Weekly Market Update – October 4, 2024

Quick Takes

• Sentiment was shaky throughout the week as markets digested the devastating damage that Hurricane Helene left in its path, escalating tensions in the Middle East between Iran and Israel, as well as a massive strike by the International Longshoremen’s union.
• However, the Longshoremen’s strike was delayed Thursday evening, and on Friday morning, a much stronger than expected employment report helped the S&P 500 eke out a small weekly gain and extend its win streak to four weeks.
• U.S. bonds sank after the strong jobs report as yields surged and the odds for another 50 basis point rate cut faded. U.S. bonds fell -1.2% for the week, while non-U.S. bonds were down -2.2%. Non-U.S. bonds were hampered in part from the U.S. dollar rising +2.1%.

Source: Bloomberg. Data as of October 4, 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. stocks extend win streak to four weeks… just barely

A late Friday rally helped U.S. stocks eke out their fourth consecutive weekly gain, the first four-week win streak since mid-May. Friday morning’s blowout employment report provided a big boost to investor confidence and helped push the S&P 500 Index to a just-barely positive +0.2% week. Likewise, the Nasdaq Composite Index inched up a meager +0.1% for the week, just enough to extend its own four-week win streak. The small cap Russell 2000 Index wasn’t able to keep up with the larger cap indexes for a second straight week, slipping -0.5%. Developed market international stocks (as measured by the MSCI EAFE Index) struggled, falling -3.7%. Emerging market stocks, on the other hand, held up as tailwinds from the prior week’s massive Chinese stimulus helped the MSCI Emerging Markets Index gain +0.4% for the week.

Sentiment was shaky throughout much of the week as markets began Monday still assessing the devastating damage that Hurricane Helene left in its path from the Gulf Coast, through Tennessee, and into the Carolinas. Then, on Tuesday, tensions escalated in the Middle East with Iran launching 180 ballistic missiles at Israel, though most were intercepted. WTI crude oil surged more than +9% for the week, while the S&P 500 energy sector was the best-performing sector of the week. 

Back in the U.S., concerns grew through Monday and Tuesday that a massive strike by the International Longshoremen’s Association – the first since 1977 – would effectively close down major seaports in the Eastern U.S. and Gulf Coasts. But fears of a new round of supply chain issues and inflationary pressures from the port worker’s strike were put to rest on Thursday evening when a temporary agreement was announced to delay a walkout until mid-January. And then on Friday the nonfarm payrolls report showed a much larger than expected 254,000 new jobs in September. 

Treasury rates in the bond market jumped Friday after the jobs report. As a result, yield on the benchmark 10-year U.S. Treasury note ended up +22 basis points for the week to close at 3.97%, its highest level since early August. The shorter 2-year U.S. Treasury yield surged +36 basis points to close at 3.92%. Bond prices and yields move in opposite directions, and so the Bloomberg U.S. Aggregate Bond Index fell -1.2%, and non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -2.2%. Non-U.S. bonds and stocks were hamstrung by a rebound in the U.S. dollar, which was up +2.1% during the week.

Chart of the Week

The monthly Employment Situation report showed an unexpected jump in job creation in September, the largest since March. On Friday the Labor Department reported that U.S. employers added 254,000 new Non-Farm Payrolls (NFP) during the month, far above Wall Street expectations for 150,000. That compares to 159,000 in August, which was revised up from the originally reported 142,000 jobs, and July job gains were revised up by 55,000. Private-sector jobs increased by 118,000 in the month. July private sector jobs were revised down to 74,000 from 97,000, and June was revised down to 97,000 from 136,000. Leisure and Hospitality, Health Care and Social Assistance, as well as Construction led the hiring. The Unemployment Rate slipped down to 4.1% from 4.2%, where it was expected to stay. The unemployment rate had been as low as 3.4% just 15 months ago but has fallen two months now from a three-year peak of +4.3%. Inflation watchers noted that Average Hourly Earnings rose +0.4% for the month, above expectations for a +0.3% rise and up from +0.5% the prior month. Year-over-year, Average Hourly Earnings increased to +4.0% from +3.9%, also above expectations for +3.8%. 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 slid to 34.2 from 34.3, where it was expected to remain. Labor-Force Participation held steady at 62.7%, as expected. The strong job creation likely means the Fed will cut a quarter point at both the November and December meeting and then pause. This pushes out the pace of cuts and increases odds of fewer total cuts than expected.

Job Creation Jumped in September

Monthly job creation in the U.S.

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

Economic Review

• The Institute for Supply Management’s (ISM) Manufacturing PMI was unchanged at 47.2% in September, short of expectations for a 47.5% reading. The manufacturing PMI has now contracted for six straight months and has been stuck in contraction territory for 22 of the last 23 months (levels below 50 indicate contracting economic activity). Only five out of thirteen industries reported growth in September and much of the weakness from a slump in Inventories. The Employment component fell to 43.9% from 46.0%. On the other hand, new business improved with the key New Orders component up to 46.1% from 44.6% the prior month. The Production component also rose to 49.8% from 44.8%. The Prices Paid index, a measure of inflation, fell for the first time this year, down to 48.3% from 54.0%.    
• In contrast to manufacturing, the Institute for Supply Management’s (ISM) Services PMI increased in September to 54.9% from 51.5% the prior month. That was far above Wall Street expectations for 51.7% and the highest level in a year and a half. Service-oriented companies, such as restaurants and retailers, employ the majority of Americans. Numbers over 50% indicate economic expansion. The New Orders index jumped to 59.4%, the highest level since early 2023, and up from 53.0% the month before. The Employment index slipped to 48.1% from 50.2%, reflecting a low-hiring labor market. The Production index jumped to 59.9% from 53.3%. For services inflation, the Prices Paid index inched up to 59.4% from 57.3%. The services side of the economy has powered the U.S. economy for the past few years and appears to be continuing to do so despite elevated interest rates, election uncertainty, and rising geopolitical tensions.
• Like the ISM Manufacturing PMI, the final reading of the S&P Global U.S. Manufacturing PMI was sluggish in September as well, moving deeper in contraction territory to 47.3, the lowest level since June 2023, and down from 47.9 the prior month. Paramount in the worsening manufacturing was continued weakness in New Orders, with the sharpest decline since June 2023. Employment decreased at the strongest pace since early 2010 if the COVID pandemic is excluded. On the positive side, Business Confidence ticked higher amid optimism that new business will pick up following the Presidential Election. Meanwhile, the rate of Input Cost inflation softened but remained marked, and firms increased their Selling Prices at the fastest pace since April.
• Like the competing ISM report, the S&P Global U.S. Services PMI reported decent growth and steeper price pressures in September, but at a slightly slower pace at 55.2, down from 55.7. New Orders grew for the fifth month running, with the latest solid expansion only slightly softer than the 14-month high seen in August. Despite that, Business Confidence in the year-ahead outlook dropped sharply during September due to concerns of a slowdown in the economy and was the lowest since October 2022. Meanwhile, Employment dropped for the second month running, albeit only marginally. Some companies reported lowering staffing levels in a bid to save costs, but others reported staff shortages. Input Prices increased rapidly in September, with the rate of inflation matching the fastest in the past year. Higher input costs were often linked to salary pressures.
• The August Job Openings Labor Turnover Survey (JOLTS) showed Job Openings rebound to 8.040 million from 7.711 million (revised up from 7.673 million). That was far above expectations for 7.693 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 listings gains were concentrated in Construction and State and Local Government, while most other industries reported flat or lower job openings. The ratio of Job Openings to Unemployed Workers was unchanged at 1.1 and is down from a peak of 2.0 in 2022, and at the prepandemic level the Fed wants to see it at. The Number of People Quitting Jobs slowed to 3.1 million from 3.2 million the prior month, which is far off the record 4.5 million job quitters reached in late 2021. The Quits Rate fell to 1.9% from 2.1% the prior month and is now the lowest since June 2020 and another sign the labor market remains soft. People tend to quit less often when the economy softens, and jobs become harder to find. The Hiring Rate dipped to 3.3% from 3.7%, which is the lowest level in 11 years, excluding the COVID pandemic era. 
• The Commerce Department reported that Construction Spending remained under pressure with a third straight decline in August, falling -0.1%, far short of expectations for an increase of +0.2%, but an improvement from the prior month’s -0.5% drop (that was revised down from -0.3%). Over the past year, construction spending is up +4.1%, versus an annual rate of +6.7% the previous month. Total Private Construction was down -0.2% after a drop of -0.7% the month before, and total Public Construction was up +0.3% compared to a rise of +0.5% the prior month. Private Residential Spending fell -0.3% month-over-month, and private Nonresidential Spending was down -0.1%. The report showed that single-family construction fell -1.5% and multifamily construction was down -0.4%.
• The Commerce Department reported U.S. Factory Orders fell -0.2% in August, short of expectations for +0.1%, and far below the +4.9% pace the prior month (revised down from +5.0%). That’s the third decline in the last four months. Factory Orders Ex-Transportation were down -0.1, shy of expectations for +0.2% and down from the prior month’s +0.3% (revised lower from +0.4%). Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment were flat as expected from the initial estimate two weeks ago. That’s a big drop from the +9.9% rate the prior month. Durable Goods Orders Excluding Transportation were up +0.5, in line with expectations and unchanged from initial estimate, and up from -0.1% the prior month. The important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, was up +0.3%, a tick up from the initial estimate of +0.2% where it was expected to remain. Core Capital Goods Shipments, which are factored into GDP, fell -0.1%, down from the initial estimate +0.1%.
• Texas factory activity improved slightly in September with the Texas Manufacturing Outlook Survey ticking up to -9.0 from an unrevised -9.7 the prior month, much better than expectations for a -10.8 reading. Still, it was the 29th consecutive month with a contractionary reading. Underlying details showed weakness underneath the headline result, with indexes for Production, New Orders, and Shipments all dropping to negative levels. The exception was the Employment index, which rebounded to +2.9 from -0.7 the prior month, but the Hours-Worked index was little changed at -2.5, remaining in contraction. The Texas Service Sector Outlook General Business Activity Index also improved, moving up to -2.6 from 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), improved to 46.6 in August from an unrevised 46.1 the prior month and above expectations for a 46.0 reading. Readings below the 50 level indicate contraction. This is the tenth 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.
• Weekly MBA Mortgage Applications slipped -1.3% for the week ending September 27, following the prior week’s +11.0% jump. The Purchase Index increased +0.7% following a +1.4% rise the prior week. The Refinance Index jumped -2.9%, following the prior week’s +20.3% jump. The average 30-Year Mortgage Rate ticked up 6.14% from 6.13% the prior week, breaking eight straight weeks of declines.
• Weekly Initial Jobless Claims increased +6,000 to 225,000 for the week ending Sept 28, above expectations for 221,000. The prior week was revised up to 219,000 from the originally reported 218,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) slid -1,000 to 1,826,000 in the week ending Sept 21, below expectations for 1,830,000. Last week’s reading of 1,834,000 was revised down to 1,827,000.

The Week Ahead

The macro calendar is light this week but with a few main events, particularly on the inflation front. At the front and end of the week, we will get some updates on the health of the consumer with Consumer Credit on Monday and Consumer Sentiment on Friday. Small Business Optimism will be reported on Tuesday, and then on Wednesday, the Federal Reserve will release the minutes from the September 18 policy meeting when they delivered the half point rate cut. But the headline event for the week will come on Thursday morning when the Bureau of Labor Statistics (BLS) releases the Consumer Price Index (CPI) for September. After the big Nonfarm Payrolls growth reported last Friday, inflation may be back in focus. The BLS will release the Producer Price Index (PPI) on Friday morning.

Third-quarter earnings season kicks off this week as well, with results from major U.S. banks and several other notable firms, including PepsiCo, Delta Air Lines, Domino’s Pizza, and then the banks come on Friday with JPMorgan Chase, Wells Fargo, Bank of New York Mellon, and BlackRock. 

Did You Know?

WRONG WAY – Following the U.S. Federal Reserve’s 50-basis-point rate cut last week, the 10-year U.S. Treasury yield increased from 3.65% on 9/17 to 3.73% on 9/24. In the eight prior rate cut cycles since 1984, the only two times the 10-year yield rose in the week after the first cut were in January 2001 and September 2007 (Source: Bespoke).

OPEN HOUSES OPEN UP – In the week ending 9/22/24, in which the Fed cut rates by 50 basis points, Redfin’s Homebuyer Demand Index rose +7% month-over-month and saw its first year-over-year increase since October 2023. The index is a measure of home tours and other home buying services (Source: Redfin).

BANKRUPTCIES JUMP – In the second quarter, 2,462 companies filed for Chapter 11 bankruptcy. That’s up 109% over the past two years and the highest reading since Q1 2012 (Source: Administrative Office of US Courts).

This Week in History

SPACE RACE – On October 4, 1957, the U.S.S.R. launched Sputnik 1, the world’s first orbiting satellite, taking an early lead in the space race. The Dow Jones Industrial Average fell -9.1% over the next 12 trading days (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.