Weekly Market Update – September 27, 2024

Quick Takes

• Economic data and stimulus blitz from China carried U.S. equities to their third straight week of gains. The S&P 500 rose +0.6% for the week, while the Nasdaq Composite was up +1.0%. However, the small cap Russell 2000 slipped -0.1%.
• Chinese stocks soared on news of massive stimulus measures. The blue chip China CSI 300 Index was up nearly +16% for the week, its best week since the 2008 global financial crisis. The MSCI Emerging Markets Index rose +6.2% for the week, the best since November 2020.
• U.S. bonds slipped -0.01% for the week, basically flat, while non-U.S. bonds were up +0.9%. Non-U.S. bonds benefitted from continued weakening in the U.S. dollar as well as rate cuts by several international central banks.

Source: Bloomberg. Data as of September 27, 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.

U.S. equities hit three-week win street, bonds were flat

Economic data and stimulus blitz from China carried U.S. equities to their third straight week of gains. The week started off slow after the Conference Board reported on Tuesday morning that their index of U.S. consumer confidence fell sharply in August, sitting near the low end of its range over the past two years leaving it just above levels that have historically predicted a recession. But China’s central bank came out swinging on Tuesday, sharply reducing its reserve requirement ratio to the lowest level since the 2020 pandemic and cutting its short-term interest rate. They also took several steps to shore up the country’s debt-straddled property market, effectively lowering mortgage costs and making purchases of second homes easier. Chinese stocks soared on the news, but it also helped boost U.S. stocks. Other U.S. economic data then helped buoy confidence for investors. Initial jobless claims fell more than expected in the latest week, indicating a healthy labor market, the final reading of second-quarter gross domestic product came in at a robust 3%, durable goods orders beat Wall Street forecasts, the Fed’s favored inflation gauge was lower than expected, and U.S. consumer sentiment climbed to a five-month high.

In the end, it was enough for the benchmark S&P 500 Index to rise +0.6% for the week, while the Nasdaq Composite Index rose +1.0%. The small cap Russell 2000 Index wasn’t able to keep up with the larger cap indexes but only slipped -0.1%. Of course, the bigger story over the week was the performance of stocks overseas. Developed market international stocks (as measured by the MSCI EAFE Index) were up +3.5%, but it was emerging market stocks that soared on the massive Chinese stimulus. The MSCI Emerging Markets Index was up +6.2% for the week. You have to go back to November 2020 to find a better weekly return for emerging market equities. China’s blue chip CSI 300 Index was up nearly +16% for the week, its best weekly gain since the 2008 global financial crisis era. 

As mentioned, the Fed’s preferred inflation gauge, the Core (less food and energy) Personal Consumer Expenditures (PCE) Price Index, rose only +0.1% in August, a tick below expectations. On a year-over-year basis, the Core PCE climbed only +2.2%, the lowest since February 2021, and close to the Fed’s +2.0% long-term inflation target. As a result, yield on the benchmark 10-year U.S. Treasury note ended little changed for the week (bond prices and yields move in opposite directions) at 3.75%. The shorter 2-year U.S. Treasury note slipped -3 basis points to close at 3.56%. The Bloomberg U.S. Aggregate Bond Index slipped -0.01% for the week, basically flat, while non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were up +0.9%. Non-U.S. bonds benefitted from a continued move down in the U.S. dollar as well as rate cuts by central banks in Hungary, the Czech Republic, the Swiss National Bank, the Bank of Mexico, and Sweden’s Riksbank.

Chart of the Week

The cost of goods and services was relatively steady in August, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) inching up +0.1%, in line with expectations and down slightly from the prior month’s unrevised +0.2% rate. On a year-over-year basis, the PCE Price Index was down to +2.2%, compared to +2.5% the prior month, and a tick below expectations for a +2.3% annual rate. That marks the lowest annual pace since February 2021. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, also rose by +0.1% for the month, down from +0.2% the prior month where it was expected to stay. Year-over-year, the Core-PCE Price Index was up a tick to +2.7%, matching expectations but above the +2.6% annual rate reported the prior month. Essentially, there was little change in this inflation report and continued to show the pace of inflation easing, which should provide room for additional interest rate reductions by the Fed.

All Quiet on the Inflation Front

Personal Consumption Expenditures (PCE) Index, Year-over-year % change

Source: U.S. Bureau of Economic Analysis, CNBC.

Economic Review

• The preliminary “flash” S&P Global U.S. Composite Purchasing Managers Index (PMI) was 54.4 in September, slipping from 55.7 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI fell to 47.0 from 47.9 the prior month, well below expectations for 48.6. The Services PMI slipped to 55.4 from 55.7 the prior month and just ahead of expectations for 55.2. The service side of the economy — such as retailers, banks, and hospitals — employs most Americans and has driven the expansion since the pandemic. The S&P Global “flash” PMI surveys are among the first indicators of each month to give a sense of how well the U.S. economy is doing. Optimism about the outlook in the year ahead deteriorated sharply to the lowest level since October 2022, in part due to uncertainty regarding the presidential election, S&P said. The survey also found that average prices for goods and services rose at their fastest rates since March, and was the first acceleration for four months. Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “The early survey indicators for September point to an economy that continues to grow at a solid pace, albeit with a weakened manufacturing sector and intensifying political uncertainty acting as substantial headwinds. A reacceleration of inflation is meanwhile also signaled, suggesting the Fed cannot totally shift its focus away from its inflation target as it seeks to sustain the economic upturn.”
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment were unchanged in August, beating expectations for a -2.6% decline. It followed a +9.9% surge the prior month (revised up from the initial +9.8% report). The better-than-expected result was due to a smaller than expected decline in aircraft orders.  Durable Goods Orders Excluding Transportation were up +0.5%, far above expectations for a +0.1% increase and above the prior month’s -0.1% gain (revised up from the originally reported -0.2% drop). The important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, improved +0.2% from -0.2% the prior month (revised down from -0.1%) and above expectations for a +0.1% increase. Core Capital Goods Shipments, which are factored into GDP, increased +0.1% after being down -0.4% the month before (revised lower from -0.3%).
• The U.S. economy grew at a +3.0% pace in the second quarter, unchanged from the prior estimate but up from the +2.9% rate that Wall Street expected. That puts Gross Domestic Product (GDP) for the second quarter at nearly twice the rate as the +1.6% annual pace in the first quarter (revised up from the originally reported +1.4% rate). The increase in real GDP, the official scorecard for the economy, overcame some slippage in Personal Consumption Expenditures (PCE), the main engine of the economy, which eased to +2.8% from the prior estimate of +2.9%, where it was expected to stay. Still, that is nearly twice the +1.5% rate from the prior quarter. Government Spending, on the other hand, was revised higher, to +3.1% from the prior estimate of +2.7% and compared to the prior quarter’s +1.8%. Most other aspects of GDP – such as business investment, trade and inventories – were little changed in the latest GDP update. The Personal Saving Rate was +5.2%, well above its previous estimate of +3.3%. Profits increased +1.7% (not annualized) after declining -1.4% in the first quarter. Gross Domestic Income (GDI) rose at a 3.2% pace. Whereas GDP measures spending on goods and services, GDI measures income generated and costs incurred from producing those same goods and services. It is generally considered a more accurate barometer of U.S. growth. But whether looking at GDP or GDI, the economy looks to be in decent shape, although some areas, such as hiring and manufacturing, have shown some weakness. Nevertheless, the economy is expected to stay near that 3.0% pace of expansion for the just completed third quarter.
• The Conference Board’s Consumer Confidence Index sank to a three-month low of 98.7 in September from 105.6 the prior month (revised up from 103.3) and far below Wall Street expectations for 104.0. That was the largest one-month decline since August 2021. 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 of 135.8. The Present Situation gauge plunged to 124.3 from 134.6 the prior month (revised up from 133.1), its lowest level since March 2021. The Expectations gauge — which reflects consumers’ six-month outlook — fell to 81.7 from 86.3 (revised up from 82.5). Levels below the 80 mark on the expectations index often signal a recession within the next year. In good times, the index can top 120 or more.  
• The final reading of the September University of Michigan Consumer Sentiment Index rose to a five-month high of 70.1, up from the preliminary 69.0 estimate, above expectations for a 69.4 reading, and higher than the prior month’s final reading of 67.9. Still, it remains far below the prepandemic peak of 101 in February 2020 and the post pandemic high of 88.3 in April 2021. The Current Economic Conditions component rose to 63.3 from the initial estimate of 62.9, as well as the prior month’s 61.3, which was the lowest level since December 2022. The Consumer Expectations component was revised higher to 74.4 from the initial estimate of 73.0 and was up from 72.1 the prior month. One-year inflation expectations were unchanged from the initial estimate of +2.7%, down from +2.9% the prior month’s level and marking the lowest level since 2020. The five-year inflation expectations level was unchanged from the prior estimate but a tick above last month’s level of +3.0%, where it was expected to slip to. “Sentiment appears to be building some momentum as consumers’ expectations for the economy brighten,” said Joanne Hsu, director of the University of Michigan survey.
• Personal Spending slowed to a seven-month low of +0.2% in August, down from an unrevised +0.5% the prior month and shy of expectations for +0.3%. After adjusting for inflation, Real Personal Spending was up +0.1%, in line with expectations and down from an unrevised +0.4% the prior month. Meanwhile, Personal Income rose +0.2%, just half of the expected +0.4%, and down from +0.3% the prior month (unrevised). The Personal Savings Rate slipped to +4.8% from +4.9% the prior month and is the lowest level of the year.
• The Federal Reserve Bank of Chicago reported that U.S. economic activity picked up in August, as the Chicago Fed National Activity Index (CFNAI) rose to +0.12 from -0.42 the prior month (which was revised lower from the originally reported -0.34). That is far below the recent February high of +0.35. Readings below zero indicate below-trend-growth in the national economic activity. The CFNAAI three-month moving average decreased to -0.17 from -0.13 the month before but remains well off the low of -0.35 in December 2022. During the last 20 years, there has been a 91% correlation between the three-month index level and the quarterly change in real GDP. Two of the four broad categories of indicators used to construct the index increased from a month earlier. The Personal Consumption and Housing category contributed -0.04 in August, down from +0.02 the prior month. The Production and Income category contributed -0.21, up from -0.42 the prior month. The Employment, Unemployment, and Hours category contributed -0.01, up from -0.09 the prior month. The Sales, Orders, and Inventories category contribution was down to -0.04 from +0.07 the prior month. Overall breadth of the index improved, with only 36 of the 85 individual indicators making positive contributions, up from just 28 the prior month.
• The Richmond Fed Manufacturing Index slipped to -21 in September from an unrevised -19 the previous month, missing expectations for an improvement to -12 and hitting the lowest level since the April 2020 pandemic low of -54.0. All three component indexes weakened, retreating further into contractionary territory. The Shipments component fell to -18 from -15 the prior month. The New Orders index, part of the Shipments component, improved to -23 from -26. The Employment index declined to -22 from -15.  
• The Kansas City Fed Manufacturing Survey fell to -8 in August from -3 the month before. That was worse than expectations for -5. Underlying details were mostly weak. The indexes for Production, Shipments, New Orders, Employment, and Average Workweek all declined in September to levels pointing toward contraction. The Kansas City Fed Service Sector Outlook Survey fell to -2 from +5 the prior month. 
• The Commerce Department reported New Home Sales slid -4.7% in August to an annual rate of 716,000 units, compared to +10.3% rise the prior month (to 751,000 units). Still, that was better than expectations for a -5.3% decline to a 700,000-unit annual rate. The prior month was revised up from the originally reported 739,000 units and marks the first back-to-back months above the 700,000 units since February and March 2022. New Home Sales data tend to be volatile month-on-month and are often revised. New-home sales remain far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes were up +9.8% compared to +7.3% the prior month. By region, month-over-month sales were only up in the South (+2.7%) and fell the most in the Northeast (-27.3%). Sales also fell in the West (-17.8%) and the Midwest (-5.8%). Those declines came despite the Median New Home Price dropping -4.6% year-over-year to $420,600 from $429,800 the prior month. The inventory of new homes for sale rose +6.8% after falling -10.7% the prior month, putting the number of new homes that were completed and for sale at the highest level since 2009. The months of supply at the current rate of sales was 7.8, up from 7.3 the prior month, which was the lowest level since September. 
• The National Association of Realtors (NAR) reported that Pending Home Sales inched up +0.6% in August from last month’s -5.5% drop to the lowest level on record. Wall Street was expecting a +1.0% gain. Year-over-year sales were down -4.3%, better than the -5.5% expected but up from the -4.6% annual pace the prior month. From a regional perspective, three of four regions were positive, led by a +3.2% increase in both the Midwest and West. The Northeast was the only region down, with a -4.6% decline. “Contract signings remain near cyclical lows even as home prices keep marching to new record highs,” Lawrence Yun, chief economist at the NAR, said in a statement.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit yet another all-time high in July, marking 18 straight monthly increases, but the pace of increases has slowed as the index increased a seasonally adjusted +0.27%. That is below expectations for a +0.40% increase and down from the prior month’s +0.47% pace (revised up from +0.42%). On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +5.92%, above expectations for +5.90% but down from the prior month’s +6.54% annual gain. That’s the slowest annual price appreciation since November 2023. New York remained in the top spot over Las Vegas, with the biggest year-over-year home-price gains (up +8.8% and +8.2%, respectively). Once again, home prices grew the slowest in Portland (at a 0.8% annual rate). All 20 cities registered annual increases for the eighth consecutive month.
• The competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) showed U.S. home prices accelerated slightly in July, as the government agency reported prices rising +0.1% after an unchanged reading the prior month (revised up from the -0.1% originally reported). Expectations were for a +0.2% increase. The government data showed home prices up +4.5% year-over-year compared to +5.3% the prior month. “For the third consecutive month, U.S. house prices showed little movement,” said Dr. Anju Vajja, Deputy Director for FHFA’s Division of Research and Statistics. 
• Weekly MBA Mortgage Applications increased +11.0% for the week ending September 20, following the prior week’s +14.2% surge. The Purchase Index increased +1.4% following a +5.4% rise the prior week. The Refinance Index jumped +20.3%, following the prior week’s +24.2% jump. The average 30-Year Mortgage Rate slid to 6.13% from 6.15% the prior week, the eighth straight weekly decline and the lowest level since September 9, 2022.
• Weekly Initial Jobless Claims slipped -4,000 to 218,000 for the week ending Sept 21, below expectations for 223,000. The prior week was revised up to 222,000 from the originally reported 219,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +13,000 to 1,834,000 in the week ending Sept 14, above expectations for 1,828,000. Last week’s reading of 1,829,000 was revised down to 1,821,000.

The Week Ahead

The economic calendar slows in the coming week but still has some high-profile reports. Purchase Managers Indexes (PMIs) from ISM and S&P Global are reported, with the manufacturing PMIs due Tuesday and the services PMIs on Thursday. Construction Spending and Job Openings will be watched on Tuesday for clues on the key housing and labor sectors of the economy. Thursday also brings Durable Goods and Factory Orders. But the headline report comes at the end of the week, on Friday morning when nonfarm payrolls and unemployment figures for September are reported. Inflation data still matters, but now that inflation is in range of the Fed’s 2% target it may take a back seat to labor market data between now and the Federal Reserve’s Nov. 6-7 meeting. To ensure a soft landing the Fed will want to see labor market weakness of late stabilize. More downward revisions in the nonfarm payrolls data could add to the case for accelerating rate cuts. Fed-funds futures now point to a 54% chance for another half-point cut in November, according to the CME FedWatch Tool.

Did You Know?

MORE CUTS COMING – At the September 18 Federal Open Market Committee (FOMC) meeting, Fed officials projected a median federal funds rate of 3.375% by the end of 2025, indicating six more 25 basis point (bp) cuts in addition to the 50-bp cut made on 9/18. Market pricing suggests the Fed will cut rates even more than that, down to 2.75% to 3% by the end of 2025 (Sources: US Federal Reserve, Bloomberg).

LARGE GROWTH VERSUS SMALL VALUE – The rotation from large-cap growth to small-cap value continued through the end of the third quarter. The Russell 1000 Growth Index (large growth) gained +21.0% in the first half of 2024 compared to a decline of -0.9% for the Russell 2000 Value Index (small value). The script has flipped in Q3, however, with the Russell 2000 Value index up +10.1% through 9/27 versus a gain of +2.8% for the Russell 1000 Growth index (Source: Bloomberg).

PAMPERING THE PETS – U.S. consumers spent $186 billion on pet products and services in 2023, which was more than they spent on childcare. Consumer spending growth on pets has outpaced the overall rate of spending growth in every year since 2011, the longest streak since at least 1960 (Sources: Economist, Bureau of Economic Analysis).

This Week in History

WHEN GENIUS FAILED – On September 23, 1998, Wall Street’s top investment banks, encouraged by the Federal Reserve, completed marathon negotiations for a $3.65 billion bailout of the hedge fund Long-Term Capital Management, which lost nearly $2 billion in a single month when the mathematical models designed by two Nobel laureates failed (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.