Quick Takes
- The economic highlight of the week was the November Employment Situation Report which showed nonfarm payrolls grow by 227,000 for the month. That was solid enough for economic growth but not so hot to prevent the Fed from cutting rates again in December.
- The S&P 500 Index and Nasdaq Composite Index both closed at all-time highs and notched three-week win streaks. The S&P was up +1.0% and the Nasdaq gained +3.3%. The small cap Russell 2000 Index slipped -1.1% for the week after jumping nearly +11% in November.
- Non-U.S. stocks also rallied last week despite several political flare-ups. France’s prime minister was sacked, South Korea’s president attempted to declare martial law, and civil war in Syria sent President Bashar al-Assad to exile in Moscow.
Source: Bloomberg. Data as of December 6, 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 extend their rally, bonds advance too
The big economic event of the week came Friday morning when the November Employment Situation Report was released, and it largely delivered for investors. The stock market got the jobs improvement it was looking for after a very disappointing report the prior month. Nonfarm payrolls grew by 227,000 in November, which was solid enough for economic growth but not so hot that it could jeopardize the Federal Reserve’s plans to cut rates again next week at their December meeting. As a result, Fed funds futures were pricing in an 85% change of a quarter-point rate cut at the December 18 meeting. That was up from 71% just the day before the jobs report. For the week, the S&P 500 Index gained +1.0%, its third straight week of gains, and closed at another record high. The Nasdaq Composite Index also had a three-week win streak and closed at a record high, gaining +3.3% on the strength of the Technology sector. Small cap stocks saw some profit taking, with the Russell 2000 Index slipping -1.1% for the week after jumping nearly +11% in November.
Stock markets outside the U.S. also rallied despite a number of political flare-ups. French Prime Minister Michel Barnier lost a confidence vote on Wednesday after failing to get a 2025 budget passed. He’s the first French premier to be sacked in over 60 years. President Emmanuel Macron plans to appoint a successor soon and serve out the remainder of his term as president. In South Korea, President Yoon Suk Yeol attempted to declare martial law, but the country’s parliament voted 190-0 to rescind the declaration. It’s expected that Yoon will face impeachment proceedings and be removed from office, setting the stage for fresh elections. In the Middle East, turmoil erupted as an armed coalition of opposition factions took control of an estimated 250 Syrian cities and towns, including Aleppo, the country’s second-largest city, and sent Syrian President Bashar al-Assad to Moscow in exile. A power vacuum is likely to result and leave the region in intensified instability. Yet, even with these events, developed market international stocks (as measured by the MSCI EAFE Index) managed to rally, rising +1.7%. Emerging market stocks (the MSCI Emerging Markets Index) advanced even more, gaining +2.5%.
In the bond world, yields were down marginally for the week, and U.S. Treasuries posted positive returns. The benchmark 10-year U.S. Treasury note slipped -2 basis points to close the week at 4.15%. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index rose +0.5% for the week after gaining +1.4% the prior week. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were just barely up, inching up +0.2%, after the prior week’s +2.2% gain.
The Week Ahead
Inflation reports dominate a relatively light week of economic data this week. The Bureau of Labor Statistics (BLS) will release the Consumer Price Index (CPI) for November on Wednesday, and the BLS then publishes the Producer Price Index (PPI) for November on Thursday. Friday brings Import and Export Prices as well. The reports come just a week before the Federal Open Market Committee‘s (FOMC) final 2024 rate decision. The NFIB’s Small Business Optimism is released on Tuesday. Outside the U.S., the European Central Bank is widely expected to cut its target interest rate by a quarter of a percentage point on Thursday to 3%.
Earnings reports to watch next week will include Oracle and Toll Brothers on Monday, AutoZone and GameStop on Tuesday, and Adobe on Wednesday. Broadcom, Costco Wholesale, and RH will release results on Thursday.
Chart of the Week
The monthly Employment Situation report showed that new Non-Farm Payrolls (NFP) rose by 227,000 in November. That beat Wall Street forecasts for 220,000 payrolls and was much better than the prior month’s paltry 36,000 new payrolls (which was revised up from the originally reported +12,000 jobs). September’s payrolls were revised up to 255,000, 32,000 higher than the prior estimate. According to the Bureau of Labor Statistics report, Health Care added 54,000 jobs, Leisure and Hospitality grew by 53,000 new positions, and Social Assistance added 19,000 jobs. Government continues to be a large contributor to the jobs total, seeing 33,000 new positions added in that area. Health Care and Social Assistance were top contributors to October’s gains as well, as was Government, with more than 40,000 jobs created in October. The Unemployment Rate edged up to +4.2% from +4.1%, where it was expected to stay. The unemployment rate had been as low as +3.4% just 15 months ago but is nearing its three-year peak of +4.3% reached in July. Inflation watchers noted that Average Hourly Earnings were unchanged from last month at +0.4% but was expected to decline to +0.3%. Year-over-year, Average Hourly Earnings also came in unchanged at +4.0% but were also expected to decline a tick to +3.9%. 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 worked was unchanged at 34.3, matching expectations. Labor-Force Participation ticked down to 62.5% from 62.6% but was expected to increase to 62.7%. The November jobs report is likely to keep the Fed on track to cut interest rates again when top officials convene in two weeks.
Payrolls increased more than expected in November
(Consumer Confidence Index, 2007 – November 2024)
Source: U.S. Bureau of Labor Statistics via FRED, CNBC.
Did You Know?
NO CORRECTIONS – Since 1928, the S&P 500 has averaged about one correction (defined as a –10% or worse correction) per year, or one about every 346 days. However, in 2024, there have been no -10% or worse corrections yet. The last year without a correction was 2021, and half of all years since 2000 haven’t had one. (Source: Bespoke)
HIGH EXPECTATIONS – Generation Z adults (those age 18 to 27) say it takes an average annual salary of $587,797 and a net worth of $9.5 million to be considered “financially successful” compared to an average annual salary of just $99,874 and a net worth of $1 million for baby boomers – those age 60 to 78. (Source: Empower, CNBC)
CLEAR YOUR PLATE – An estimated 316 million pounds of food worth $556 million were wasted this Thanksgiving. The amount of turkey discarded works out to the equivalent of 8.2 million whole turkeys, and all the discarded Thanksgiving food would be enough to provide five meals to 47 million Americans. (Source: ReFed)
This Week in History
BIG BAILOUTS – December 2, 1991, was the day that Enron filed for bankruptcy. At the time, Enron was the largest corporate bankruptcy in U.S. history, but 23 years later, it only ranks as the ninth largest. At an estimated $66 billion, Enron’s bankruptcy was less than a tenth of Lehman’s (largest ever), which occurred less than seven years later, and a fifth the size of Washington Mutual, which collapsed just after Lehman. (Source: The Wall Street Journal)
Economic Review
- The Institute for Supply Management’s (ISM) Manufacturing PMI rose to 48.4% in November, ahead of expectations for a 47.5% reading. That is up from 46.5% the prior month, which was the lowest level since July 2023. The manufacturing PMI has now contracted for eight straight months and has been stuck in contraction territory for 24 of the last 25 months (levels below 50 indicate contracting economic activity). The improvement in November is likely from a bounce back from a weak October report that was dragged down by major hurricanes and a strike at Boeing. Still, the index of New Orders rose +3.3 points to an eight-month high of 50.4%, and the Employment gauge climbed +3.7 points to 48.1%. The Price Paid index, a measure of inflation, dropped -4.5 points to 50.3%.
- In contrast to manufacturing, the ISM Services PMI grew at a slower pace in November but still expanded at 52.1%, down from 56.0% the prior month. That was far below Wall Street expectations for 55.7%. Service-oriented companies, such as retailers, banks, and hospitals, employ the majority of Americans. Numbers over 50% indicate economic expansion. The New Orders index dropped to 53.7% from 57.4%. The Employment index slid 1.5 points to 51.5%. The Prices Paid index was largely unchanged at 58.2%. Companies are hopeful that falling interest rates and a business friendly Trump administration will give the private sector a boost, but they are also worried about the damage from new U.S. tariffs and a potential trade war.
- The final S&P Global U.S. Manufacturing Purchasing Managers Index (PMI) for November remained in contraction territory but improved to 49.7 from an unrevised 48.8 preliminary estimate two weeks ago and 48.5 from the prior month (levels above 50 indicate economic expansion, while levels below 50 indicate contraction). The rate of decline in New Orders slowed sharply, while stronger confidence around the future encouraged firms to increase Hirings. Output continued to be scaled back, however. Meanwhile, the rate of Input Cost inflation weakened further and was the slowest for a year. In contrast, Output Prices were raised at a slightly faster pace.
- Unlike the competing ISM report, the S&P Global U.S. Services PMI reported improved expansion in November, rising to 56.1 from 55.0 the prior month, although slightly lower than the preliminary reading of 57.0 two weeks ago. Solid increases in both Business Activity and New Orders were seen during the month, with rates of expansion accelerating. Despite stronger increases in Output and New Orders, service providers again indicated a reluctance to hire additional staff in November. Employment decreased for the fourth month running. While Input Costs continued to increase sharply, the pace of inflation eased in November, and Output Prices rose at the slowest pace in four-and-a-half years. Some firms indicated that the result of the Presidential Election and end of the uncertainty that had been evident in the lead-up to the vote had provided the impetus for customers to commit to new orders. In some cases, lower interest rates had contributed to the rise in new business.
- U.S. Consumer Credit rose by $19.2 billion in October, nearly twice the $10.0 billion expected and up from $3.2 billion the prior month (which was revised lower from the initially reported $6.0 billion). That’s a +4.5% annual growth rate, up from a scant +0.8% annualized growth rate the prior month. Growth for revolving credit, such as credit cards, ticked up by +13.9%, the highest level in 8 months, and up from just +1.5% the prior month. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, increased +1.1% following the prior month’s +0.5% rise. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt.
- The preliminary reading of the December University of Michigan Consumer Sentiment Index jumped to an eight-month high of 74.0 from 71.8 the prior month, beating expectations for 73.2. The results were driven by improved conditions for buying Durable Goods. The Current Economic Conditions component jumped to 77.7, up from the prior month’s 63.9 reading and far ahead of expectations for 65.2. The Consumer Expectations component, however, fell to 71.6 from 76.9, short of expectations for 77.7. One-year inflation expectations rose to +2.9% from +2.6%, higher than the expected 2.7% and the highest level in six months. 5-10 year inflation expectations, however, slipped to 3.1% from 3.2%.
- The October Job Openings Labor Turnover Survey (JOLTS) showed Job Openings edge up to 7.744 million from 7.372 million the prior month (revised down from 7.443 million). That was well above expectations for 7.519 million. Job Openings peaked at 12 million in 2022, but companies have since cut back on hiring. Job openings rose the most in professional businesses and hotels and restaurants. Government listings fell. Job openings are an indication of the health of the labor market and the broader U.S. economy. 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 rose to 3.3 million from 2.9 million the prior month and the highest level since May. The record was 4.5 million job quitters in late 2021. The Quits Rate rose to 2.1% from 1.9% the prior month. People tend to quit less often when the economy softens and jobs become harder to find. The Hiring Rate slipped to 3.3% from 3.5%.
- The Commerce Department reported that Construction Spending rose +0.4% in October, up from an unrevised +0.1% the prior month, and above expectations for a +0.2% improvement. Over the past year, construction spending is up +7.2%, versus an annual rate of +4.6% the previous month. The recent boom in data-center facilities from the artificial intelligence (AI) boom has contributed to the gains, and that is expected to continue into 2025. Total Private Construction was up +0.7% after a decline of -0.2% the month before, and total Public Construction was down -0.5% compared to a +1.1% gain the prior month. Private Residential Spending rose +1.5% month-over-month, and private Nonresidential Spending was down -0.3%. The report showed that single-family construction was up +0.8% and multifamily construction was up +0.2%.
- The Commerce Department reported U.S. Factory Orders rose +0.2% in October, in line with expectations and up from the -0.2% slide the prior month (revised higher from the initially reported -0.5%). Factory Orders Ex-Transportation were up +0.1, unchanged from the prior month. Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment were up +0.3%, a slight improvement from the +0.2% initial estimate where they were expected to stay and up from -0.4% drop the prior month. Durable Goods Orders Excluding Transportation were up +0.2, slightly higher than expectations for +0.1% which was the unrevised initial estimate. The important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, slid -0.2%, in line with the initial estimate. Core Capital Goods Shipments, which are factored into GDP, rose +0.3%, up from the initial estimate +0.2%. Overall, the manufacturing sector has been sluggish. Factory Orders are down in four of the past six months.
- According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit narrowed -11.9% in October to -$73.8 billion from -$83.8 billion the prior month. That was slightly lower than the -$75.0 billion expected. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. The trade gap in September was revised lower to -$83.7 billion from -$84.4 billion. Imports fell -4% in October as Consumer Goods and Capital Goods fell. Exports, particularly Cars, and Industrial Supplies, fell by -1.6% to $265.7 billion after setting a record the prior month.
- Weekly MBA Mortgage Applications rose +2.8% for the week ending November 29, following the prior week’s +6.3% jump. The Purchase Index was up +5.6% following a +12.4% rise the prior week. The Refinance Index slipped -0.6%, following the prior week’s -2.5% decline. The average 30-Year Mortgage Rate slipped to 6.69% from 6.86% the prior week.
- Weekly Initial Jobless Claims rose +9,000 to 224,000 for the week ending November 29, worse than expectations for 215,000. The prior week was revised up to 215,000 from the original 213,000 reported. The number of people already collecting unemployment claims (i.e., Continuing Claims) slipped -15,000 to 1,871,000 in the week ending Nov 23, less than expectations of 1,904,000. Last week’s reading of 1,907,000 was revised down to 1,896,000.
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.