Weekly Market Update – July 19, 2024

Quick Takes

• For a second straight week, market leadership shifted from large cap and growth stocks to small cap and value stocks. The S&P 500 had its worst week since April 19, falling -2.0%, and the tech-heavy Nasdaq Composite was down -3.7%, while the Russell 2000 was up +1.7%.
• The week’s economic calendar generally surprised on the upside, enough to sharply boost forecasts for Q2 Gross Domestic Product (GDP) by the Atlanta Fed’s real time GDP Estimate back up to +2.7% as of July 17, up from about +1.5% at the start of the month.
• The stronger than expected economic data pressured Treasury yields higher, with the 10-year and 2-year U.S. Treasury yields up +6 basis points. The Bloomberg U.S. Aggregate Bond Index finished the week down -0.33%, while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) dipped -0.03%.

Source: Bloomberg. Data as of July 19, 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.

Market rotation from large growth to small value continued

Though it slowed from the prior week, market leadership saw a continued rotation from large-capitalization and growth to small-capitalization and value. The S&P 500 Index posted its worst week since April 19, falling -2.0%, as a rotation out of technology stocks following the soft Consumer Inflation Report (CPI) on July 11 continued over last week. The technology-dominated Nasdaq Composite Index was down -3.7%. Conversely, the small cap Russell 2000 Index was up +1.7% for the week, following the prior week’s +6.0% gain. The continued unwinding of the “tech trade” resulting from the soft CPI was followed by a June nonfarm payrolls report earlier this month that showed slowing jobs growth and an uptick in unemployment. Investors have become convinced that the Federal Reserve (the Fed) will finally start to reduce rates at their September 18 meeting, and therefore, it is okay to start moving out of richly valued technology stocks and into lower valued areas such as defensive and value sectors, including small-cap stocks. The Russell 3000 Value Index outpaced Russell 3000 Growth Index by +4.5 percentage points last week, which was the largest divergence since January 2022, when value shares outperformed by +5.6 basis points. 

Non-U.S. equities had a tough week, with developed market international stocks (as measured by the MSCI EAFE Index) falling -2.4% for the week and the MSCI Emerging Markets Index dropping -3.0%%. The European Central Bank (ECB) kept its key interest rates unchanged at 3.75%, as expected. It said it would not commit to any rate path and emphasized that economic data would guide its decisions. Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling -2.7%.

The week’s economic calendar generally surprised on the upside. We discuss that in more detail in the Chart of the Week below but suffice to say it was enough to give Treasury investors some doubt about the consensus expectations for a rate cut in September. The yield on Treasurys drifted up across the curve. The 10-year U.S. Treasury yield traded up +6 basis points to finish the week with a yield of 4.24%. The 2-year U.S. Treasury yield was also up +6 basis points to finish at 4.51%. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index finished the week down -0.33%, while the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) dipped -0.03%. The U.S. dollar was up +0.3% last week, creating a bit of a headwind for non-U.S. bonds and stocks, reversing two weeks of declines.

Chart of the Week

For weeks, investors have seen weaker-than-expected economic data, enough so to price in a near certainty that the Fed will cut rates in mid-September. But perhaps those odds for a rate cut have become too certain. Last week delivered one of the better sets of economic reports in weeks, if not months. Retail Sales were well above consensus expectations and May’s data was revised higher. Building Permits and Housing Starts also rose more than expected and ended three straight weeks of monthly declines. Industrial Production was roughly double Wall Street estimates. Two of the five regional Fed manufacturing indices were released last week, and they both came in better than expected. Overall, last week’s better than expected data sharply boosted forecasts for Q2 Gross Domestic Product (GDP), which will be released on Thursday. The Atlanta Fed’s real time GDP Estimate has crept back up to +2.7% as of July 17, up from about +1.5% at the start of the month.

Evolution of Atlanta Fed GDPNow real GDP Estimate

2024: Q2 Quarterly percentage change (SAAR)
Latest Estimate as of July 17, 2024: 2.7 Percent

Source: Blue Chip Economic Indicators and Blue Chip Financial Forecasts, Atlanta Fed, Bespoke Investment Group.

Economic Review

• The Conference Board’s Leading Economic Index (LEI) fell -0.2% in June, better than Wall Street estimates for a -0.3% decline and better than the prior month’s -0.4% drop (revised up from -0.5%). The index has declined in 26 of the last 27 months. Breadth of the index was mixed, with five of the ten indicators tracked rising, three negative, and two flat. ISM New Orders improved the most, rising to -0.13% from -0.22% the prior month. The Average Workweek declined the most, dropping to +0.6% from +1.8%. The LEI Coincident Index rose +0.3% to 112.6, while the LEI Lagging Index ticked up +0.1% after rising 0.3% the previous month. The bottom line is that “June’s data suggest that economic activity is likely to continue to lose momentum in the months ahead,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators.
• The Commerce Department reported that U.S. Retail Sales were flat in June, beating expectations for a -0.3% dip but down from a +0.3% rise the prior month (which was revised up from +0.1%). Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Sales of new vehicles and car parts fell -0.2% in the month, while gas receipts fell -0.3%. Sales for bars and restaurants rebounded to rise +0.3%. Sales also rose sharply at Internet stores for the second month in a row. Sales ex-autos and gas were up +0.8% versus the prior month’s +0.3% rise (revised lower from +0.1%) and beat Wall Street expectations for a +0.2% rise. The Control Group, a figure used to calculate GDP, was up +0.9%, above expectations for +0.2%, and up from the unrevised +0.4% gain the prior month. Consumer spending has slowed under the weight of lingering inflation and high interest rates, but households are spending enough to keep the economy expanding.
• Imports Prices were flat in June following the largest monthly decline since the end of last year, the prior month. The unchanged reading was more than the expected -0.2% decline and an acceleration from the prior month’s -0.2%, which was revised higher from -0.4%. Gas prices were down -1% after a +0.4% rise the prior month. Year-over-year (YoY) import prices were up +1.6%, up from the prior month’s +1.4% rise, which was revised higher from +1.1% and above expectations for a +1.0% annual rate. Export Prices dipped to -0.5%, far below expectations for a -0.1% decline, but up from the prior month’s -0.7% fall (revised down from -0.6). Export prices were up +0.7% over the past year, under expectations for a +1.0% rise but up from the +0.5%annual rate the prior month (revised down from the originally reported +0.6% rise).
• May Housing Starts rose +3.0% to seasonally adjusted annual rate of 1,353,000 units, above expectations for a +1.8% increase to 1,300,000 units. That compared to the positively revised 1,314,000 units, or -4.6%, the prior month (originally 1,277,000 and -5.5%). Housing starts peaked at 1,800,000 in April 2022. Single-family homes fell -2.2% in the month, while multi-family units surged by +22%. New construction was down in the West, falling -6.1%, while the South was down -1.7%, versus a +26.8% rise in the Midwest and the Northeast up +34.4%. Meanwhile, Building Permits, one of the leading indicators tracked by the Conference Board, rose +3.4% to 1,446,000, following the prior month’s unrevised -2.8% decrease to 1,399,000. That was far above expectations for +0.1% increase to 1,400,000. Single-unit permits were down -2.3%, while multi-unit permits for buildings rose by +15.6%. Regionally, permits were up in the Midwest by +15.6% and +2.8% in the South, but down -2.5% in the Northeast and flat in the West.
• Homebuilder confidence slumped to its lowest level since December, according to the National Association of Home Builders (NAHB) Housing Market Index (HMI), which fell a point in July to 42, short of expectations to remain at 43. A year ago, the index stood at 56. 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 a point to 47, Future Sales (in the next six months) rose a point to 48, and Traffic of Prospective Buyers dropped a point to 27. 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, 31% of builders reported cutting home prices, up from 29% the prior month. The average price reduction held steady at -6%, where it’s been for a year now. The use of sales incentives beyond price cuts was unchanged at 61%. Geographically, the Northeast fell to 47 from 62, and the West slipped to 37 from 38, the Midwest dropped to 39 from 40, while the South was flat at 43.
• U.S. Industrial Production was up +0.6% in June, the second straight rise following the prior month’s +0.9% gain, which was the biggest monthly rise since last July. That was well ahead of expectations for +0.3% rise. Gas and electric utilities saw a +2.8% advance from demand for air conditioning and fuel for summer travel. Car manufacturing also climbed +1.7%. Capacity Utilization, a measure of potential output, rose to 78.8% from 78.3% the prior month, just above expectations for 78.4% and the highest since September 2023. Capacity Utilization reflects how much a manufacturing plant is being used to produce things.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, fell to -6.6 in June from -6.0 the prior month, remaining in contraction territory for an eighth straight month. Still, that was above expectations -7.6 (reading below zero indicates deteriorating economic conditions). New Orders inched up +0.4 points to -0.6, the highest level in ten months. Shipments improved +0.6 points to +3.9, its highest level in eight months. The Prices Paid index rose while the Prices Received component dropped. Expectations for six months ahead retreated from the prior month’s big bounce, dropping -4.3 points to +25.8.
• Manufacturing in the Federal Reserve’s Third District jumped to +13.9 in July from +1.3 the prior month, according to the Philly Fed Manufacturing Business Outlook Survey. That was far above expectations for +2.9 and the highest level since April (readings above zero indicates economic expansion). New Orders improved to +20.7 from -2.2 the month before. The Shipments component jumped to +27.8 from -7.2. The Employment index improved to +15.2 from -2.5. The Six-Month Business Outlook surged to +38.7 from +13.8, which is the highest level in three years. The Prices Paid index fell to +19.8 from +22.5 the prior month, while Prices Received rose to +24.2 from +13.7.
• Weekly MBA Mortgage Applications were up +3.9% for the week ending July 12, following the prior week’s -0.2% dip. The Purchase Index was down -2.7% following a +1.7% drop the prior week. The Refinance Index jumped +15.2% following a  -2.1% drop the prior week. The average 30-Year Mortgage Rate dropped to 6.87%, down from 7.0% the previous week and the lowest level since March 8 when it was at 6.84%.
• Weekly Initial Jobless Claims rose +20,000 to 243,000 for the week ending July 13, above expectations for 229,000. The prior week was revised up to 222,000 from 223,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,867,000 in the week ending July 6, above consensus estimates for 1,867,000. Last week’s reading of 1,852,000 was revised down to 1,847,000.

The Week Ahead

Election developments are bound to drive headlines this week with President Biden dropping his reelection bid over the weekend and economic data is relatively light and back-loaded for the week. Monday through Wednesday are bare of high-impact economic reports with just Home Sales reports for June as well as the S&P Global’s Manufacturing and Services Purchasing Managers’ Indexes (PMIs) for July. On Thursday, the Bureau of Economic Analysis will publish its first estimate of second-quarter Gross Domestic Product (GDP). Consensus expectations are for seasonally adjusted annual growth to pick up to a +1.9% rate from the +1.4% rate for the first three months of 2024. On Friday, we get the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index for June. It is expected to show continued deceleration to a +2.5% year-over-year increase, down from 2.6% in May. Earnings season will gather some steam, with roughly a quarter of the companies in the S&P 500 scheduled to release second-quarter results. Among those, some of the higher-profile companies reporting are Alphabet (Google), AT&T, Chubb, Chipotle Mexican Grill, Coca-Cola, General Motors, Ford, Southwest Airlines, Tesla, United Parcel Service, Verizon Communications, and Visa.

Did You Know?

HAPPY = SAVINGS – Only 47% of people who save nothing are satisfied with life, but among those who saved any amount, at least half were satisfied, ranging from 50% among those who saved the least to 68% for those who saved the most (Source: University of Bristol, Bespoke).

POLITICS AND INVESTING – In a survey of retail investors, 27% of respondents cited the 2024 election as a top source of stress this year. An equal percentage of respondents (20%) also said they would be ‘very likely’ to pull investment funds from the market if Biden wins compared to if Trump wins (Source: Betterment).

SUMMER SOFTNESS – The three-month period following the close on July 14th has been the weakest three-month stretch of the year for the S&P 500 over the last 25 years. During this span, the S&P 500’s median decline has been -2.5%, with positive returns just half of the time (Source: Bespoke).

This Week in History

8K DOW MILESTONE – On July 16, 1997, the Dow Jones Industrial Average closed above 8,000 for the first time, just five months after breaking the 7,000 mark. The Dow closed last week at 40,288, just -2.2% below its all-time high of 41,198 set on July 17th, representing an average annual total return of +827%, or +8.6% annualized, with dividends reinvested (Source: Bloomberg, 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.