Weekly Market Update – June 02, 2023

Quick Takes

• Stocks closed the week with another late-week strong rally following the passage of a debt ceiling bill by the Senate late Thursday and a much stronger-than-expected May employment report on Friday. The S&P 500 gained +1.8%, the Nasdaq was up +2.0%, and the small cap Russell 2000 jumped +3.3% higher.
• U.S. Treasury yields slipped over the week after the prior week’s surge helping the Bloomberg U.S. Aggregate Bond Index gain +1.0% for the week and non-US bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, rose +1.3%, their first gain in four weeks.
• The May Employment Report showed another solid month of labor market activity. Nonfarm Payrolls jumped by a seasonally adjusted 339,000, far exceeding consensus expectations of 195,000 by Wall Street economists and up from April’s 294,000 (revised up the originally reported 253,000).

Debt deal and jobs data helps stocks and bonds advance

The stock market closed out the holiday-shortened week with a strong end-of-week rally. Investors rejoiced the passage of a debt ceiling bill that prevents a U.S. default as well as Friday’s May employment report that showed much stronger jobs growth than expected, which helps alleviate fears of a deep recession. On Thursday night the U.S. Senate passed a debt ceiling bill by a vote of 63-36 that suspends the debt limit until Jan. 1, 2025. President Biden is expected to sign the bill into law. Investors were in a cheerful mood with the debt ceiling drama behind them, along with strong jobs data, plus a few Fed officials calling for a pause in further rate hikes.

For the week, the S&P 500 gained +1.8%, its third straight weekly advance. The Nasdaq made it six straight positive weeks with a +2.0% gain. That’s its longest winning streak since January 2020. But the big winner for the week was small cap stocks, as the Russell 2000 jumped +3.3% higher after suffering losses in four of the five previous weeks. The rally was much more robust than it’s been for most of the year. All 11 sectors of the S&P 500 were positive for the week, led by a +3% jump for Consumer Discretionary and Real Estate. For the year only three of the 11 sectors were positive entering June. International stocks couldn’t keep up with their U.S. counterparts but also finished positive. Developed international stocks, as measured by the MSCI EAFE Index, were up +0.8% for the week while the MSCI Emerging Markets Index gained +1.2%.

U.S. Treasury yields slipped over the week after the prior week’s surge. The 2-year U.S. Treasury yield slid -6 basis points to 4.50% and the benchmark 10-year U.S. Treasury yield shed -11 basis points to 3.69%. Traders are placing about 67.3% odds that the Federal Reserve skips an interest rate increase at its June meeting so that the central bank can reevaluate things in July. Of course, with yields falling, bonds prices moved higher (bond prices move in the opposite direction of yields), and the Bloomberg U.S. Aggregate Bond Index was up +1.0% for the week, breaking a four-week losing streak. Non-US bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were up +1.3%, their first gain in four weeks.

Chart of the Week

The May Employment Report showed another solid month of labor market activity. Nonfarm Payrolls jumped by a seasonally adjusted 339,000, far exceeding consensus expectations for 195,000 by Wall Street economists and up from April’s 294,000 (revised up the originally reported 253,000). March was also revised higher, to 217,000 from 165,000, putting the two-month revision for both March and April at a positive net gain of +93,000 jobs. Strong hiring and historically low unemployment continue to support wages. Average Hourly Earnings were up +0.3% in May, in line with expectations, but down from +0.4% in April which was revised down from the originally reported +0.5%. Year-over-year, Average Hourly Earnings were up a solid +4.3%, just below expectations and last month’s +4.4%. As expected, Labor-Force Participation was unchanged at 62.6%, which is still below the February 2020 pre-pandemic level of 63.3%, but at the highest level since the pandemic. However, as seen in the Chart of the Week below, for so-called prime-age workers aged 25 to 54, the participation rate rose to 83.4%, a level last touched in 2007. That suggests a very tight labor market for Americans who aren’t in school or nearing retirement. There were some underlying signs of weakness in the report. The Average Workweek fell to 34.3 hours, the lowest since April 2020 near the start of the pandemic. And the Unemployment Rate unexpectedly moved higher to 3.7% from April’s 3.4%. That’s still near historic lows but above expectations of 3.5% and the highest level since last October. Healthcare, Government, and Professional sectors added the most jobs last month. Manufacturing and Information sectors shed workers during the month, the Information sector likely a reflection of a television writers’ strike. Some sectors, like Construction, have hit record employment levels.

Solid Jobs Growth May Unsettle the Fed
Percentage share of the prime-age (25-54 years old) population

Source: Labor Department, The Wall Street Journal.
Note: Seasonally adjusted. The shaded area represents the U.S. recession.

Economic Review

• The Federal Reserve released its Beige Book— business anecdotes collected from the 12 Federal Reserve districts used by policymakers to prepare for their next monetary policy decision. The latest read on the state of national economic activity is that conditions varied across the country, with four districts noting small increases in activity, six noting no change, and two reporting slight to moderate declines. Consumer spending generally was steady or up a bit, with many districts noting an uptick in spending on leisure and hospitality. Financial conditions were generally stable to slightly tighter, but several districts did note that consumer loan delinquencies had risen back closer to pre-pandemic levels. Expectations for future growth weakened slightly, though districts still expressed that they expect economic activity to expand further over the coming months. Manufacturing activity was flat to up in most Districts, and supply chain issues continued to improve. Demand for transportation services was down, especially in trucking, where contacts reported there was a “freight recession.” Commercial construction and real estate activity decreased overall, with the office segment continuing to be a weak spot.
• The Institute for Supply Management’s (ISM) Manufacturing Index fell to 46.9% in May from 47.1% in April, just shy of expectations of 47.0%. That represents the seventh consecutive month that U.S. manufacturing activity has contracted (levels below 50% signal economic contraction). The last time the index was below that threshold for more than six months was between March 2008 and June 2009 — during the Great Recession. New Orders were the primary detractor, falling to 42.6% from 45.7%. However, Production moved from contraction to expansion, up to 51.1% from 48.9%, and Employment moved higher into expansion territory, to 51.4% from 50.2%. The Prices Paid index plunged back into contraction territory after rebounding to expansion in April, it was down to 44.2% from 53.2%.
• The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index (PMI) slipped to 48.4 in May from 50.2 in April, a bit below the earlier released ‘flash’ estimate of 48.5 (levels above 50 indicate economic expansion, while levels below 50 indicate contraction). The deterioration was only marginal but was driven by a solid contraction in New Orders amid muted demand conditions. For those watching inflation, the report saw Input Costs fall for the first time since May 2020. The decrease in costs contributed to the slowest rise in selling prices for almost three years. The latest figure indicated the fastest deterioration in operating conditions since February.
• According to the Conference Board’s Consumer Confidence Index, confidence slipped in May, falling to 102.3 from a positively revised 103.7 (initially 101.3). Still, that was above expectations for 99. The Present Situation index fell to 148.6 from 151.8 in April, and the Expectations index — which reflects consumers’ six-month outlook — fell to 71.5 from 74 in April, as consumers felt current and future business and labor market conditions worsened. “Consumer confidence declined in May as consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy,” said Ataman Ozyildirim, senior director of economics at The Conference Board, “However, expectations for jobs and incomes over the next six months held relatively steady.”
• The April Job Openings Labor Turnover Survey (JOLTS) report surprised to a three-month high of 10.1 million, well above expectations for 9.4 million and the prior month’s 9.75 million (revised up from 9.59 million). Job openings in retail, health care, transportation, and warehousing rose the most — parts of the economy that have led the way in hiring. The number of job openings for each unemployed worker rose to 1.8 in April from 1.7 in the prior month, keeping it well above pre-pandemic levels of 1.2. The Fed is watching the ratio closely and wants to see it fall back to pre-pandemic norms. Job openings are an indication of the health of the labor market and the broader U.S. economy, and the higher-than-expected numbers may make it harder for the Fed to pause rate hikes, let alone pivot to cuts. The Hiring Rate held steady at 3.9% and has been little changed in recent months. In a sign that the labor market is cooling somewhat, the Quits Rate continued its decline to 2.4%, the lowest point since February 2021, and has nearly reversed the pandemic rise after peaking at 3.3% one year ago.
• Texas factory activity remained weak in May as Production and New Orders fell for the 12th consecutive month. The Texas Manufacturing Outlook Survey slumped to -29.1 in May, far below expectations of -18, and worse than the unrevised -23.4 the prior month. The Texas Service Sector Survey fell to -17.3 from -14.4 in April.
• MNI Indicators reported that the Chicago Business Barometer, also known as the Chicago PMI, fell -8.2 index points to 40.4 in May, well below expectations of 47.3 and the unrevised 48.6 reading the prior month. This is the ninth straight reading below the 50 threshold that indicates contraction territory.
• U.S. home prices rose for the second straight month in March after 8 previous months in decline, according to the Case-Shiller S&P CoreLogic Case-Shiller National Home Price Index. Low inventory and high demand from home-buyers have stabilized U.S. home prices with them rising a seasonally adjusted +0.4% for the month, up from +0.3% in February. Regionally, prices are declining fastest in Western markets, such as Seattle, where prices fell a seasonally adjusted -0.9% in March from the prior month, and Phoenix, where prices declined -0.4%. On a year-over-year (YoY) basis, the pace of home price declined to +0.7% from a positively revised +2.13% (originally 2.05%) in February. That is the slowest annual increase since May 2012.
• U.S. house prices rose a seasonally adjusted +0.6% in March, according to the monthly Federal Housing Finance Agency (FHFA) House Price Index (HPI), a tick down from the upwardly revised +0.7% in February (originally +0.5%) but beating expectations for +0.2%. Year-over-year, the FHFA HPI was up +3.6%, down from +4.3% the prior month, marking the slowest annual home price increase since July 2012. All census divisions except the Pacific and Mountain divisions posted gains on an annual basis. Only the Mountain division declined on a monthly basis.
• The Commerce Department reported Construction Spending was up +1.2% in April to a seasonally adjusted annual rate of $1.91 trillion, easily beating expectations for a +0.2% rise and February’s unrevised +0.3%. Year-over-year (YoY), total construction spending was up +7.2%. The April gains were again driven by Non-Residential Construction, which was up +1.9% for the month and up +31.2% YoY. Residential Construction rose +0.4% in April but was down -9.1% YoY. Total Private Construction was up +1.3% month-over-month while total Public Construction rose +1.1% month-over-month. Public construction was up +0.2% after a +1.1% gain in February and was led by substantial growth in educational- and commercial-related expenditures. Continued weakness in new single-family construction was overshadowed by strength in private and public nonresidential spending.
• The weekly MBA Mortgage Application Index sank -3.7% for the week ended May 26, following -4.6% and -5.7% drops the previous two weeks. This is the first three weekly decline the index has posted since mid-February after oscillating between positive and negative readings for eight straight weeks. The Purchase Index fell -2.5 following a -4.3% drop the prior week and the Refinance Index sank -6.9% following a -5.4% fall the prior week. The declines came as the average 30-Year Mortgage Rate rose +22 basis points to 6.91%, the highest level since the week of November 4, 2022.
• Weekly Initial Jobless Claims rose +2,000 to 232,000 for the week ended May 27, better than expectations for 235,000 but up from the prior week’s positively revised 230,000 (originally 229,000). The number of people already collecting unemployment claims (i.e. Continuing Claims) rose +6,000 to 1,795,000 in the week ended May 20, up from the prior week’s 1,789,000, revised down from the originally reported 1,1794,000.

The Week Ahead

With the debt ceiling bill on the way to being signed into law and earnings season over, investors will likely turn their attention back to the economy and the Fed in the coming week. For economic data, the week is fairly light. S&P Global and ISM will report service sector PMIs. Factory Orders are also due on the manufacturing side. Some insight into the consumer will be gleaned with Consumer Credit and Household Net Worth both being reported. Other than that there may be some volatility in the energy market with the June 4-5 OPEC meeting.

Did You Know?

LOCKED IN – A whopping 82% of recent or potential home sellers said they feel “locked in” to their current home because of a low mortgage rate. Gen Z (97%), Millennials (87%), and Gen X (87%) homeowners feel universally “locked in,” but most Baby Boomers said they don’t feel “locked in,” likely because this older age cohort has built up the most equity in their homes over the years (Source: Realtor.com, MFS)

ROAD TRIP? – More than two million people took road trips this Memorial Day weekend, and while gas prices were up 11.4% year to date (YTD) heading into the weekend, that’s 7.5 percentage points less than the 18.9% average since 2005. Historically, the national average for gas prices tends to peak in early June and trend lower for the remainder of the year (Source: AAA, MFS).

COOKOUT COSTS SOAR – Prices for hamburgers and steaks are already near record highs and are set to go even higher. Years of persistent drought conditions, which make cattle more expensive to raise, pandemic disruptions, and widespread cost increases have prompted ranchers to sell off livestock, bringing the number of cattle in the U.S. to its lowest level in nearly a decade. U.S. beef production is on track to drop by more than 2 billion pounds in 2024, the biggest annual decline since 1979, according to Agriculture Department (Source: The Wall Street Journal).

This Week in History

BUBBLE TROUBLE – On June 1, 1720, one of the greatest speculative bubbles in history entered its final ascent. South Sea Company stock shot from £610 to £870 and kept climbing. The bubble burst by end-summer and shares fell below £150, leaving investors including Sir Isaac Newton and Jonathan Swift, author of Gulliver’s Travels, with big losses (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 than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. 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 U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% U.S. 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.