Weekly Market Update – September 20, 2024

Quick Takes

• The Federal Reserve initiated the first rate cutting cycle since the 2020 pandemic with a jumbo-sized 50 basis point cut. The Fed expects two more cuts of 25 bps in 2024 and an additional 100 bps of cuts in 2025.
• Economic data was mostly upbeat as retail sales were stronger than expected, housing starts and building permits were bigger than expected, home builder confidence surprised to the upside, industrial production was higher than expected, and regional Fed surveys from New York and Philadelphia moved back to growth territory.
• The S&P 500 Index closed above the 5,700 level for the first time ever on the way to a +1.4% weekly gain. The tech-heavy Nasdaq Composite Index rose +1.5%, and the small cap Russell 2000 Index led U.S. stock indexes with a +2.1% weekly advance.

Source: Bloomberg. Data as of September 20, 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.

It’s official: Fed starts new rate cycle with big 50 basis point cut

It was an eventful week for investors, with the Federal Reserve (the Fed) initiating a rate cutting cycle, the first since 2020, with a 50 basis point (bps, or 0.50%) rate cut. It is only the third time in recent history that the Fed has started rate cuts with a 50 bps cut. The previous two times, in 2007 and 2001, the economy went into recession. However, the Fed maintains that the economy is strong and expects a soft landing. Fed chairman Jerome Powell said the Fed is confident that inflation is moving to their target of 2%. The Fed’s projections show two more cuts of 25 bps in 2024 and 100 bps of cuts in 2025. It took a little time for markets to digest the Fed’s interest rate pivot on Wednesday, but on Thursday, markets powered higher to achieve virtually all of the week’s gains. For the benchmark S&P 500 Index, it closed above the 5,700 level for the first time ever on the way to a +1.4% weekly gain. Meanwhile, the Nasdaq Composite Index rose +1.5% for the week, led by Thursday’s +3.4% gain by the Magnificent 7 mega-cap technology stocks. The Russell 2000 Index led the U.S. stock indexes with a +2.1% weekly advance. In addition to the jumbo rate cut, markets were buoyed by mostly upbeat economic data. Retail sales were stronger than expected, housing starts and building permits were bigger than expected, home builder confidence surprised to the upside, industrial production was higher than expected, and regional Fed surveys from New York and Philadelphia moved back to growth territory. Less positive were existing home sales, which slumped to the lowest level since 2023, and the Conference Board’s Leading Economic Index showed a sixth straight month of decline and remains close to recessionary levels.

Overseas stocks were more muted. Developed market international stocks (as measured by the MSCI EAFE Index) were up +0.4% while emerging market stocks (the MSCI Emerging Markets Index) were up +2.2%. A lower U.S. dollar and lower U.S. rates are good for many emerging market companies that hold U.S. denominated debt. Unlike the European Central Bank (ECB), which cut interest rates to 3.5% from 3.75% the previous week, the Bank of England (BoE) left its policy rate unchanged at 5.0% last week. Norges Bank, the Central Bank of Norway, and the Bank of Japan (BoJ) also left their interest rates unchanged.

Bonds actually fell in the wake of the Fed rate cut, likely due to several weeks of anticipating it. U.S. Treasury yields were up modestly, with the benchmark 10-year U.S. Treasury note rising +9 basis points to close at 3.74%. The shorter 2-year U.S. Treasury note was up +2 basis points to close at 3.59%. With treasury yields falling, the Bloomberg U.S. Aggregate Bond Index slipped -0.2% for the week, and non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were just behind with a loss of -0.3%.

Chart of the Week

Home sales fell to the lowest level since October 2023, as declining mortgage rates failed to offset home prices near record highs. The National Association of Realtors (NAR) reported that Existing Home Sales fell -2.5% in August to a seasonally adjusted annual rate of 3.86 million units, below expectations for 3.90 million units and the prior month’s 3.96 million units (revised higher from 3.95 million units). Year-over-year existing sales are down -4.2% versus the -2.5% annual rate the prior month. The Median Existing Home Price fell to $416,700, the second consecutive month of increases after seven months of increases. Year-over-year, home prices were up +3.1%, down from +3.9% the prior month, but the fourteenth consecutive month of year-over-year price increases.  The Inventory of Homes for Sale was up +0.7% from the prior month and +22.7% from last year, to 1.35 million units, which is the highest level since October 2021. Unsold Inventory is at a 4.0-month supply, down from 4.1 months the prior month. Homes Listed for Sale remained on the market for 26 days on average, up from 24 days the previous month. First-Time Buyers were 26% of sales in the month, down from 29% the month before. Historically, these buyers make up closer to 40% of home sales, but affordability has been hit hard in the last two years due to fast-rising home prices and higher mortgage rates.  All-Cash Sales slid to 26% of transactions. For the month, sales fell in three regions: the Northeast was down -2.4%, the West was down -3.0%, and the South was down -4.3%. The Midwest was unchanged from the prior month.

Home sales fall to lowest level since October 2023

U.S. Existing Home Sales

Source: National Association of Realtors, The Wall Street Journal.
Note: Seasonally Adjusted, August is preliminary.

Economic Review

• The Commerce Department reported that U.S. Retail Sales were up +0.1% in August, well ahead of expectations for a -0.2% decrease, but down sharply from the +1.1% drop the prior month (which was revised up from +1.0%). Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Restaurant sales, a key economic bellwether, were flat in August, ending a string of four straight increases. Sales decreased at grocery stores, big-box retailers, department stores, and clothing stores. Sales ex-autos and gas were up +0.2%, down from the prior month’s unrevised +0.4% rise, and just shy of Wall Street expectations for a +0.3% rise. The Control Group, a figure used to calculate GDP, was up +0.3%, matching expectations and just below the positively revised +0.4% gain the prior month (originally reported at +0.3%).
• Homebuilder confidence rebounded in September from its lowest level since December, according to the National Association of Home Builders (NAHB) Housing Market Index (HMI), which rose to 41 from an unrevised 39 the prior month. That was in line with expectations and breaks four straight months of declines. A year ago, the index stood at 44. The index is based on a 0-to-100 scale, where any number over 50 indicates a good reading, and below 50 is considered negative sentiment. The Current Sales component was up +1 point to 46, Future Sales (in the next six months) rose +4 points to 53, and Traffic of Prospective Buyers increased +2 points to 27. The improvement across the board should be assisted going forward as the Fed begins a rate cutting cycle. For the month, 32% of builders reported cutting home prices, down from 33% the prior month and the first drop since April. The average price reduction slid to 5% from 6% the prior month, where it had been for over a year. The use of sales incentives beyond price cuts slipped to 61% from 64%, which was the highest use of sales incentives since April 2019. Geographically, the South inched up to 40 from 39, the Midwest rebounded to 42 from 38, the West increased to 42 from 37, and the Northeast jumped to 55 from 46.
• The Conference Board’s Leading Economic Index (LEI) fell -0.2% in August, better than the Wall Street forecast for a -0.3% decline and the prior month’s unrevised -0.6% drop. The index has declined in 28 of the last 29 months (rising only in February 2024). The breadth of the index was mixed, with five of the ten indicators tracked falling, four positive, and one unchanged. The Building Permits component improved the most, rising +0.14%, with the Leading Credit Index the second best at +0.08%. ISM New Orders was the biggest detractor for the second straight month, falling -0.23% after a -0.17% decline the prior month. The LEI Coincident Index was up +0.3% for the month after falling -0.1% the previous month. Meanwhile, the LEI Lagging Index was unchanged after falling -0.1% the previous month. The bottom line is that “the economy will lose momentum in the second half of this year as higher prices, elevated interest rates, and mounting debt erode domestic demand,” according to Justyna Zabinska-La Monica, senior manager of business cycle indicators.
• August Housing Starts surged +9.6% to a seasonally adjusted annual rate of 1,356,000 units, far above expectations for a +6.5% increase to 1,318,000 units and compares to a negatively revised 1,237,000 units, or -6.9% decline, the prior month (originally 1,238,000 and -6.8%). Housing starts peaked at 1,800,000 in April 2022. Single-family homes jumped +15.8% in the month, while multi-family units fell -4.2%. New construction was up +5.9% in the West, up +15.5% in the South, up +29.6% in the Midwest, but down -27.3% in the Northeast.  Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, rose +4.9% to 1,475,000, following the prior month’s -3.3% decrease to 1,406,000 (revised up from -4.0%). That was much better than the expected +1.0% rise to 1,410,000. Single-unit permits were up +2.8%, while multi-unit permits for buildings jumped +9.3%. Regionally, permits were up +12.5% in the Midwest, up +6.0% in the South, up +3.5% in the Northeast, but down -1.6% in the West.
• U.S. Industrial Production rebounded to +0.8% in August from -0.9% the prior month (revised lower from +-0.6%). That was well ahead of expectations for +0.2%. Manufacturing rose to +0.9% from -0.7%. Motor vehicles and parts output surged to +9.8% from -8.9% the prior month. But outside of vehicles, production was only up +0.3%. Capacity Utilization, a measure of potential output, rose to 78.0% from 77.8%, just beating expectations for 77.9%. Capacity Utilization reflects how much a manufacturing plant is being used to produce things. 
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, surged to +11.5 in September from -4.7 the prior month, ending nine straight months in contraction territory (values less than 0 signal economic contraction). That was above expectations for a -4.0 reading. New Orders jumped +17.4 points to a multi-year high of +9.4. Shipments surged +17.6 points to +17.9, which is its highest level in eighteen months. The Prices Paid index slipped -0.2 points while the Prices Received component slid -1.1 points. Expectations for six months ahead rose +7.7 points to +30.6.
• Manufacturing in the Federal Reserve’s Third District rose to +1.7% in September from -7.0 the prior month, according to the Philly Fed Manufacturing Business Outlook Survey. That was above expectations to come in flat (readings above zero indicate economic expansion). However, New Orders fell to -1.5 from +14.6 the month before. The Shipments component dropped sharply to -14.3 from +8.5. The Employment index was the one positive aspect of the report, rising to +10.7 from -5.7. The Six-Month Business Outlook inched up to +15.8 from +15.4. The Prices Paid index rose to its highest level since December 2022.  
• Weekly MBA Mortgage Applications surged +14.2% for the week ending September 13, following the prior week’s +1.4% rise. The Purchase Index increased +5.4% following a +1.8% rise the prior week. The Refinance Index jumped +24.2%, following the prior week’s +0.9% rise. The average 30-Year Mortgage Rate slid to 6.15% from 6.29% the prior week, the seventh straight weekly decline and the lowest level since September 9, 2022.
• Weekly Initial Jobless Claims slipped -12,000 to 219,000 for the week ending September 14, below expectations for 230,000. The prior week was revised up to 231,000 from the originally reported 230,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -14,000 to 1,829,000 in the week ending September 7, below expectations for 1,850,000. Last week’s reading of 1,850,000 was revised down to 1,843,000.

The Week Ahead

On Monday, S&P Global will release its Manufacturing and Services Purchasing Managers Indexes (PMIs) for September. Also, on Monday, the Chicago Fed National Activity Index (CFNAI) is released. Tuesday brings the Home Price Indices from S&P CoreLogic Case Shiller and FHFA, as well as Consumer Confidence Index for September from the Conference Board. On Wednesday, weekly mortgage applications and New Home Sales will be reported. On Thursday, the Census Bureau releases the Durable Goods report for August. The second revision for Gross Domestic Product (GDP) is also released along with Pending Home Sales. Finally, the Bureau of Economic Analysis reports the Personal Consumption Expenditures Price Index for August on Friday. It will also be a busy week of speaking engagements from Fed officials following the Fed’s decision to cut interest rates on September 18.

Did You Know?

ON TO Q4 – Since World War 2, the fourth quarter of the year has been the best for the S&P 500, with an average gain of +4.2% and gains 79% of the time. Q4’s average gain is twice the next- best quarter of the year, which is Q1 at +2.1% and gains just 62% of the time (Source: Bespoke Investment Group).

BORROWING ON THE RISE – U.S. consumer borrowing increased $25.5 billion in July, the most since November 2022 and surpassing every economist forecast. Revolving debt (including credit cards) increased +$10.6 billion while non-revolving debt, which includes auto and student loans, rose to a 12-month high of +$14.8 billion (Source: Bloomberg)

DELINQUENCIES RISING TOO – As consumer credit outstanding has risen, so too have delinquencies. Through Q2, the percentage of auto loans (7.95%) that were 30+ days delinquent rose to the highest level since Q4 2010, while credit card delinquencies (9.05%) hit the highest level since Q1-2011 (Source: New York Fed).

This Week in History

CURB YOUR ENTHUSIASM – On September 17, 1998, the stock markets took a pounding after Fed Chairman Alan Greenspan dismissed plans for coordinated global interest-rate cuts amid the Russian debt crisis. In weeks, the U.S. stock market bottomed out and headed straight up (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.