Weekly Market Update – December 15, 2023

Quick Takes

• On Wednesday, the Federal Reserve maintained its key policy rate at 5.25%-5.50%, but the most noteworthy aspect came as Chairman Jerome Powell surprised economists and delighted investors with a press conference that was much more dovish than expected. 
• The unexpected dovish shift in monetary policy outlook from the Federal Reserve sent stock and bond indices sharply higher. The S&P 500 rose +2.5%, and the Bloomberg Aggregate Bond Index advanced +2.2% for the week.
• Once again, the small-cap Russell 2000 Index was the leading U.S. market index last week, with a +5.6% gain. It is the fifth straight weekly gain for the Russell, and it has been the leading U.S. index in 4 of the last 5 weeks after being the lagging index for most of the year.

Stocks and bonds rallied after Fed opened the door to rate cuts

PIVOT! An unexpected dovish shift in monetary policy outlook from the Federal Reserve sent stocks sharply higher. On Wednesday, the Fed left its key policy rate unchanged for the third straight meeting. That was widely expected. What wasn’t expected was the change in median projections by fed officials to 3 rate cuts in 2024, up from just 2 in September. Then, what really got investors’ attention was Chairman Jerome Powell’s comments in the post-meeting press conference in which he essentially endorsed the views of additional cuts and further stated that Fed officials were starting to discuss when to cut rates and said that the Fed is “likely at or near peak the rate for this cycle.” In a nutshell, the Fed delivered a full pivot from “higher for longer” to “lower and sooner.” Rate cuts would mark a major departure in the Fed’s roughly two-year campaign to control inflation. As discussed more in the Chart of the Week section below, markets immediately cheered the abrupt change in Fed stance. Most major U.S. indices jumped about 1.5% to 2% in the wake of the Wednesday 2 pm Eastern time press conference and maintained those gains through the end of the week. The S&P 500 finished the week up +2.5%, the Nasdaq Composite was up +2.8%, and the Russell 2000 small cap index surged +5.6%. For all three indexes, it was the seventh straight week of gains. For the S&P and Nasdaq, it was the seventh straight week of gains. For the S&P, that’s the longest weekly winning streak since November 2017. 

Bond traders also wasted no time resetting their interest rate expectations for next year, sending the benchmark 10-year U.S. Treasury yield sharply down to below 4%, about a percentage point lower than just a few weeks ago in late October when it crested 5%. That means borrowing costs are headed lower, and financial conditions are easy, fueling the equity rally, especially for rate-sensitive assets that have lagged over the past couple of years. For the week, the 10-year yield dropped -31 basis points, closing at 3.91%. The shorter end 2-year U.S. Treasury yield fell -28 basis points to close at 4.44%. With yields sharply down, bond indices were sharply higher, with the Bloomberg U.S. Aggregate Bond Index delivering a total return of +2.2% for the week. 

Overseas markets were also encouraged by the U.S. rally as well as from the European Central Bank and Bank of England also leaving their key rates unchanged. Also bolstering non-U.S. returns was a continued slide in the U.S. dollar, which fell -1.4% for the week. The Bloomberg Global Aggregate ex U.S. Bond Index) advanced +2.7% for the week. On the international equity front, developed market international stocks (as measured by the MSCI EAFE Index) were up +2.6%, and the MSCI Emerging Markets Index was up +2.7%.

Chart of the Week

On Wednesday, the Federal Reserve maintained its key policy rate at 5.25%-5.50%, but the most noteworthy aspect came as Chairman Jerome Powell surprised economists and delighted investors with a press conference that was viewed as much more dovish than expected. In all, the Fed projected that there will be three rate cuts in 2024 instead of two that they indicated in September. The Fed also softened its tightening bias by saying they were mulling the need for “any” more hikes. At his press conference about a half an hour after the release of the Fed’s statement and economic forecasts at 2 p.m. Eastern, Chairman Powell did nothing to soften the dovish signals from the statement and projections. Powell said Fed officials were starting to discuss when to cut rates, “The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said. Fed officials think the Fed is “likely at or near the peak rate for this cycle.” Powell didn’t take rate hikes off the table, but this was the first significant mention of rate cuts in 2024 by the Fed. However, markets are currently pricing in up to 6 rate cuts in 2024, twice the amount the Fed suggested. As shown in the chart below, markets immediately cheered the Fed’s outlook, with all three primary U.S. stock indices jumping about +1.5% higher. The European Central Bank and Bank of England also left rates unchanged, but they pushed back against talk of rate cuts, as did IMF chief Kristalina Georgieva, who warned against jumping the gun in the inflation battle.

Powell surprises with a dovish pivot

Index Performance, December 11 – 15

Source: FactSet, The Wall Street Journal.

Economic Review

• Inflation remained tepid in November, with the headline Consumer Price Index (CPI) rising a scant +0.1% for the month as lower oil prices helped to offset higher costs of other goods and services such as rent and used cars. That was a tad higher than the flat reading in October, which is where it was expected to stay. That helped year-over-year CPI recede to 3.1% from 3.2% the prior month. Core CPI, which excludes the more volatile food and energy prices, was a bit hotter, up +0.3% for the month, as expected, which was up from last month’s +0.2%. On a year-over-year (YoY) basis Core CPI rose +4.0%, matching the annual rate from last month, which is where it was forecast to be. Both measures are well off their 2022 peak levels but still remain stubbornly above the Fed’s +2% target. The cost of gasoline dropped -6.0% last month and largely accounted for the flattish CPI in November. However, food costs were up +0.2% after being up +0.3% in October. Shelter, the biggest expense for most families, continues to be sticky, with rents jumping +0.5% for the month and up +6.9% from last year. Used vehicle prices also increased a sharp +1.6% in November, breaking a string of five straight declines. Prices declined for clothing, home furnishings, plane tickets, hotel rentals, and new vehicles. 
• November wholesale inflation was also flat, with the headline Producer Price Index (PPI) at 0.0%, matching expectations and compared to the prior month’s -0.5%. Year-over-year (YoY) PPI slipped to +0.9%, under expectations for +1.0% and the prior month’s +1.2%. Core PPI, which strips out volatile food and energy costs, was also unchanged, below expectations for +0.2% and matching the prior month’s unrevised +0.0%. Year-over-year (YoY) Core PPI was up +2.0%, under expectations for +2.2% and down from +2.3% the prior month. Cheaper gasoline gave a big assist to the benign inflation report, but prices in most major categories were also muted. Overall, energy prices sank -1.2% in November, helping to offset a sharp +0.6% rise in food prices.
• November Import Prices fell -0.4%, higher than expectations for -0.8% and the prior month’s -0.6% (revised up from -0.8%). Year-over-year, import prices were down -1.4%, higher than expectations for -2.1% and versus the prior month’s -1.8% drop (revised up from -2.0%). Imported fuel prices slide -5.6%, following the prior months -6.3% drop and driving much of the overall decline. Nonfuel import prices rose +0.2% after falling -0.2% for the month. Export Prices fell -0.9%, matching the prior month’s decline.
• The Commerce Department reported that November U.S. Retail Sales rose +0.3%, far above expectations for a -0.1% drop and the prior month’s -0.2%, which was the first decline in seven months. Spending surged at internet retailers as well as stores that sell books, music, and other hobby items. Sales were also up for clothes, furniture, healthcare items, and new cars and trucks. Receipts at gasoline stations fell sharply again to hold down the headline number on retail sales. Sales also fell at department stores and home centers. Sales ex-autos and gas were up a sharp +0.6%, far outpacing the +0.2% gain expected and the prior month’s +0.1%. The Control Group, a figure used to calculate GDP, was up +0.2%, matching expectations, and up from 0.0% the prior month (revised down from +0.2%). 
• The Small Business Optimism Index was relatively flat in October, slipping just -0.1 points from the prior month. The National Federation of Independent Business (NFIB) reported that business optimism fell to 90.6 for the month from 90.7 the prior month, which is where it was expected to stay. November marked the 23rd consecutive month the index was under the 49-year average of 98. The decline was led by a -3 percentage point drop in the Plans to Increase Inventories, dropping it to -3%, as well as a -3% drop in the Current Job Openings index, which fell to 40%, the highest of the 10 component indices. Current Inventory was up the most (+3 percentage points). Concerns over inflation remain a pain point for small businesses, though Quality of Labor was the most cited concern in November, as small businesses are struggling to fill open positions.
• On Tuesday, the Treasury Department reported that the U.S. Federal Budget Deficit widened to $314 billion in November, up from $249 billion in the same month last year and smaller than the $317 billion forecast by Wall Street economists. Government receipts were up $23 billion to $275 billion from a year ago, but spending was up even more, rising $88 billion to $589 billion. With the increase in interest rates, Interest on Federal Debt was up $66.3 billion more than the first two months of the fiscal year a year ago. The deficit for all of fiscal year 2023, which ended on September 30, was $1.7 trillion. The deficit is projected to remain upward of $2 trillion per year for the next decade if no legislative changes are enacted. Interest groups that have been pressing for a reduction in the deficit have been urging Congress to set up a fiscal commission to explore reforms. 
• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) showed modest expansion in mid-December, up slightly to 51.0 from the prior month’s 50.7. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI slid to a four-month low of 48.2 from 49.4 the prior month and missed expectations of 49.5. The manufacturing index has been in negative territory since last spring. The Services PMI rose to a five month high of 51.3 from 50.8 the prior month, beating expectations for 50.5. The results show a bifurcated economy in which Services have flourished as people go out to eat more and spend more on travel and entertainment while Manufacturing has seen a drop in demand. 
• November Industrial Production rebounded +0.2%, slightly below expectations for +0.3% but nicely improved from the prior month’s -0.9% (revised down from -0.6%). Auto manufacturing jumped +7.1% after plunging -10.0% in the prior month due to the United Auto Workers’ strike. However, Manufacturing fell -0.2%, excluding autos. Defense orders continued to trend higher, rising +1.2%, the 11th consecutive monthly increase. Capacity Utilization, a measure of potential output, improved to 78.8% from 78.7% the prior month (which was revised down from 78.9%), which was below expectations for 79.1%. The current level is about 1 point below the historic average. 
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, sank to a four month low of -14.5 in December, more than negating the +9.1 jump the prior month and sharply below the expectations for +2.0%. Reading below zero indicates worsening conditions. New Orders sank -6.0 points to -11.3, the third consecutive month of declines. Shipments also declined. Expectations for six months ahead improved +13 points to +12.1. 
• Weekly MBA Mortgage Applications surged +7.4% for the week ended December 8, following the prior week’s +2.8% jump. The Purchase Index was up +3.5% following a -0.3% dip the prior week, and the Refinance Index was up +19.4 % following a +13.9% gain the prior week. The average 30-Year Mortgage Rate slipped to 7.07% from the prior week, the fourth straight weekly decline and the sixth drop in the last 7 weeks.
• Weekly Initial Jobless Claims rose +1,000 to 220,000 for the week ended December 2, in line with expectations. The prior week was revised up to 219,000 from 218,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) slid -64,000 to 1,861,000 in the week ended November 25, below consensus for 1,910,000 and last week’s reading of 1,925,000 (revised down from 1,927,000).

The Week Ahead

The week ahead brings a bevy of U.S. housing-market data, a collection of corporate earnings reports, personal income and spending data, consumer sentiment and confidence reports, and the Federal Reserve’s preferred inflation measure (the core personal-consumption expenditures price index). The housing market data includes the National Association of Home Builders’ housing market index for December on Monday, the Census Bureau’s November housing starts on Tuesday, the National Association of Realtors’ existing-home sales for November on Wednesday, and the Census Bureau’s new-home sales data for November on Friday. Companies releasing quarterly results next week include FedEx on Tuesday, Micron Technology and General Mills on Wednesday, and on Thursday, Nike, Carnival, Cintas, and CarMax all report.

Did You Know?

ADVISOR ADVANTAGE – In Fidelity’s 2024 Financial Resolutions survey, 76% of Gen Z respondents said they’ll be better off financially in the coming year compared to just 52% of Baby Boomers. When asked if they were able to stick to their financial resolutions in 2023, 80% of survey-takers that work with an advisor said yes compared to just 51% without an advisor (Source: Fidelity).

MAAUTO – A total of 375 commercials aired during NFL games this season through December 1 have featured Travis Kelce, more than any other athlete, actor, or other household name, according to ad measurement firm iSpot. Marketers want the Kansas City Chiefs tight end for his approachability and comic timing—but his romance with Taylor Swift hasn’t hurt (Source: iSpot, The Wall Street Journal).

ELECTION ANXIETY – In a recent Nationwide survey of investors, 45% said the results of the 2024 Presidential Election will have a bigger impact on their retirement plans than market returns. A third (32%) of investors said they believe the U.S. economy will fall into a recession within twelve months if their preferred political party is not victorious (Source: Nationwide, MFS).

This Week in History

ALL BULLISH ON THE WESTERN FRONT – On December 12, 1914, the New York Stock Exchange reopened after closing in July amid jitters over the outbreak of World War I. By the end of 1915, the stock market had risen nearly +82% as Western Europe supplied its war effort with American-made goods and weapons (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.