Weekly Market Update – August 16, 2024

Quick Takes

• A trifecta of low inflation readings sets the stage for the Federal Reserve to cut interest rates in mid-September.  Wholesale inflation, consumer inflation, and import prices were all relatively soft and helped rekindle investor confidence after the sharp early August selloff.
• For the week, the S&P 500 Index gained +3.9%, the Nasdaq Composite Index was up 5.3%, and the MSCI EAFE Index rose +4.0%. For all three indexes, it was the best week since November 3 and snapped four-week losing streaks for each. 
• Treasury yields declined through most of the week on the soft inflation data. The benchmark 10-year U.S. Treasury yield ended the week down -6 basis points at 3.88%, and the Bloomberg U.S. Aggregate Bond Index ended the week up +0.5%.

Source: Bloomberg. Data as of August 16, 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.

What a difference a week makes!

Early August’s sharp risk-off decline is in the rear-view mirror, and capital markets rallied big. At the beginning of last week, stock markets were still reeling from the prior week’s global sell-off. But a trifecta of soft inflation reports, combined with robust retail sales and a decline in jobless claims, helped investors gain confidence that a recession wasn’t on the immediate horizon. Improvements in the preliminary reading of August consumer sentiment also seemed to encourage investors. The result was the best week of the year for many major stock indexes. 

The S&P 500 Index gained +3.9% on the week, and the Nasdaq Composite Index was up 5.3%. Even developed market international stocks (as measured by the MSCI EAFE Index) had a meaningful rally, rising +4.0%. For all three indexes it was the best week since November 3 and snapped four-week losing streaks for each. U.S. small cap stocks (the Russell 2000 Index) and emerging market stocks (the MSCI Emerging Markets) weren’t quite as strong but still had solid gains of +2.9% and +2.8%, respectively. 

Wholesale inflation, consumer inflation, and import prices were all relatively soft and appeared to convince investors that the Federal Reserve is almost certain to join other world central banks in cutting their policy rate at the upcoming meeting in mid-September. The weaker-than-expected inflation data did seem to take a 0.5% rate cut off the table, though. According to the CME FedWatch Tool, odds for a 50 basis point cut in September fell to just 25% from almost 100% on the morning of August 5 when global markets were in the midst of the steep selloff. Investors still expect between three and four quarter-point cuts before the end of 2024. Of course, bond investors welcomed the near certainty that the easing phase of monetary policy is just weeks away. Treasury yields declined through most of the week, with the yield on the benchmark 10-year U.S. Treasury note ending the week down -6 basis points (bps) at 3.88%. Longer-dated bond yields fell even more; the 30-year Treasury yield fell -8 bps to end at 4.14%. As a result, the Bloomberg U.S. Aggregate Bond Index ended the week up +0.5%, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) rose +0.3%.

Chart of the Week

The U.S. Treasury Department recorded a Federal Budget Deficit of $243.7 billion in July, more than the $240.0 billion shortfall expected compared to the $220.8 billion shortfall in July 2023. Because of the lack of any major personal or corporate tax deadlines during the month, July has recorded a deficit in 68 out of the last 70 fiscal years (the government’s fiscal year runs from October through September). Federal Tax Receipts jumped $54.2 billion over the past year to $330.4 billion, or up +19.6% from the same period in fiscal year 2023. But Government Outlays surged $77.2 billion higher over the past year to $574.1 billion, or up +15.5%. For the full fiscal year, the U.S. deficit totaled $1.52 trillion with two months to go, down slightly from $1.61 trillion in the same span in the prior fiscal year. Still, the deficit in 2024 is on track to end up somewhat bigger at $1.9 trillion compared to $1.7 trillion in the previous year, according to the Congressional Budget Office (CBO). A big contributor is rising interest payments on the nation’s record $35 trillion in debt, which has resulted in $763 billion spent on interest payments in the first 10 months of the fiscal year — more than what the U.S. federal government has spent on Medicare or the military.

U.S. Records 2nd Largest July Deficit in History

U.S. Budget Deficit: July Calendar Month (Billions)

Source: U.S. Treasury.

Economic Review

• Wholesale inflation rose less than expected in July. The headline Producer Price Index (PPI) rose +0.1% versus expectations for a +0.2% increase which is where it was the prior month. Year-over-year (YoY) PPI came in at 2.2%, under expectations for +2.3% and the prior month’s 2.7% (which was revised higher from +2.6%). Core PPI, which strips out volatile food and energy costs, was flat (0.0%) versus expectations to be at +0.2% and down from +0.3% the prior month (revised lower from +0.4%). YoY Core PPI was up +2.4%, under expectations for +2.6% and the prior month’s unrevised +3.0% annual pace. Goods inflation climbed +0.6% in July after two monthly declines. Meanwhile, Service inflation fell -0.2%, its first monthly decline since December. PPI tends to take 2-3 months to migrate into CPI, so the Fed may want to wait longer than September to see how quickly the wholesale inflation works into consumer inflation (CPI) before cutting more than 25 basis points.
• The rate of inflation for consumer goods and services rose slightly in July. The headline Consumer Price Index (CPI) was up +0.2%, in line with expectations, and up from the prior month’s unrevised -0.1%, which was the first decline in four years. Year-over-year (YoY) CPI grew at a 2.9% rate, below the prior month’s unrevised +3.0% annual rate, where it was expected to stay and marking the lowest level since the spring of 2021. Core CPI, which excludes the more volatile food and energy prices, was also up +0.2% for the month, matching expectations and up a tick from +0.1% the prior month. YoY Core CPI was +3.2% as expected, also the lowest level in three years, and down a tick from +3.3% the prior month. The Federal Reserve and Wall Street generally consider the core rate as a better predictor of future inflation, so it is good news to see the core measures declining. However, inflation in some core services categories – including housing rents and car insurance – remains elevated. The mild CPI and PPI reports seem to make it certain that the Fed will cut its policy rate in mid-September.
• Imports Prices were up +0.1% in July, more than the expected -0.1% decline and a slight acceleration from the prior month’s unchanged reading. Import prices ex-petroleum rose 0.2%, the same as the prior month and a bit higher than expectations for +0.1%. Auto prices rose +0.4% after no change in June. Year-over-year (YoY) import prices were up +1.6%, up from the prior month’s +1.5% rise, which is where it was expected to stay. Export Prices rose +0.7%, far above expectations for a flat reading, and up from the prior month’s -0.3% fall (revised up from -0.5). Export prices were up +1.4% over the past year, above expectations for a +0.1% rise and the prior month’s +0.1% annual rate (revised up from the originally reported +0.7% rise).
• The Commerce Department reported that U.S. Retail Sales were up +1.0% in July, well ahead of expectations for a +0.4% increase, and up sharply from the -0.2% drop the prior month (which was revised down from flat). Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Gains in sales were propelled by increases at motor vehicle and parts dealers (+3.6%), electronics and appliance stores (+1.6%), and food and beverage outlets (+0.9%). Miscellaneous retailers saw a plunge of -2.5%, while clothing stores were down -0.1%. Sales ex-autos and gas were up +0.4%, down from the prior month’s unrevised +0.8% rise, but ahead of Wall Street expectations for a +0.2% rise. The Control Group, a figure used to calculate GDP, was up +0.3%, above expectations for +0.1%, but down from the unrevised +0.9% gain the prior month.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index rose to 93.7 – its highest reading since February 2022 – compared to 91.5 the prior month, which is where it was expected to remain.  It wasn’t very robust, though, with just 4 of the 10 components improving, 4 flat, and 2 falling. The biggest increase in the components was from business owners Expecting the Economy to Improve, which increased 18 points to a net reading of -2%. Those business owners Expecting Real Sales to be Higher and Planning to Increase Inventories both rose a modest +4 points. Current Job Openings ticked up +1 point. Current Inventory slipped -2 points, and Earnings Trends ticked down -1 point. Inflation is still the top small business issue, with 25% of owners reporting it as their single most important problem in operating their business, up from 21% the prior month. “Despite this increase in optimism, the road ahead remains tough for the nation’s small business owners,” said NFIB Chief Economist Bill Dunkelberg. “Cost pressures, especially labor costs, continue to plague small business operations, impacting their bottom line. Owners are heading towards unpredictable months ahead, not knowing how future economic conditions or government policies will impact them.”
• The preliminary reading of the August University of Michigan Consumer Sentiment Index rose to 67.8, the first increase in five months, up from the 66.4 final reading from the prior month. That was ahead of expectations for 66.9. The Current Economic Conditions component was 60.9, down from last month’s 62.7, which is the weakest level since December 2022. The Consumer Expectations component, however, surged to 72.1 from 68.8, far ahead of expectations for 68.5. One-year inflation expectations were unchanged at +2.9%, which was just under expectations for a 2.8% reading. The five-year inflation expectations came in at +3.0%, also unchanged from the prior month and ahead of expectations for 2.9%.
• U.S. Industrial Production fell -0.6% in July, the first drop in four months, worse than expectations for a -0.3% decline and down from +0.3% (revised lower from +0.6%). Part of the poor result was from Hurricane Beryl, which shaved -0.3 percentage points off the total. Manufacturing fell -0.3% after remaining flat the prior month. Motor vehicles and parts output fell -7.8% after a +0.3% rise the prior month. Capacity Utilization, a measure of potential output, also fell, down to 77.8 from 78.4%, missing expectations for 78.5%. Capacity Utilization reflects how much a manufacturing plant is being used to produce things.
• Manufacturing in the Federal Reserve’s Third District slid to -7 in July from +13.9 the prior month, according to the Philly Fed Manufacturing Business Outlook Survey. That was far below expectations for +5.2 and the first negative reading since January (readings above zero indicate economic expansion). New Orders fell to +14.6 from +20.7 the month before. The Shipments component dropped sharply to +8.5 from +27.8. The Employment index plunged to -5.7 from +15.2. The Six-Month Business Outlook slipped to +15.4 from +38.7. The Prices Paid index rose to +24.0 from +19.8, while Prices Received fell to +13.7 from +24.2.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, rose to -4.7 in July from -6.6 the prior month, remaining in contraction territory for a ninth straight month. Still, that was above expectations -6.0 (reading below zero indicates deteriorating economic conditions). New Orders fell to -7.9 from +0.6, which had been the highest level in ten months. Shipments fell to +0.3 from +3.9, which was its highest level in eight months. The Prices Paid index fell -1.1 points while the Prices Received component rose +2.4 points. Expectations for six months ahead retreated -2.9 points to +22.9. 
• Homebuilder confidence slumped to its lowest level since December, according to the National Association of Home Builders (NAHB) Housing Market Index (HMI), which fell for a fourth straight month in August to 39, short of expectations of 43 and down from 41 the prior month (revised lower from 42). A year ago, the index stood at 50. 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 down -2 points to 45, Future Sales (in the next six months) rose a point to 49, and Traffic of Prospective Buyers dropped -2 points to 25. High mortgage rates are weighing on builder confidence as home-buying activity slows. Builders are ramping up incentives and cutting prices to keep buyers interested. For the month, 33% of builders reported cutting home prices, up from 31% the prior month. The average price reduction held steady at -6%, where it’s been for over a year now. The use of sales incentives beyond price cuts increased to 64% from 61%, which is the highest use of sales incentives since April 2019. Geographically, the South fell the most, to 39 from 43, and the Northeast slipped to 46 from 47, the Midwest and West were unchanged at 39 and 37, respectively.
• July Housing Starts plunged -6.8% to seasonally adjusted annual rate of 1,238,000 units, below expectations for a -1.5% decline to 1,333,000 units. That is the lowest level since May 2020 and compares to a negatively revised 1,329,000 units, or +1.1%, the prior month (originally 1,353,000 and +3.0%). Housing starts peaked at 1,800,000 million in April 2022. Single-family homes plunged -14.1% in the month, the worst level since April 2020, while multi-family units surged by +19.6%. New construction was down -12% in the West, the South was down -13.6%, the Midwest slipped -1.7%, but the Northeast surged +42.6%.  Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, fell -4.0% to 1,396,000, following the prior month’s +3.9% increase to 1,454,000 (revised up from +3.4%). That was much worse than the expected +-2.0% decline to 1,425,000. Single-unit permits were down -0.1%, while multi-unit permits for buildings plunged -11.1%. Regionally, permits were down in the Midwest by -12.6%, by -4.2% in the South, and down -5.3% in the West, but up +16.2%in the Northeast.
• Weekly MBA Mortgage Applications surged +16.8% for the week ending August 9, following the prior week’s +6.9% jump. The Purchase Index was up +2.8% following a +0.8% rise the prior week. The Refinance Index rocketed up +34.5% after jumping +15.9% the prior week. The average 30-Year Mortgage Rate fell to 6.54% from 6.55% the prior week, the lowest level since May 5, 2023.
• Weekly Initial Jobless Claims fell -7,000 to 227,000 for the week ending August 10, below expectations for 235,000. The prior week was revised up to 234,000 from the originally reported 233,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell to 1,864,000 in the week ending August 3, below consensus estimates for 1,870,000. Last week’s reading of 1,875,000 was revised down to 1,871,000.

The Week Ahead

The economic calendar is lighter this week without too many high-profile releases. The Conference Board’s Leading Economic Index will be released Monday, then nothing happens until the Federal Reserve releases its July FOMC meeting minutes on Wednesday afternoon. Like last week, Thursday will be the busiest day with weekly jobless claims, the Chicago Fed’s National Activity Index, S&P Global Manufacturing and Services Purchasing Managers’ Indexes, Existing Home Sales, and finally, manufacturing activity from the Kansas City Fed. The week concludes with New Home Sales on Friday. The Federal Reserve’s annual Jackson Hole conference will also occur this week and should command regular highlights, including a highly anticipated speech by Jerome Powell on Friday morning. The Fed chair is expected to lay the groundwork for a September interest-rate cut.

Did You Know?

QUICK LOSSES, QUICK RECOVERY – For just the 16th time since 1928, the S&P 500 recently declined by -7% or more from an all-time high in under four weeks. Following prior occurrences, the S&P 500’s median return over the next one and three months was +4.54% and +6.1%, respectively (Source: Bespoke).

CORRECTION TERRITORY – The Nasdaq Composite recently entered “correction” territory by falling more than -10% from its all-time high. Over the last 10 years, Nasdaq corrections have seen an average high-to-low drop of -17.5% over 42 trading days (Source: Bespoke).

VOLATILITY IN VOLATILITY – On August 5, the CBOE Volatility Index (VIX) experienced its largest ever intraday increase relative to its prior close (42.3 points) and followed that up by closing with its largest ever decline from an intraday high (27 points) (Source: Bloomberg).

This Week in History

LOW DOW – August 13, 2024, was the 42nd anniversary of the 1982 market low. The Dow Jones Industrial Average closed at 776.92, which was lower than it had been 18 years before; meanwhile, over that period, inflation tripled. For context, Fast Times at Ridgemont High opened the next day (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.