders decreased for the first time in 2024. Output Prices increased at a slower pace, but the rate of Input Cost inflation quickened to hint at sustained near-term upward pressure on selling prices. Production increased for the third consecutive month, albeit at the slowest pace in this sequence, but was supported by a fourth successive month of Hiring, which saw the quickest pace in nine months.  Like the ISM data, the S&P Global U.S. Services PMI ticked down in April, the third successive decline, to a four-month low of 51.3 from 51.7 the prior month. Unlike the ISM Service PMI, the S&P Services PMI remained above the 50.0 expansion/contraction delineation mark and, therefore, signaled a rise in business activity for the 15th consecutive month. The rate of expansion slowed, though, amid the first reduction in New Orders since last October. Employment was also reduced as firms showed a reluctance to replace departed staff and ending period of job creation stretching back to July 2020. Despite the drop in employment, wage pressures remained a key factor pushing up Input Prices. Higher oil and gas prices were also reported. 
• The Employment Cost Index (ECI) rose to a seasonally adjusted +1.2% in the first quarter, the fastest pace since Q1-2023, and above consensus expectations for +1.0% and the unrevised +0.9% for the fourth quarter of 2023. The ECI is the Federal Reserve’s preferred measure of wage gains, and the unexpected rise will keep the Fed wary that a strong labor market may keep inflation above the Fed’s target. The cost of labor had risen by +1% or more for 10 consecutive quarters prior to the fourth quarter’s slight dip to +0.9%, but the Q1-2024 reading puts it right back above the 1% threshold that started back in the middle of 2021. Prior to that, the last time compensation rose at least +1% a quarter was in 2006. Wages and Salaries account for about 70% of compensation costs and remained at +1.1% for the third straight quarter. Year-over-year, the ECI was up +4.2%, down from +5.1% for the prior quarter, and still above the 3.5% rate or so that the Fed would like to see. 
• The March Job Openings Labor Turnover Survey (JOLTS) showed Job Openings fell to 8.488 million, the lowest level in three years and down from 8.813 million the prior month (revised up from 8.756 million). That was below expectations for 8.680 million and far off the peak of 12 million in 2022. Job openings are an indication of the health of the labor market and the broader U.S. economy. Job openings rose the most in Public Education and fell the most in Construction, Finance, and Insurance. The ratio of Job Openings to Unemployed Workers slipped to 1.32 from 1.36, 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 down to 3.3 million from 3.5 million, also a three-year low and far off the record 4.5 million job quitters reached in late 2021. The Quits Rate slipped to 2.1% from 2.2%, which, outside the pandemic period, is the lowest since January 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 5.5 million from 5.8 million the month before, the smallest increase since the pandemic in early 2020. The Hiring Rate ticked down to 3.5% from 3.6%.
• The Commerce Department reported that Construction Spending fell in March, down -0.2%, far short of expectations for an increase of +0.3% and below the prior month’s flat reading, which was revised up from -0.3% decline. Over the past year, construction spending is up +9.6%, versus an annual rate of +10.7% the previous month. Total Private Construction was down -0.5% from +0.7% the prior month, but total Public Construction was up +0.8% versus -0.4% the prior month. Total Residential Spending increased +0.7% month-over-month while total Nonresidential Spending fell -0.9% month-over-month. The takeaway from the report is that residential construction was weak, with both single- and multi-family spending falling, which likely reflects the rise in financing costs and tighter lending standards.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit another all-time high in February, marking 13 straight monthly increases, as the index increased a seasonally adjusted +0.61%, well above expectations of +0.10% increase and the prior month’s +0.17% pace (revised up from +0.14%).  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +7.29%, above expectations for +6.70% and the prior month’s +6.58% annual gain. San Diego again posted the biggest year-over-year home-price gains, up +11.4%. Home prices grew the slowest in Portland, by +2.2%. All 20 cities registered annual increases for the third consecutive month.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) showed U.S. home prices rose in February, up a seasonally adjusted +1.2% compared to the unrevised -0.1% dip the prior month. Expectations were for a +0.2% increase. The government data showed home prices up +7.0% year-over-year.
• The Conference Board’s Consumer Confidence Index fell for the third consecutive month in April to a 21-month low of 97.0 from 103.1 the prior month (revised down from 104.7) and missing expectations for 104.0. Consumer confidence tends to signal whether the economy is getting better or worse. Confidence has retreated since the start of the year and sits well below the pre-pandemic high. The Present Situation gauge sank to 142.9 from 146.8 the prior month (revised down from 151.0), the lowest level since November. The Expectations gauge — which reflects consumers’ six-month outlook — fell to 66.4, the lowest level since July 2022, down from 77.0 (revised up slightly from 73.8). Levels below the 80 mark on the expectations index often signals a recession within the next year. In good times, the index can top 120 or more. Elevated price levels, particularly for food and gas, dominated consumer concerns. Politics and global conflicts were distant runners-up.
• According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit was a tick lower in March, sitting at a nearly one-year high of -$69.4 billion versus -$69.5 billion the prior month (which was revised wider from the originally reported -$68.9 billion). That was narrower than the expected -$69.8 billion. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. Higher oil prices have contributed to the widening deficit, but Americans have also been buying more imported goods, typically a sign of a healthy economy. Exports fell -2.0% to $257.6 billion, and imports slipped -1.6% to $327 billion, mainly from fewer automobiles and mobile phones. A wider trade deficit subtracts from Gross Domestic Product (GDP) since it means the U.S. is buying relatively more goods and services from foreign suppliers instead of American producers. Foreign goods are cheaper these days because of a strong dollar.
• U.S. Factory Orders rose in March, up +1.6% for the month, in line with expectations and up nicely from the prior month’s +1.2% gain (revised down from the originally reported +1.4). Factory Orders Ex-Transportation were up +0.5%, more than double the +0.2% expected but down from an unrevised +1.1% the prior month. Meanwhile, Durable Goods Orders were up +2.6%, also matching expectations and the prior month’s level. The important Core Capital Goods Orders (Nondefense Capital Goods Excluding Aircraft), a proxy for business spending, were up a mere +0.1% versus +0.2% the prior month too. Shipments of Core Capital Goods Orders, which feeds into Gross Domestic Product (GDP), were flat for the month versus a +0.2% rise the prior month.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), dropped to 37.9 in April from an unrevised 41.4 the prior month and badly missed expectations of 45.0. Readings below the 50 level indicate contraction. This is the fifth consecutive reading in negative territory and the lowest level since November 2022. The index has fallen sharply from the November reading of 55.8, which was the highest level since May 2022. The index isn’t a national indicator but has shown similar indications of stagflation that other national PMIs have reported recently, including New Orders, Inventories, and Order Backlogs signaling contraction while Prices Paid rising at a faster pace and signaling expansion. Three of the first four regional Federal Reserve manufacturing surveys for April have shown some modest improvement but have remained in slight contractionary territory on an ISM-weighted basis.
• Texas factory activity slid again in April, with the Texas Manufacturing Outlook Survey slipping to -14.5 from an unrevised -14.4 the prior month, below expectations for -11.2. The Fed’s 11th District saw activity decline in components such as Inventories, Employment, and Outlook Uncertainty, but saw improvements in indicators such as Production, New Orders, and Capacity Utilization. Indicators related to inflation eased, with both Prices Paid and Prices Received at roughly half their levels from the prior month. Also, on the positive side, indicators of future conditions six months from now have become significantly more optimistic in recent months. The Texas Service Sector Outlook Survey also fell, dropping to -10.6 from -5.5 the prior month.
• Weekly MBA Mortgage Applications fell -2.3% for the week ended April 26, following the prior week’s -2.7% drop. The Purchase Index was down -1.7% following a -0.96 dip the prior week. The Refinance Index fell -3.3% following a -5.6% drop the prior week. The average 30-Year Mortgage Rate rose to 7.29%, the highest level since late November and up from 7.24% the prior week. 
• Weekly Initial Jobless Claims were flat at 208,000 for the week ended April 27, below expectations for 211,000. The prior week was revised to 208,000 from 207,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) were also flat at 1,774,000 in the week ended April 20, below consensus estimates for 1,790,000. Last week’s reading of 1,781,000 was revised down from 1,774,000.

The Week Ahead

Economic data is very light this week. Reports on Senior Loan Officer Opinions (SLOOS) on Monday and the Federal Reserve’s Consumer Credit data for March on Tuesday will give an update on consumer financing trends. Consumer Sentiment will be updated for May on Friday with the University of Michigan’s Consumer Sentiment Index for May. 

First-quarter earnings reports will continue, with results from more than 50 S&P 500 companies. Monday’s earnings highlights will be BioNTech, Palantir Technologies, and Tyson Foods. BP, Ferrari, NRG Energy, Occidental Petroleum, Walt Disney, and Wynn Resorts release results on Tuesday, followed by Airbnb, Anheuser–Busch InBev, and Uber Technologies on Wednesday. Roblox and Warner Bros. Discovery report on Thursday, and then Honda Motor closes the week on Friday.

The Bank of England (BOE) will announce a monetary-policy decision on Thursday. Like the Fed last week, the BOE is widely expected to keep its target interest rate unchanged.

Did You Know?

MORE OLDER CARS – The share of Americans’ cars that were 10 or more years old is 44.2% in 2022, up from 16.9% in 1977, according to the Federal Highway Administration. Drivers are holding on to their vehicles for longer because car and insurance costs are higher, newer models are more expensive to repair, and record-high interest rates mean pricier auto loans. (Source: The Wall Street Journal).

TITANIC TIME – Patrick Gruhn, a German fintech entrepreneur, and former executive at cryptocurrency exchange FTX, paid $1.5 million for a gold watch that survived the sinking of the Titanic. The 14-karat timepiece belonged to American property magnate John Jacob Astor IV, who stayed aboard the doomed ship. His body—and the watch—was recovered a week later. (Source: The Wall Street Journal).

MALINVESTMENT – The 8 Ivy League Schools, plus Northwestern and Stanford (all private), received $33.1 billion in grants and contracts from the federal government between 2018 and 2022 in data calculated by Open the Books. The U.S. government has also given $1.6 trillion in “loans” to young people to buy the “services” of schools and their academics. While it is true that most people with high-paying jobs have gone to college, George Mason economist Bryan Caplan found a college degree isn’t actually the cause. People that earn more are often highly intelligent, very conscientious, or willing to conform to a corporate culture. Preston Cooper at FREOPP.org has researched about 30,000 bachelor’s programs around the U.S. and found that more than 25% of programs experience a negative return on investment (ROI), which helps explain why so many people feel burdened by student loans and going to a very selective school is no guarantee of a positive ROI (Source: First Trust).

This Week in History

VALUE INVESTING – On April 30, 1803, in one of the greatest value trades in history, the United States purchased the Louisiana Territory from France for $15 million, more than doubling the size of the country (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.