Weekly Market Update – February 02, 2024

Quick Takes

• After starting on a down note in the first week of the year, the S&P 500 Index has now risen for four straight weeks and for 13 of the last 14 weeks. It closed last week up +1.4% at a new record high. However, the gains continue to be dominated by the top mega cap tech stocks. 
• The largest companies in the market reported fourth-quarter earnings last week, and, for the most part, the results were solid. Apple, Alphabet, Amazon, Meta Platforms, and Microsoft all reported better-than-expected earnings. However, Apple’s growth remains challenged, particularly in China, and Alphabet’s ad revenue wasn’t that strong.
• The monthly Employment Situation report showed hotter than expected hiring again in January, with the U.S. economy adding 353,000 nonfarm payrolls in January. Moreover, and in contrast to virtually all of 2023, the revisions of the prior two months’ data were sharply higher.

U.S. Large-Caps Hit New Highs, but Small-Caps Still Struggle

After starting on a down note in the first week of the year, the S&P 500 Index rose another +1.4% last week to a new record high. The S&P is now up four straight weeks and for 13 of the last 14 weeks. However, the gains continue to be dominated by a handful of mega cap tech stocks, as the equal weighted version of the S&P 500 Index recorded a modest loss for the week. Likewise, the small-cap Russell 2000 Index declined -0.8% for the week and is down in five of the last six weeks. Like the S&P, the tech-heavy Nasdaq Composite has been up for four straight weeks and 13 of the last 14, adding +1.1% last week.

On Wednesday afternoon, Federal Reserve policymakers left Fed fund rates unchanged, as was widely anticipated, but at his post-meeting press conference, Fed Chair Jerome Powell stated that he didn’t think it’s likely that the Fed will cut rates in March. As a result, by the end of the day, equity markets fell sharply lower and weren’t helped by weaker-than-anticipated forward earnings guidance from Microsoft, Alphabet, and chipmaker Advanced Micro Devices. However, the indexes recovered much of their losses on Thursday following upside earnings surprises from Amazon, Meta Platforms, and Apple and continued that momentum on Friday.

Odds for a March rate cut faded further on Friday after the Labor Department reported that employers had added 353,000 nonfarm payrolls in January, nearly double what Wall Street was expecting. Furthermore, November’s and December’s payroll gains were also revised higher, a sharp contrast to most of 2023 when 10 of the prior 11 months saw the jobs numbers revised lower. Average hourly earnings also surprised on the upside, further underscoring that inflation pressures haven’t been sufficiently subdued for the Fed to cut rates yet. In fact, the futures pricing for a March rate cut went from 57% prior to Powell’s press release to just 18.5% following the strong January employment report of Friday morning. Less than a month ago, odds for a March Fed rate cut were at 90%. That’s quite a reset of market expectations, and yet stocks, outside of small caps, have held up reasonably well.

The market action overseas wasn’t as strong as in the U.S., but was still positive. Developed market international stocks (as measured by the MSCI EAFE Index) were up +0.02%, while the MSCI Emerging Markets Index gained +0.3%. The U.S. dollar continued its strength, a headwind for non-U.S. assets, rising +0.5% last week. 

Fixed income investors also had gains for the week, despite the drop in rate cut expectations. The 10-year U.S. Treasury yield sank -12 basis points to close at 4.02%, while the shorter 2-year U.S. Treasury yield was only up +1 basis points to finish the week at 4.36%. With that background, the Bloomberg U.S. Aggregate Bond Index was able to increase +0.7% for the week, and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) were up +0.2%. 

Outside of economic and earnings data, some other non-routine events added to the week’s choppy trading. Regional banks returned into focus when New York Community Bancorp (NYCB) saw its share price plunge -38% after the company slashed its dividend and increased loan loss reserves on Wednesday. That prompted a broad decline in U.S. regional bank shares later in the week as the shaky commercial real estate sector came back into the spotlight. And the impact wasn’t just in the U.S., as two foreign banks, Japan’s Aozora Bank and Germany’s Deutsche Bank, each raised loan loss reserves due to exposure to U.S. commercial real estate loans. Stress in China’s large property sector continued to increase as China’s largest property developer, Evergrande, was ordered to liquidate by a court in Hong Kong after its overseas creditors failed to reach an 11th-hour deal last weekend to restructure the sprawling real-estate company.

More geopolitical unrest unfolded as well, with President Joe Biden saying that he holds Iran responsible for the deaths of three U.S. service members after an attack on an outpost in Jordan by militias supplied by Iran. President Biden did appear to time the U.S. retaliatory attacks until after global financial and oil markets were closed, with strikes commencing late Friday afternoon. 

Chart of the Week

The monthly Employment Situation report showed hotter than expected hiring again in January, but the revisions of prior data was revised upward rather than large downward revisions made throughout virtually all of 2023. On Friday, the Labor Department reported that U.S. employers added a seasonally adjusted 353,000 new Non-Farm Payrolls (NFP) during the month, far above Wall Street expectations for 185,000 and an acceleration from the 333,000 in December. The December result was revised sharply higher from the initially reported 216,000, and November was also revised up to 182,000, or 9,000 higher than the prior release. The January jobs report is notoriously difficult to decipher because of big changes in the labor market at the start of each year. Temporary workers hired for the holiday shopping season are let go, for one thing, and many companies announced job cuts at that time. Employment gains were led by professional and business services, with 74,000. Other significant contributors included health care (70,000), retail trade (45,000), government (36,000), social assistance (30,000) and manufacturing (23,000). The Unemployment Rate remained at a four-month low of 3.7%, versus expectations to inch up to 3.8%. Inflation watchers will note that Average Hourly Earnings rose at a sharp +0.6% rate, which was the largest increase in nearly two years and double expectations of +0.3%. Year-over-year, Average Hourly Earnings were up +4.5%, above expectations of +4.1% and the prior month’s +4.3% (revised up from +4.1%). Average Weekly Hours slipped again, down to 34.1 from 34.3 the prior month, where they were expected to stay. Labor-Force Participation held steady at 62.5%, a tick below expectations for 62.6%. It remains well below the February 2020 prepandemic level of 63.3%. The key takeaway from the report is that the U.S. labor market remains quite strong. Hiring has slowed in the past year, and layoffs might be creeping higher, but most Americans who want a job can find one. 

Monthly Job Creation in the U.S.

January 2022 through January 2024

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

Economic Review

• The Institute for Supply Management’s (ISM) Manufacturing PMI rose to 49.1% in January from 47.4% the prior month (revised down from 47.4) and well above expectations of 47.2. That’s the highest level since October, but the manufacturing PMI has remained in contraction territory for 15 months in a row (levels below 50 indicate contracting economic activity), which is the longest monthly contraction streak since 2000-2001 following the dot com bubble crash. New Orders jumped into expansion territory, rising 5.5 points to 52.5% from 47.1%, breaking 16 months straight months in contraction territory (which is the longest streak since 1981). The Production component rose +0.5 points to also cross over to expansion territory at 50.4%, after being in contraction for 10 of the last 14 months. New Export Orders were a big drag, falling -4.7 points to 45.2%, continuing weak levels that have persisted for the last 18 months. The Employment component also picked up, improving by 2.3 points to 48.1%. The Prices Paid index, a measure of inflation, rose +7.7 points to 52.9%. The national ISM contradicted the five regional Fed manufacturing surveys, which were very weak for the month.
• The seasonally adjusted S&P Global U.S. Manufacturing PMI also crossed over into expansion levels in January, rising to 50.7 from 47.9 the prior month and a bit higher than the earlier flash estimate of 50.3. The latest upturn ended a two-month sequence of decline and signaled the strongest improvement in operating conditions since September 2022. Although only marginal, overall growth was supported by a return to expansion in new orders and a slower contraction in output. Production was reportedly hampered, however, by a renewed decline in supplier performance and longer input deliveries. Greater transportation costs pushed input prices higher on the month, with cost inflation hitting a nine-month high. 
• The final reading of the January University of Michigan Consumer Sentiment Index shot up to 79.0, the highest level in two and a half years. That was a slight bump higher than the preliminary mid-month estimate of 78.8 and well above the 69.7 reading in December. The Current Economic Conditions component dipped to 81.9 from the preliminary estimate of 83.3 but is up from 73.3 the prior month. The Consumer Expectations component rose to 77.1 from the preliminary 75.9 and is up from 67.4 the prior month. One-year inflation expectations remained at +2.9%, matching expectations. The five-year inflation expectations also came in at +2.9%, just above expectations of +2.8%. Bottom line, cheaper gas prices, slowing inflation, a stock-market rally and a strong labor market have given consumers more confidence in the economy. But it also makes it harder for the Fed to hit its 2% inflation target and may push interest rate cuts further down the road.
• The December Job Openings Labor Turnover Survey (JOLTS) showed Job Openings unexpectedly rose to 9.026 million, the first time over 9 million in three months. That was up from 8.925 million the prior month (revised up from 8.790 million). That was above expectations for 8.750 million and far off the peak of 12 million last year. Job openings are an indication of the health of the labor market and the broader U.S. economy. Most of the new job openings were in white-collar professional occupations as well as in manufacturing and health care. As is typically the case following the holiday shopping season, job posts declined in wholesale and transportation. The ratio of Job Openings to Unemployed Workers inched up to 1.44 from 1.43, still above prepandemic levels of 1.2 but down from a peak of 2.0 in 2022. The Fed is watching the ratio closely and wants to see it fall back to prepandemic norms. The Number of People Quitting Jobs, at 3.4 million, fell again to the lowest level in a few years and is far off the record 4.5 million job quitters reached in late 2021. The Quits Rate held steady at 2.2%, which, outside the pandemic period, is the lowest since March 2018. People tend to quit less often when the economy softens, and jobs become harder to find. The Number of People Hired in the month rose to 5.62 million from 5.55 million the month before, which was the smallest increase since April 2020 during the COVID shutdown. The Hiring Rate inched up to 3.6% from 3.5%, which was the lowest since August 2014 outside the COVID shutdown period.
• The Employment Cost Index (ECI) rose at a seasonally adjusted +0.9% in the fourth quarter, the slowest pace in two and a half years and below consensus expectations for +1.0% and the unrevised +1.1% for the third quarter of 2023. The ECI is the Federal Reserve’s preferred measure of wage gains, and the unexpected slowdown will ease concerns that a strong labor market risks keeping inflation above the Fed’s target. The cost of labor had risen by +1% or more for 10 consecutive quarters prior to this quarter, beginning back to the middle of 2021. Prior to that, the last time compensation rose at least +1% a quarter was in 2006. Wages and Salaries, which account for about 70% of compensation costs, rose about +0.9% following a +1.2% increase last quarter. Year-over-year, the ECI was up +4.2%, down from +4.3% for the prior quarter and the smallest increase in two years, but still above the 3.5% rate or so that the Fed would like to see. 
• The Conference Board’s Consumer Confidence Index hit a two-year high of 114.8 in January, up from 108.0 the prior month (revised down from 110.7) and matching expectations. A year ago, the index stood at 102.2. The Present Situation gauge rose to 161.3 from 147.2 the prior month (revised down from 148.5). That’s the strongest reading since the last month before the onset of the pandemic in March 2020. The Expectations gauge — which reflects consumers’ six-month outlook — increased to 83.8 from 81.9 (revised down from 85.6). Below the 80 mark on the expectations index often signals a recession within the next year. It topped the recessionary line of 80 in December for the first time in four months. In good times, the index can top 120 or more. 
• Orders for manufactured goods rose in December, as U.S. Factory Orders were up +0.2% for the month, in line with expectations but down sharply from the prior month’s +2.6% increase. Ex-Transportation orders were up +0.4%, higher than the prior month’s +0.2% gain (revised up from +0.1%). Meanwhile, Durable Goods Orders were flat, as expected, and matching the prior month. Non-Durable Goods Orders rose +0.4%. The important Core Capital Goods Orders (Nondefense Capital Goods Excluding Aircraft), a proxy for business spending, were up +0.2% following an unrevised +0.3% rise the prior month. Shipments of Core Capital Goods Orders, which feeds into Gross Domestic Product (GDP), were flat after a +0.1% gain the prior month.
• Texas factory activity sank in January with a huge miss in the Texas Manufacturing Outlook Survey, which fell to -27.4 from -10.4 the prior month (revised down from the original -9.3), well below expectations for -11.0. Fed’s 11th District is at its lowest level since May and has now been negative for 21 straight months. New Orders, Capacity Utilization, Production, and Shipments all weakened and are in contraction territory (negative readings). Prices Paid for Raw Materials were up again to +20.2 from +17.8 the prior month, while Prices Received from Finished Goods fell to +0.1 from +6.1 the prior month. Hours Worked were down sharply to -11.8 from the prior reading of -0.2. The Texas Service Sector Outlook Survey also dropped, but more modestly, falling to -9.3 after falling to -8.8 the prior month.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), fell further in January to 46.0 from 47.2 the prior month (revised up from 46.9) and was below expectations of 48.0. Readings below the 50 level indicate contraction. The index has fallen sharply from the November reading of 55.8, which was the highest level since May 2022. New Orders, Employment, and Order Backlogs fell at a slower pace and signaled contraction. Inventories fell at a faster pace in contraction levels. Prices Paid rose at a faster pace, signaling expansion. Supplier Deliveries rose at a faster pace, signaling expansion.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit an all-time high in November, marking the tenth straight month of increases, as the index increased a seasonally adjusted +0.15%, below expectations for a +0.5% increase and down from the prior month’s +0.63% pace. On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +5.4%, slightly below expectations for +5.8% but above the prior month’s +4.9% annual gain. For the third month in a row, Detroit was up the most (+8.2% YoY), while Portland was the only city down from a year ago, down -0.5%. Six cities registered new all-time highs in the month (Miami, Tampa, Atlanta, Charlotte, New York, and Cleveland). The median price of a resale home was $382,600 in December 2023, and a newly built home was $413,200.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) also showed U.S. home prices on the rise, up a seasonally adjusted +0.3% in November, unchanged from the prior month’s unrevised level. The government data shows home prices are up +6.6% year-over-year. All nine census divisions experienced positive price appreciation over the last 12 months, with five census divisions exhibiting deceleration compared to the price appreciation observed last year. Seasonally adjusted monthly price changes ranged from -0.2 percent in the New England division to +0.7 percent in the Mountain division. The 12-month changes ranged from +3.1 percent in the West South Central division to +9.8 percent in the New England division.
• The Commerce Department reported that Construction Spending rose for the 12th month in a row, up +0.9% in December to a seasonally adjusted annual rate of just $2.1 trillion, above expectations for +0.5% and matching the prior month, which was revised sharply higher from originally reported as +0.4%. Year-over-year (YoY), total construction spending was up +13.9%, compared to +11.3% the prior month. Total Private Construction was up +0.7% month-over-month, and total Public Construction was up +1.3%. Total Residential Spending increased +1.4% month-over-month while total Nonresidential Spending fell -0.2% month-over-month. Single-Family construction rose +1.6%, while Multi-Family construction was up +0.3%. The bottom line is that there was solid construction spending activity in both the private and public sectors, and overall construction spending rose in every month of 2023.
• Weekly MBA Mortgage Applications fell to -7.2% for the week ended January 26, following the prior week’s gain of +3.7%. The Purchase Index sank -11.4% following a +7.5% gain the prior week, and the Refinance Index rebounded +1.6% following a -7.0% drop the prior week. The average 30-Year Mortgage Rate remained at 6.78% and is up from 6.19% a year ago.
• Weekly Initial Jobless Claims rose +9,000 to 224,000 for the week ended January 27, above expectations for 212,000 and the prior week’s 215,000 (revised up from 214,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +70,000 to 1,898,000 in the week ended January 20, the highest level since mid-November and above consensus expectations for 1,839,000 as well as the prior week’s unrevised reading of 1,828,000 (revised down from 1,833,000).

The Week Ahead

After a few heavy weeks of economic data, this week, the calendar is sparse. On Monday, the Institute for Supply Management (ISM) and S&P Global will release their respective U.S. Services Purchasing Managers’ Indexes (PMI) for January. Weekly MBA Mortgage Applications and weekly Jobless Claims come on Wednesday and Thursday as usual. Consumer Credit and Wholesale Trade also get reported on Wednesday and Thursday. The economic-data highlight of the week will be Friday’s release of annual revisions to the Consumer Price Index (CPI) from the Bureau of Labor Statistics. Those could affect the previous five years of inflation data and may have implications for Federal Reserve policy. Unlike the economic calendar, there is a deluge of fourth-quarter earnings results to fill the calendar. Another 100-plus S&P 500 companies are scheduled to report their results this week. Among others, Caterpillar, McDonald’s, Simon Property Group, and Tyson Foods release quarterly results on Monday, followed by BP, Chipotle Mexican Grill, Eli Lilly, Ford Motor, and Spotify Technology on Tuesday. Alibaba Group Holding, CVS Health, PayPal Holdings, Uber Technologies, and Walt Disney report on Wednesday. ConocoPhillips, Expedia Group, FirstEnergy, and Take-Two Interactive Software will go on Thursday, then Enbridge and PepsiCo close the week on Friday. 

Did You Know?

LIGHTS OUT – The technology sector’s weighting in the S&P 500 ticked above 30% on 1/24/2024 for the first time since 9/26/2000. On the same day last week, the utilities sector saw its weighting in the S&P 500 drop to a multi-decade low of 2.17%. Since 1990, the only time the utilities sector’s weighting dipped below that level was in late March 2000 at the peak of the dot-com bubble (Source: Bloomberg).

FEBRUARY CHILLS – Since 1990, the S&P 500’s average performance in February has been a decline of -0.04%, with positive returns 58% of the time. The only other months that have averaged declines are June (-0.11%), August (-0.64%) and September (-0.92%), and the only other months where the S&P 500 has been positive less often than February are September (47%), August (53%) and January (56%) (Source: Bespoke Investment Group).

GOT STEAK? – Over the past 10 years, the number of restaurants offering steak as a main dish has decreased to just 14%, according to food-industry market research firm Datassential. With beef prices rising, diners want steakhouse vibes but not the big checks. That change has mooooooooooved steakhouses to include more fish, pasta, and vegan options (Source: Datassential, The Wall Street Journal).

This Week in History

DOT COM BOWL – On January 30, 2000, 17 dot-com companies each spent $73,000 per second for network television ads—a total of nearly $38 million—during Super Bowl XXXIV. By the time of the next Super Bowl, the internet bubble had burst, and several of those companies had gone into Chapter 11 bankruptcy (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.