Weekly Market Update – April 12, 2024

Quick Takes

• Stocks and bonds struggled for a second straight week, which can be chalked up to accelerating inflation data, rising geopolitical conflicts, and concerns that the just-beginning first-quarter earnings season will fail to impress.
• The S&P 500 fell -1.6%, the Nasdaq was down -0.5%, and the Russell 2000 dropped -2.9%. Meanwhile, the 10-year U.S. Treasury yield rose +12 basis points to 4.52%, and the Bloomberg U.S. Aggregate Bond Index fell -0.7%.
• On Wednesday, the Consumer Price Index (CPI) was released, showing inflation accelerated for March and exceeded Wall Street expectations. Following the report, the Fed funds futures market pushed the odds for the first rate cut back to September. 

Investors flock to safety on hot inflation data and geopolitics

It was another tough week for investors as stocks and bonds dropped while volatility picked up. The S&P 500 Index fell -1.6% for the week, its worst weekly performance since late October 2023. The drop was primarily from another bout of hotter-than-expected inflation data, particularly the Consumer Price Index (CPI) report released on Wednesday. Additionally, wholesale inflation (Producer Price Index, or PPI) reported on Thursday and Import Prices on Friday also showed inflationary pressures. Further pressuring stocks on Friday were reports of escalating geopolitical tensions in the Middle East, which were realized on Saturday evening after a drone and missile attack by Iran on Israel. The start of the first quarter earnings season at the end of the week didn’t help either. On Friday, several major banks reported results that were underwhelming. The most important, JPMorgan Chase, was a disappointment, and shares of the country’s largest bank dropped -6.5%, the largest drop since June 2020. The tech-heavy Nasdaq Composite Index performed better but still lost ground, slipping -0.5% for the week, its third consecutive weekly decline—which hasn’t happened since October 2023. The small cap Russell 2000 Index fell -2.9% for the second week in a row and is now negative in 2024.

Meanwhile, with stocks declining, volatility picked up. The CBOE Market Volatility Index (commonly referred to as the VIX Index or “Fear Index“) ended the week up +16% at 17.31, its highest close since October. Stocks overseas also struggled but outperformed their U.S. counterparts. Developed market international stocks (as measured by the MSCI EAFE Index) fell -1.2%, while the MSCI Emerging Markets Index dipped -0.4%. 

Of course, the stubborn inflation data continues to be a major hindrance for bonds as well. The U.S. 10-year Treasury yield was up +12 basis points, ending the week at 4.52%. Meanwhile, the 2-year U.S. Treasury yield was up +15 basis points to finish the week at 4.90%. Both are at their highest weekly closes since mid-November. With yields marching higher, the Bloomberg U.S. Aggregate Bond Index fell -0.7% for the week, while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was down -1.3%.  

Geopolitics will move into the spotlight to start the week after Iran’s attack on Israel. Israel’s air defense system worked to thwart the majority of drones and missiles launched by Iran at Israel on Saturday evening. An Israeli military spokesman said the country is prepared to do “whatever is necessary” in its defense. Tehran said it would attack with greater force if there was retaliation. 

Chart of the Week

Inflation accelerated more than expected again in March, with the headline Consumer Price Index (CPI) increasing +0.4% for the month, above Wall Street expectations for a +0.3% increase and matching the prior month’s upside surprise. Year-over-year (YoY) CPI grew at a 3.5% rate, more than the expected +3.4%, and up from an unrevised +3.2% rate the prior month. The annual CPI rate hasn’t been below 3% since March 2021. More concerning, Core CPI, which excludes the more volatile food and energy prices, was also up +0.4% for the month, above expectations for +0.3% and matching the prior month. YoY Core CPI was +3.8%, higher than expectations for +3.7%, matching the prior month’s annual rate. Though both measures are well off their 2022 peak levels, they still remain stubbornly higher than the Fed’s +2% target and have reaccelerated recently. Shelter and Energy costs drove the increase, with Energy up +1.1% after climbing +2.3% in February, while Shelter, which make up about one-third of the weighting in the CPI, were higher by +0.4% on the month and up +5.7% from a year ago. Food prices increased just +0.1% on the month and were up +2.2% YoY but did see some subcomponents with big increases. The measure for the meat, fish, poultry, and eggs category climbed +0.9%, pushed by a +4.6% jump in egg prices. Food away from home increased +0.3%. On the other hand, Cereal and bakery products declined by -0.9%. The report makes it even more difficult for the Fed to start cutting rates until they have seen sufficient evidence that inflation is truly decelerating back to their 2% annual goal. Markets had expected three rate cuts this year, beginning in June, but that changed dramatically following the CPI release, with traders in the fed funds futures market pushing the odds for the first rate cut back to September, according to the CME FedWatch Tool. Moreover, multiple Fed policymakers also expressed skepticism about lowering rates in the near future over the past week.

Consumer Prices Rose 3.5%from a Year Ago, more than Expected

Year-over-year percent change, January 2021 through March 2024

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

Economic Review

• Unlike consumer inflation, wholesale inflation did not accelerate more than expected in March. The headline Producer Price Index (PPI) was up just +0.2%%, well below the prior month’s unrevised +0.6% rate and below expectations for a +0.3% rate. The year-over-year (YoY) PPI accelerated to +2.1%, an 11-month high, and up from +1.6% the prior month, but was still below expectations for +2.2%. Core PPI, which strips out volatile food and energy costs, was up +0.2%, in line with expectations, and down from the unrevised +0.3% increase the prior month. YoY Core PPI was up +2.4%, above expectations for +2.3% and the prior month’s +2.1% (revised up from +2.0%). Energy costs fell sharply for the month, providing relief to wholesale prices. Service prices – the biggest source of recent inflation – rose +0.3% for the second month in a row but have stabilized some after a +0.6% spike in January.
• In late 2022 and 2023, Imports Prices fell steadily but have now risen for three consecutive months. March import costs were up +0.4%, following an unrevised +0.3% jump the month before, which is where Wall Street expected them to stay. Higher oil prices were a big contributor for the third month in a row. The YoY rate of import inflation rose to +0.4%, above expectations of +0.3%, up from -0.9% in February and the first annual increase since January 2023. Export Prices were up +0.3%, in line with expectations, and down from the prior month’s +0.7% rise (revised down from +0.8%). Export prices are down -1.4% over the past year, slower than the -2.0% annual drop the prior month (revised down from the originally reported -1.8% decline).
• The preliminary reading of the April University of Michigan Consumer Sentiment Index fell further from a 32-month high of 79.4 to 77.9 in light of expectations for 79.0. The prepandemic peak reached 101. The Current Economic Conditions component dropped to 79.3 from 82.5, well short of forecasts for 81.9. The Consumer Expectations component fell to 77.0 from 77.4 the prior month, missing forecasts for 78.0. One-year inflation expectations rose to 3.1% from 2.9% the prior month, which is where they were expected to remain. The five-year inflation expectations also increased to 3.0% from 2.8%, which is where it was expected to stay. 
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index fell for the third consecutive month in March, dropping -0.9 points to 88.5, well below expectations of 89.9 and the lowest level since December 2012. Weakness was broad-based, with six of the 10 components declining on the month and only 2 improving. Expectations for Sales Growth saw the largest drop in the month, falling -8 points to a net -18. Plans to Increase Employment deteriorated further, slipping -1 from the prior month to a net 11% of small business owners that plan to create new jobs in the next three months, the lowest level since May 2020. In general, small businesses remain pessimistic about the current and future state of the economy. Continued stress in navigating inflation pressures leads as the top business problem. Inflation continues to frustrate owners as a significant share of them still report it as their biggest problem in operating their business. 
• The Treasury Department reported that the U.S. Federal Budget Deficit topped $1 trillion halfway through the current fiscal year, primarily due to rising interest payments on the national debt and almost matching the entire prior fiscal year. The deficit totaled -$236.5 billion in March, more than the expected -$223.0 trillion, but down 38% from a gap of -$378.4 billion in the same month a year earlier. For the six months in fiscal 2024 (October through March), the deficit widened to -$1.07 trillion, up from -$828 billion for the same period last year. Year-over-year (YoY) Government Receipts rose about +6% to $332 billion, while Government Spending fell -18% to $569 billion. The annual U.S. budget deficit is forecast to decline slightly to -$1.5 trillion in fiscal 2024 from a year earlier and then rise again. High deficits and high interest rates, meanwhile, have caused net interest payments by the government to surge in the past few years, climbing to $429 billion in the first six months of fiscal 2024 from $301 billion in the same period in the previous year. Net interest payments now roughly equal what the U.S. spends on defense. These payments could continue to increase if interest rates remain high and annual deficits of $1 trillion-plus persist.
• The Census Bureau reported Wholesale Inventories for December increased +0.5% to a total of $901.1 billion, after a -0.2% decline to a total of $896.5 billion the prior month. Year-over-Year (YoY) inventories were down -1.6%, the seventh negative YoY reading in a row. Inventories are goods produced for sale that have not been sold yet. Businesses tend to increase inventories when sales are rising and the recent increases are a good thing for the economy because it may indicate that the supply chain issues from the pandemic might finally be normalizing. Wholesale Trade Sales rose +2.3% for the month, more than double the expected +0.8% rise, and much improved from the -1.4% decline the prior month. Wholesale inventories data isn’t adjusted for inflation. Year-over-Year Wholesale Trade Sales were down -1.6%. The Inventory-to-Sales Ratio slipped to 1.34 months, which is down from the 1.36 the prior month and 1.37 a year ago. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves. The lower readings vs. last year suggest it’s taking less time for companies to sell their goods.
• Weekly MBA Mortgage Applications inched up +.01% for the week ended April 5, following the prior week’s -0.6% dip. The Purchase Index fell -4.7% following a -0.1% dip the prior week. The Refinance Index jumped +9.9% following a -1.6% drop the prior week. The average 30-Year Mortgage Rate increased to 7.01% versus 6.91% the prior week. 
• Weekly Initial Jobless Claims fell -11,000 to 211,000 for the week ended April 6, above expectations for 215,000. The prior week was revised up +1,000 to 222,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +28,000 to 1,817,000 in the week ended March 30, below consensus estimates for 1,800,000 and last week’s reading of 1,789,000 (revised down from 1,791,000).

The Week Ahead

The economic calendar will be watched closely following the recent slew of hotter-than-expected jobs and inflation data. Monday brings the March Retail Sales report, and Industrial Production on Tuesday. Housing data will also be prominent with NHAB homebuilder confidence on Monday, Housing Starts and Building Permits on Tuesday, weekly MBA Mortgage Applications on Wednesday, and Existing Home Sales on Thursday. Other notable reports include the Federal Reserve’s third Beige Book of the year on Wednesday and the Conference Board’s Leading Economic Index for March on Thursday.

The first quarter earnings season picks up this week, with about 10% of S&P 500 companies reporting. Notable names releasing profit reports include Netflix, Charles Schwab, American Express, Goldman Sachs, Morgan Stanley, Bank of America, UnitedHealth, Johnson & Johnson, Procter & Gamble, United Airlines Holdings, and Taiwan Semiconductor Manufacturing. Wall Street Analysts’ consensus forecast is for +5% year-over-year per share earnings growth for the S&P 500 companies.

Additionally, the cryptocurrency world will be keeping an eye on the expected Bitcoin halving event this week. Geopolitical tensions in the Middle East will be on traders’ minds as well after an escalation in conflict between Israel and Iran on Saturday. 

Did You Know?

SOMETHING ABOUT APRIL – Among the six publicly traded U.S. companies worth over $1 trillion, Microsoft (founded April 4, 1975) is the oldest, while Meta Platforms, which just turned 20 in early February, is the youngest. Interestingly, three of the trillion-dollar club members (Apple, Microsoft, and Nvidia) have founding dates within the first week of April (Source: Wikipedia).

WHERE THE AUDITS ARE – If your reported income is over $500K or less than $25K, you are twice as likely to receive an IRS audit than people with reported incomes of between $25K and $500K (0.4% vs 0.2%). Those with reported incomes of over $10 million were the most likely to be audited at an average rate of 2.4% in 2020 (Source: Internal Revenue Service, Bespoke).

ANOTHER STREAK ENDS – The ISM Manufacturing survey increased more than expected in March, rising from 47.8 to 50.3. That ended a streak of 16 months of contractionary readings (50 is the level distinguishing economic expansion, above 50, and economic contractions, below 50). That was the third longest in the index’s history since data began in 1948 (Source: Institute of Supply Management, Bloomberg).

This Week in History

SENATE IN SESSION – On April 8, 1913, the 17th Amendment, requiring the direct election of senators, was ratified. Connecticut was the 36th state to approve the modification to Article 1 Section 3 of the U.S. Constitution, giving it the three-fourths majority needed to enact the amendment (the U.S. had 48 states at the time; Alaska and Hawaii became states in 1959). Since the Constitutional Convention of 1787, state legislatures had chosen their two senators to serve six-year terms. In the late 19th century, fighting among state politicians led to stalemates that left senatorial seats vacant for long stretches. Corruption and special interests also muddied the legislators’ selections (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.