Weekly Market Update – August 30, 2024

Quick Takes

• Reassuring growth and inflation data left stocks and bonds mixed for the week but up for the month of August. The S&P 500 Index inched up +0.2% for the week, and finished August up +2.3%, its fourth straight monthly gain.
• Second quarter GDP was unexpectedly revised up from +2.8% to +3.0%, largely from solid consumer spending. Core PCE, the Fed’s preferred inflation gauge, was up +0.2% in July, as expected, but the year-over-year rate was a slight tick lower than expected at +2.6%.
• The 10-year U.S. Treasury yield was up +10 basis points for the week to close at 3.90% while the shorter 2-year U.S. Treasury yield was unchanged at 3.92%. The Bloomberg U.S. Aggregate Bond Index was down -0.5% for the week but remains up +1.4 for the year.

Source: Bloomberg. Data as of August 30, 2024.
Price Returns for Equity, Total Returns for Bonds.
* 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.

Stocks mixed with encouraging growth and inflation data

In the week following getting the green light from Federal Reserve Chairman Jerome Powell capital markets received more encouraging data on the growth and inflation fronts. Economic data was reassuring with the Commerce Department reporting on Wednesday that the final estimate of second quarter Gross Domestic Product (GDP) was unexpectedly revised up from a +2.8% to 3.0% annualized rate of growth, largely from solid consumer spending. On Friday, the Commerce Department also reported that Personal Incomes had increased an unexpected +0.3% in July, up from +0.2% in June. Personal Spending was even stronger, up +0.5% matching consensus expectations. More importantly on Friday, the Labor Department released its Core Personal Consumption Expenditures (PCE) index, which is the Federal Reserve’s preferred inflation gauge, and it showed inflation rising by +0.2% in July, largely as expected, although the year-over-year rate was a slight tick lower than expected at +2.6%. Consumer Sentiment from the University of Michigan and Consumer Confidence from the Conference Board also improved in August. Overall, the economic data was confirmation that both growth and inflation are moving in the right directions and consumer sentiment and confidence remain healthy.

With the reassuring economic data as a background, the S&P 500 Index inched up +0.2% for the week, and finished August up +2.3%, its fourth straight monthly gain. The tech-heavy Nasdaq Composite Index was down -0.9% for the week but managed to just stay positive for the month with a +0.6% gain. Small cap stocks were essentially flat for the week, with the Russell 2000 Index slipping -0.05%, and down -1.5% in August. The Russell 3000 Value Index outperformed Russell 3000 Growth Index last week by +1.9%, the largest margin since the week ending July 26, and helped it outperform +0.5% in August. Growth is still leading Value by +5.9% for the year though.

The value of the U.S. dollar rebounded +1.0% during the week but fell -1.6% over the month, its biggest monthly decline of the year. Developed market international stocks (as measured by the MSCI EAFE Index) were still able to advance for the week, rising +0.6%, and were up +3.0% for the month. Emerging market stocks (the MSCI Emerging Markets Index) lagged developed markets again last week, falling -0.1%, but also increased for the month, gaining +1.4%.

The yield on the benchmark 10-year U.S. Treasury note drifted higher during the week, up +10 basis points to close at 3.90%. The shorter 2-year U.S. Treasury note, which is influenced more by the Fed funds rate, was unchanged for the week at 3.92%. As a result, the Bloomberg U.S. Aggregate Bond Index ended the week down -0.5% and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) fell -0.6%. That still leaves them up +1.4 and +3.1% for the year respectively.

Chart of the Week

Bespoke Investment Group points out that Fed Chairman Jerome Powell noted at the Jackson Hole annual economic symposium that “my confidence has grown that inflation is on the path to +2%.” One reason for Powell’s confidence regarding inflation is based on consumer expectations. The one-year forward inflation expectations in the Consumer Confidence report from the Conference Board and the Consumer Sentiment report from the University of Michigan show inflation expectations have fallen sharply since peaking at +7.9% in mid-2022. In fact, the current level of inflation expectations in the Conference Board’s survey is now slightly below the historical average of +5% and at the lowest level since March 2020. For the survey from the University of Michigan, shown below, its levels tend to track the Consumer Price Index (CPI) more closely, and this month’s report released on Friday showed that expected inflation over the next 12-months dropped to +2.8% which is the lowest level since December 2020 and below the historical average of +3.1%.

University of Michigan Inflation Expectations

Median 12-Month Inflation Expectations: 1987 – 2024

Source: University of Michigan, Bespoke Investment Group.

Economic Review

• The cost of goods and services was relatively steady in July, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) inching up +0.2%, as expected and up slightly from the prior month’s unrevised +0.1% rate. On a year-over-year basis, the PCE Price Index was unchanged at +2.5%, matching expectations. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, also increased by +0.2% for the month, unchanged from the prior month as expected. Year-over-year, the Core-PCE Price Index was unchanged at +2.6%, which is a bit lower than the +2.7% rate expected. Essentially there was little change in this inflation report that would have much sway on the Fed’s expected rate cut in September.
• Personal Spending rose again in July to a +0.3% rate, up from an unrevised +0.2% the prior month and in line with expectations. After adjusting for inflation, Real Personal Spending was up +0.4%, above expectations for +0.3% which is where it was the prior month (revised up from +0.2%). Households spent more on durable goods, while nondurable goods and services spending was more modest. Meanwhile, Personal Income rose +0.3%, above expectations of +0.2% which is where it was the prior month (unrevised). The Personal Savings Rate fell to just +2.9% from +3.1% the prior month (revised down from +3.4%) and marking the lowest level since June 2022. If that trend continues, economists worry that spending could slow in the months ahead and result in weaker U.S. growth.
• The final reading of the August University of Michigan Consumer Sentiment Index rose a tick to 67.9 from the preliminary 67.8 estimate but was shy of expectations for it be 68.1. Still, it was the first increase after four months of declines but remains far below the prepandemic peak of 101. The Current Economic Conditions component rose to 61.3 from the initial estimate of 60.9 but is down from the prior month’s 62.7 and the lowest level since December 2022. The Consumer Expectations component was unrevised from the initial estimate of 72.1 and was up from 68.8 the prior month. One-year inflation expectations were unchanged from the initial estimate of +2.8%, a tick down from the initial estimate of +2.9% and the prior month’s level, and where it was expected to stay. The five-year inflation expectations was unchanged at +3.0%, as expected.
• The U.S. economy grew at a +3.0% pace in the second quarter, an upward revision from the initial +2.8% estimate where it was expected to remain. Gross Domestic Product (GDP) for the second quarter is more than twice as fast as the +1.4% annual pace in the first quarter. The increase in real GDP, the official scorecard for the economy, was driven by a +2.9% increase in Personal Consumption Expenditures (PCE), revised up from the initial estimate of +2.3% and ahead of expectations for +2.2%. That is nearly twice the +1.5% rate from the prior quarter. Gross Private Investment, however, was revised lower to +7.5% from the initial estimate of +8.4%, but higher than the prior quarter’s +1.5%. Government Spending was also revised lower, to +2.7% from initial estimate of +3.1% and compared to the prior quarter’s +1.8%. The Personal Saving Rate dropped to +3.3%, approaching its 2022 low, from +3.8% in the prior quarter. Profits increased +1.7% (not annualized) after declining -1.4% in the first quarter. Gross Domestic Income (GDI) remained at +1.3%. Whereas GDP measures spending on goods and services, GDI measures income generated, and costs incurred from producing those same goods and services. Growth has cooled so far this year after accelerating the second half of 2023 and the Atlanta Fed GDPNow is pointing to a +2.0% annual rate in the third quarter.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances and transportation equipment rebounded +9.9% in July, well ahead of expectations for a +5.0% rise. It followed a -6.9% drop the prior month (revised down from the initial -6.7% report), which broke four consecutive months of gains and was the sharpest decline since the pandemic. So, the strong July showing was a welcome sign June was an outlier primarily due to weak aircraft orders. Durable Goods Orders Excluding Transportation were down -0.2%, shy of expectations for -0.1% and down from the prior month’s +0.1% gain (revised down from the originally reported +0.4%). The important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, slipped -0.1 from +0.5% the prior month (revised down from +0.9%), and shy of expectations to be unchanged. Core Capital Goods Shipments, which are factored into GDP, fell -0.4% in July after being flat the month before (revised down from +0.2%). The weaker than expected reading excluding the transportation sector shows how business investment has faded but a Federal Reserve rate cut may help revitalize activity.
• The Conference Board’s Consumer Confidence Index rose to 103.3 in August from 101.9 the prior month (revised up from 100.3). That was comfortably ahead of expectations for 100.8, and the highest level in six months. Consumer confidence tends to signal whether the economy is getting better or worse. Confidence had retreated since the start of the year and sits well below the pre-pandemic high of 135.8. The Present Situation gauge improved to 134.4 from 133.1 the prior month (revised down from 133.6). The Expectations gauge — which reflects consumers’ six-month outlook — jumped to 82.5 from 81.1 (revised up from 78.2). 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.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), improved to 46.1 in August from an unrevised 45.3 the prior month and well above expectations for a 44.8 reading. Readings below the 50 level indicate contraction. This is the ninth consecutive reading in contraction territory. New Orders, Employment, Inventories, Production, and Order Backlogs all signaled contraction. Only the Prices Paid and Supplier Deliveries components showed expansion.
• Texas factory activity fell again in August with the Texas Manufacturing Outlook Survey dropping to -9.7 from an unrevised -17.5 the prior month, much better than expectations for a -16.0 reading. It was the 28th consecutive month with a contractionary reading. Nearly all measures of activity rose month over month. Production and Shipments rose into positive territory, pointing toward modest expansion. New Orders also rose but remained negative — and well below their historical average. The exception was the Employment index, which fell to -0.7 from 7.1 the prior month, but the Hours-Worked index rose, though it remained negative. Employment weakness has been a common theme across all of August’s regional Fed manufacturing indexes. The Texas Service Sector Outlook General Business Activity Index fell to -7.7, down from -0.1 the prior month.
• The Richmond Fed Manufacturing index fell to -19 in August from an unrevised -17 the previous month, missing expectations for -14 and hitting the lowest level since May 2020. All three component indexes weakened in July, retreating further into contractionary territory. The Shipments component rose to -15 from -21 the prior month. The New Orders index, part of the Shipments component, fell further to -26 from -23. The Capacity Utilization component slowed to -17 from -13. The Employment index declined to -15 from -5.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit yet another all-time high in June, marking 17 straight monthly increases, as the index increased a seasonally adjusted +0.42%, above expectations for a +0.30% increase, and up from the prior month’s +0.39% pace (revised up from +0.34%).  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +6.47%, above expectations for +6.14% but down from the prior month’s +6.88% annual gain. New York remained in the top spot over San Diego with the biggest year-over-year home-price gains (up +9.0% and +8.7% respectively). Once again, home prices grew the slowest in Portland (at a 0.8% annual rate). All 20 cities registered annual increases for the seventh consecutive month. Home prices continue to reach new heights, but the pace of appreciation has significantly slowed. With more homes being listed for sale, home buyers are finding more options in the market. And as supply increases, prices cool.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) also showed U.S. home prices decelerate in June, but unlike Case Shiller, the government agency reported prices sliding -0.1% after an unrevised flat reading the prior month. Expectations were for a +0.1% increase. The government data showed home prices up +5.1% year-over-year compared to 5.7% the prior month. “U.S. house prices saw the third consecutive slowdown in quarterly growth,” the agency said, “likely due to higher inventory of homes for sale and elevated mortgage rates.”
• The National Association of Realtors (NAR) reported that Pending Home Sales plunged -5.5% in July to the lowest level on record, badly missing expectations for a +0.2% gain, and sharply lower from the prior month’s unrevised +4.8% rate. Year-over-year sales were down -4.6%, below the -2.0% expected but up from the -7.8% annual pace the prior month. From a regional perspective, all four regions were negative, led by a -7.8% decrease in the Midwest while the Northeast was only down -1.4%. “A sales recovery did not occur in midsummer,” said NAR Chief Economist Lawrence Yun. “The positive impact of job growth and higher inventory could not overcome affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election.” He added that falling mortgage rates should bring buyers into the market in coming months.
• Weekly MBA Mortgage Applications rose +0.5% for the week ending August 23 following the prior week’s -10.1% plunge. The Purchase Index inched up +0.9% following a -5.1% drop the prior week. The Refinance Index slipped -0.1%, following the prior week’s -15.2% plunge which was the largest drop of the year. The average 30-Year Mortgage Rate slid to 6.44% from 6.50% the prior week, the fourth straight weekly decline and the lowest level since April 7, 2023.

The Week Ahead

US markets were closed Monday for Labor Day so economic data begins Tuesday with the U.S. Manufacturing Purchasing Managers’ Indices (PMIs) by competing firms ISM and S&P Global. The corresponding Services PMIs come on Thursday. Wednesday is the busiest day of the week, with the release of the JOLTS job openings for July, factory orders, the U.S. trade balance, weekly mortgage applications, and the Fed’s Beige Book (the sixth of eight releases this year). Friday only brings one report, but it’s probably the week’s biggest, when the Bureau of Labor Statistics releases the monthly employment report for August. The Bloomberg survey of economists forecast a gain of 165,000 nonfarm payrolls, following July’s increase of just 114,000. The unemployment rate is expected to slip to 4.2% from 4.3%.

Did You Know?

SOFT LANDING REALITY? – Exchange-traded funds tracking government debt, corporate credit and equities have now risen in unison for four straight months. It’s the longest stretch of correlated gains since at least 2007. Up +25% in the past 12 months, the S&P 500 has never climbed this much in the run-up to the first interest-rate cut of an easing cycle (Source: Bloomberg).

MAJORITY BULLISH – The weekly survey run by the American Association of Individual Investors (AAII) showed bullish sentiment ticked back above 50% last week for the third time this year. For all of 2022 and 2023, there were only three weeks in which bullish sentiment exceeded 50% (Source: AAII.com).

This Week in History

DRILL BABY DRILL – On August 27, 1859, the U.S. petroleum industry began when the first successful oil well, 69.5 feet deep, was drilled in Titusville, Pennsylvania (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.