Weekly Market Update – August 23, 2024

Quick Takes

• Stock and bond investors received the green light from Federal Reserve Chairman Jerome Powell and sent markets higher. Powell made the case that the time had come for a shift to less restrictive monetary policy and essentially guaranteed a rate cut in September.
• The S&P 500 Index moved back near record highs, advancing +1.5% for the week, and the tech-heavy Nasdaq Composite Index was just behind with a +1.4% gain. Small cap stocks saw the biggest rally, with the Russell 2000 Index jumping +3.6% for the week.
• Investors bought Treasurys and sent yields lower for a second straight week. The 10-year U.S. Treasury yield ended the week down -8 basis points at 3.80% and the Bloomberg U.S. Aggregate Bond Index ended the week up +0.7%, following the prior week’s +0.5% gain.

Source: Bloomberg. Data as of August 23, 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.

Fed sets stage for rate cuts, investors celebrate

Stock and bond investors received the green light from Federal Reserve Chairman Jerome Powell and sent markets higher. On Friday, at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, Powell made the case in his keynote address that the time had come for a shift to less restrictive monetary policy and essentially guaranteed an interest-rate cut in September. Stocks jumped and bond yields fell following the release of his statement and moved higher after his remarks appeared to leave room for the possibility of a 50 basis point cut (0.50 percentage points) rather than the typical 25 basis points. Sentiment had already been bolstered on Wednesday when the release of the minutes from the Fed’s July policy meeting indicated that the majority of Fed policymakers recognized the case for rate cuts in September, with several even favoring cutting in July. The minutes showed the consensus of policymakers felt confident that the Fed’s 2% inflation target was attainable and unemployment risks were rising so easing too late could unduly weaken the economy. The risks from weaker employment were emphasized after the Bureau of Labor Statistics reported their initial estimate of their annual jobs growth revisions was an exceptionally large reduction of -818,000 payrolls for the twelve months ended March (see the Chart of the Week below for more details). How far and how fast rates will decline now depends on the economy, but the bottom line is that markets are fully expecting that the first rate cut since 2020 is coming on September 18.

The S&P 500 Index moved back near record highs, advancing +1.5% for the week, and the tech-heavy Nasdaq Composite Index was just behind with a +1.4% gain. Small cap stocks saw the biggest rally, with the Russell 2000 Index jumping +3.6% for the week, showing how broad-based the rally was. The value of the U.S. dollar fell another -1.7% last week and closed near its lowest level in more than two years before the Fed started hiking rates. Of course, a weaker dollar tends to help non-U.S. assets, and indeed developed market international stocks (as measured by the MSCI EAFE Index) had a meaningful rally, rising +2.7% last week, on top of the +4.0% rally the prior week. Emerging market stocks (the MSCI Emerging Markets Index) lagged developed markets again but still rose +0.6%.

With Powell giving the green light for rate cuts next month, investors bought up U.S. Treasurys, sending the benchmark 10-year U.S. Treasury yield down -8 basis points for the week, to close at 3.80%. The shorter 2-year U.S. Treasury note, which is influenced more by the Fed funds rate, was down -13 basis points for the week to 3.92%. As a result, the Bloomberg U.S. Aggregate Bond Index ended the week up +0.7% and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) rose +1.7%.

Chart of the Week

Over the past year we’ve discussed the trend for monthly U.S. payroll data to be consistently revised lower following the initial reports. And those previously released monthly payrolls have been revised even further lower the Bureau of Labor Statistics (BLS) announced Wednesday. Each year about this time the BLS publishes the preliminary estimate of its annual Current Employment Statistics (CES) for the 12 months ending March. For March 2024 the preliminary estimate of the benchmark revision indicates an adjustment to total nonfarm employment of -818,000. As the chart below shows, the 2024 revision was the biggest in the past decade, and the second biggest on record, with just the -824,000 downward revision in 2009, in the wake of the Global Financial Crisis, slightly exceeding the 2024 downward revision. The revision is almost entirely comprised of private sector jobs, primarily from the higher-paying sectors such as Professional Services (-358,000), Leisure (-150,000), and Manufacturing (-115,000). In contrast, Government payrolls were actually revised higher by +1,000. The final benchmark revision will be issued in February 2025 with the publication of the January 2025 Employment Situation news release.

Revisions to U.S. Payroll Growth

Previous 12 months ending in March of the year shown

Source: Bureau of Labor Statistics, Bloomberg, Barron’s.

Economic Review

• The Conference Board’s Leading Economic Index (LEI) fell -0.6% in July, worse than the Wall Street forecast for a -0.4% decline and the prior month’s unrevised -0.2% drop. The index has declined in 27 of the last 28 months (rising only in February 2024). Breadth of the index was mixed with five of the ten indicators tracked falling, four positive and one unchanged. The Leading Credit Index component improved the most, rising +0.11%, with Stock Prices (S&P 500) the second best at +0.09%. ISM New Orders, which improved the most the prior month, was the biggest detractor, falling -0.17%. The LEI Coincident Index was unchanged for the month at 112.5 after increasing +0.2% the prior month. Meanwhile, the LEI Lagging Index ticked down -0.1% after rising +0.2% the previous month. The bottom line is that “the LEI continues to fall on a month-over-month basis, but the six-month annual growth rate no longer signals recession ahead,” according to Justyna Zabinska-La Monica, senior manager of business cycle indicators. 
• The preliminary “flash” S&P Global U.S. Composite Purchasing Managers Index (PMI) was 54.1 in August, slipping from 54.3 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI fell to 48.0 from 49.6 the prior month, well below expectations for 49.5 and the lowest level since December 2023. The Services PMI improved to 55.2, the highest reading since April 2022, up from 55.0 the prior month, and well ahead of expectations for 54.0. The service side of the economy — retailers, banks, hospitals and the like — 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. Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “This ‘soft-landing’ scenario looks less convincing, however, when you scratch beneath the surface of the headline numbers. Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline. The manufacturing sector’s forward-looking orders-to-inventory ratio has fallen to one of the lowest levels since the global financial crisis.”
• The Federal Reserve Bank of Chicago reported that U.S. economic activity slowed in July, as the Chicago Fed National Activity Index (CFNAI) dropped to -0.34 from -0.09 the prior month (which was revised lower from the originally reported +0.05). That is far below the recent February high of +0.35. Readings below zero indicate below-trend-growth in the national economic activity. The CFNAI three-month moving average improved, however, was unchanged at -0.06, which 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. Three of the four broad categories of indicators used to construct the index decreased from a month earlier. The Personal Consumption and Housing category contribution was up +0.03 in July, from -0.02 the prior month. The Production and Income category contributed -0.28, down from -0.02 the prior month. The Employment, Unemployment, and Hours category contributed -0.08, down from -0.02 the prior month. The Sales, Orders, and Inventories category contribution was down to -0.01 from -0.02 the prior month. Overall breadth of the index regressed with only 28 of the 85 individual indicators making positive contributions, down from just 42 the prior month.
• 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.
• The Kansas City Fed Manufacturing Survey improved to -3 in August from -13 the month before. That was better than expectations for -9. Underlying details were somewhat mixed. The Production index rebounded to +6 from -12 the prior month, and New Orders improved to -12 from -21 the previous month. The number of Employees index improved as well, to -7 from -12 and the Average Employee Workweek index rose to -10 from -17. The Prices Paid inched up to +18 from +17 the prior month. The Kansas City Fed Service Sector Outlook Survey rose to +5 from -4 the prior month.
• 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.
• The U.S. housing market broke out of a four-month slump. The National Association of Realtors (NAR) reported that Existing Home Sales rose +1.3% in July to a seasonally adjusted annual rate of 3.95 million units, above expectations for 3.94 million units and the prior month’s 3.90 million units (revised higher from 3.89 million units). Year-over-year existing sales are down -2.5% versus the -5.1% annual rate the prior month. The Median Existing Home Price slipped -1.0% to $422,600, breaking seven consecutive months of increases, but increased 4.2% year-over-year, the thirteenth consecutive month of year-over-year price increases.  The Inventory of Homes for Sale was up +0.8% from the prior month and +19.8% from last year, to 1.33 million units which is the highest level since October 2021. Unsold Inventory is at a 4.0-month supply, down from 4.1 months the prior month. Homes Listed for Sale remained on the market for 24 days on average, up from 22 days the previous month. First-Time Buyers were 29% of sales in the month, unchanged from the month. Historically, these buyers make up closer to 40% of home sales, but affordability has been hit hard in the last two years due to fast-rising home prices and higher mortgage rates.  All-Cash Sales held slid to 27% of transactions. For the month, sales rose in three regions: the Northeast was up +4.3%, the West was up +1.4%, and the South was up +1.1%. The Midwest was unchanged from the prior month.
• The Commerce Department reported New Home Sales surged +10.6% in July to an annual rate of 739,000 units, compared to +0.3% the prior month (to 621,000 units). It was also the biggest increase in nearly two years and marked the highest level of sales since May 2023. It was far above expectations for a +1.0% increase, or 623,000 units. The prior month was revised up from the originally reported -0.6% (617,000 units). 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 +5.6% compared to -7.4% the prior month. By region, month-over-month sales surged +33.8% in the West, +9.9% in the Midwest, +6.9% in the Northeast, and +2.9% in the South. The Median New Home Price rose to $429,800 from $416,700 the prior month. The inventory of new homes for sale fell -10.7% after rising 2.2% the prior month to the highest level since October 2022. The months of supply at the current rate of sales was 7.5, the lowest since September, down from 9.3 the prior month.
• Weekly MBA Mortgage Applications sank -10.1% for the week ending August 16 following the prior week’s +16.8% surge. The Purchase Index fell -5.1% following a +2.8% rise the prior week. The Refinance Index plummeted -15.2%, the largest drop of the year, after jumping +34.5% the prior week. The decreased activity came despite a further decline in the average 30-Year Mortgage Rate, which slipped to 6.50% from 6.54% the prior week, the lowest level since May 5, 2023.

The Week Ahead

The economic calendar is much busier this week following a light schedule last week. The Census Bureau’s Durable Goods report for July is Monday and the Conference Board’s Consumer Confidence Index for August is Tuesday, along with home price indices from the FHFA and S&P CoreLogic. The National Association of Realtors reports Pending Home Sales for July on Thursday and the second revision of Q2 GDP will be released. On Friday the July Personal Consumption Expenditures Price Index provides the Fed’s favorite inflation measure. 

Beyond economic data, the big event for the week will be Nvidia’s earnings report on Wednesday evening. Results of the big artificial intelligence player will likely move the market, one way or the other. Most companies have reported earnings at this point, but a few companies are left including Nordstrom, Salesforce, CrowdStrike, Chewy, Dell Technologies, Lululemon Athletica, and Birkenstock.

Did You Know?

REALITY BITES FOR GEN X – The oldest members of Generation X are turning 60 next year and many can’t afford to stop working any time soon. Gen X, the ‘forgotten generation’ born between 1965 and 1980, launched their careers as companies moved from pensions that promise steady income after years of service, to plans such as 401(k)s that place employees’ retirement destiny in their own hands. Some were also  hit hard during the 2008 financial crisis, still have student debt, or are caring for aging parents (Source: The Wall Street Journal).

POOR POLICIES – An evaluation of more than 1,500 climate policies in 41 countries found that just 63 actually worked to reduce greenhouse gas emissions according to a new study by Berlin-based Mercator Research Institute on Global Commons and Climate Change. The key to success was combining subsidies and regulations with price-based strategies aimed at changing consumer and corporate behavior, such as carbon pricing and vehicle or energy taxes (Source: The Wall Street Journal).

This Week in History

FIRST LIGHT – On August 21, 1754, William Murdock was born in Bellow Mill, near Cumnock in Ayrshire, Scotland. His invention of coal-gas lighting in 1792 marked a leap forward in human productivity and safety from lit buildings and streets (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.