Weekly Market Update – June 30, 2023

Quick Takes

• Most global stock market indices rebounded from the prior week’s losses, led by U.S. small companies for a change. The S&P 500 Index was up +2.4%, the Nasdaq Composite Index rose +2.2%, and the small cap Russell 2000 Index jumped +3.7%. Developed international stocks added +1.6% but emerging markets slipped -0.2%.
• Bonds slipped a bit as yields across the curve moved up. The Bloomberg U.S. Aggregate Bond Index and the Bloomberg Global Aggregate ex U.S. Bond Index both fell -0.3% – their second consecutive weekly loss.
• Markets seem to be bolstered by diminishing fears of a U.S. economic slowdown as most U.S. data surprised to the upside during the week. Durable goods orders, new home sales, consumer confidence, consumer sentiment, weekly jobless claims, and GDP all surprised the upside in the week.

Stocks rally in the final week of Q2, bonds were slightly down

Wall Street’s major averages closed out a strong first half of the year on an upbeat note, but unlike most of 2023, it wasn’t Technology that led stocks higher. The S&P 500 Index rebounded +2.4% after the prior week’s -1.4% decline. Real Estate surged +5.0% and Energy was just behind with a +4.8% gain to lead the index. Technology was still able to advance +2.9%, as Apple achieved a historic $3 trillion market capitalization. Apple is the top weighting in the tech-heavy Nasdaq Composite Index which helped it to a +2.2% gain for the week. But small caps stocks rebounded in the week, with the Russell 2000 Index jumping +3.7% – its best week since March. The first half of 2023 was characterized by a very narrow market, with just a handful of giant cap tech stocks accounting for the lion’s share of the gains, so it is good to see a broadening of market performance from smaller companies.

Non-U.S. stocks continue to lag their U.S. counterparts, with developed international stocks (the MSCI EAFE Index) up +1.6% for the week, but the MSCI Emerging Markets Index slipped -0.2%, following its worst week since October 2022. China continues to be a drag on emerging markets indices as its economy struggles to grow. China’s manufacturing Purchasing Managers’ Index contracted for the third straight month and fell into contraction territory with a reading of 49.

Bonds slipped a bit as yields inched up. The 2-year U.S. Treasury yield was up +15 basis points (bps) to 4.90%, the benchmark 10-year U.S. Treasury yield advanced +10 bps to 3.84%, and the 30-year U.S. Treasury yield rose +5 bps to 3.86%. Both the Bloomberg U.S. Aggregate Bond Index and Bloomberg Global Aggregate ex U.S. Bond Index slipped -0.3% for the week.

Markets seem to be bolstered by diminishing fears of a U.S. economic slowdown as most U.S. data surprised to the upside during the week. Real Gross Domestic Product (GDP), the broadest measure of U.S. economic growth, had a surprisingly strong third, and final, estimate for the first quarter that bumped it up to +2.0% from the prior estimate of +1.3%. In addition, durable goods orders, new home sales, consumer confidence, consumer sentiment, and weekly jobless claims all surprised the upside in the week. Moreover, the banking sector added confidence with all 23 major banks meeting the minimum capital requirements under the Federal Reserve’s 2023 bank stress tests, indicating they would be able to lend in a hypothetical “severe global recession.” The results will allow several of the large banks to increase their dividends.

Chart of the Week

Estimates of U.S. economic growth for the first quarter saw a strikingly large upward revision in the third and final government estimate. Real Gross Domestic Product (GDP), a measure of the value of all the goods and services produced in the U.S., expanded at an estimated +2.0% annual rate in the first quarter, which was better than last month’s estimations of +1.3% and higher than expectations of +1.4%. Consumer spending, the backbone of the U.S. economy, was the primary driver of growth, as Personal Consumption Expenditures (PCE) rose at a +4.2% pace, revised higher from the second estimate of +3.8%, which marks the highest level since the first half of 2021. Net Exports also contributed to the positive revision, as first-quarter estimates were revised up to +7.8% from the last survey’s +5.2%. Real Disposable Income was up for a third consecutive quarter, its largest in two years, rising a revised +8.5%, assisted by one-time cost-of-living adjustments. The Saving Rate jumped to +4.3% from +3.4%. Business Investment and Government Spending were drags on economic activity, as both revisions were cut back from previous estimates. The GDP Price Deflator increase was revised slightly down to +4.1% from the last estimate’s level of +4.2%. The report continues to signal that consumer spending is strong and is carrying continued U.S. economic activity. The surprisingly strong revision makes it more likely that the Fed Reserve will increase rates next meeting due to the continued economic activity). The Fed itself recently raised its GDP forecast for 2023 to +1.1% from +0.4%. Currently, odds are 85% that the Fed will hike rates in July, according to the CME Group FedWatch Tool.

U.S. economy was even better in Q1 than it seemed

GDP, change from the previous quarter

Note: Seasonally and inflation-adjusted at annual rates.
Source: Commerce Department via St. Louis Fed, The Wall Street Journal.

Economic Review

• The Personal Consumption Expenditures (PCE) Price Index increased by +0.1% in May, in line with expectations but down from +0.4% in April. Year-over-year, the PCE Price Index was up +3.8%, also in line with expectations but down from a negatively revised 4.3% (originally 4.4%) the prior month. The Core-PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.3% month-over-month, in line with expectations and down from +0.4% the prior month. Year-over-year, the Core-PCE Price Index is up +4.6%, a bit below expectations of +4.7%, matching the previous month’s unrevised reading. The key takeaway from the report is that core inflation remains sticky and should keep the Fed sticking to its plans for another rate hike.
• Personal Spending inched up +0.1% in May, slightly underperforming expectations for +0.2% and lower than last month’s +0.6% reading (revised down from +0.8%). After adjusting for inflation, Real Personal Spending remained flat compared to last month’s increase of +0.5%. Personal Income rose +0.4%, slightly higher than expectations of +0.3% and above April’s +0.3% gain (originally +0.4%). The increase in spending was primarily due to an unexpected boost in employee compensation, which rose +5.9 billion in comparison to the total increase of personal income of +7.6 billion. The Personal Savings Rate rose to +4.6% from April’s 4.3%, indicating consumers are becoming a bit more fiscally conservative and intend to save more.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment unexpectedly rose +1.7% in May, the third straight increase. This follows an upwardly revised +1.2% rise in April (from +1.1%) and handily beat expectations for a -0.9% dip. Once again, the transportation sector drove the improvement, with transportation orders jumping +3.9% after increasing +3.7% in April and +9.9% in March. The transportation segment is a large and volatile category that can exaggerate the ups and downs in industrial production. New orders were up +0.6% after falling -0.6% in April. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.7% following a +1.4% in April and -0.4% and -0.7% falls in March and February.
• The Texas Manufacturing Outlook Survey hit its highest reading in three months in June with a rise in the Texas Manufacturing Outlook Survey to -23.2, up from -29.1 in May (which was a three-year low), but below expectations of -21.8. The production index, a key measure of state manufacturing conditions, fell three points to -4.2. The new orders index has been in negative territory for more than a year and fell from -0.5 to -16.6. The Texas Service Sector Outlook Survey slowed again in June, but unlike manufacturing, remains in expansion at +3.6, down from +6.9 in May.
• The Richmond Fed Manufacturing index improved much more than expected in June, but remains in contraction at -7, up from -15 in May and well above expectations for -12. June was the sixth consecutive negative reading, however, the relative improvement is a change of momentum away from a level of -20 associated with previous recessions. Two of its three component indexes as the shipments index gained +8 points up to -5, and the new order index jumped +14 points up to -15. The third component index, the employment index dropped -3 points down to 2.
• The MNI Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), increased +1.1 points up to 41.5, underperforming expectations of 43.8. The index has remained below 50 for ten straight months, indicating worsening business conditions.
• Consumer confidence reached its highest point since January 2022, as the Conference Board’s Consumer Confidence Index jumped +7.2 points to 109.7 from a positively revised 102.5 (initially 102.3) in May, and easily beating expectations for 104. Overall, the increase was driven by improved perceptions about income, business, and job market conditions. The present situation index was up +6.4 points to 155.3 and the expectations index — which reflects consumers’ six-month outlook — surged +7.8 points to 79.3, including a decline in consumers expecting a recession, though it’s still at 69.3% (down from the 73.2% in May). Still, that is the 15th reading in the last 16 months that the expectation component was below 80.0, which is the level associated with a recession within the next year. Consumers expected inflation to average 6.0% over the next 12 months, which is the lowest reading since December 2020.
• The final June University of Michigan Consumer Sentiment report showed optimism improved for future economic conditions, as the index rose +0.5 points to 64.4, beating expectations for 63.9 and outperforming May’s 59.2. The Current Economic Conditions component rose +0.5 from June’s preliminary reading to 64.4, compared to 64.9 in the month of May. The Consumer Expectations Index also rose, increasing +0.2 points to 61.5, and outperforming May’s reading of 55.4. The positive outlook extended to inflation, One-year inflation expectations fell sharply to +3.3% from +4.2%, which is the lowest level since March 2021. The five-year inflation expectations slipped to +3.0% from +3.1%. “Overall, this striking upswing reflects a recovery in attitudes generated by the early-month resolution of the debt ceiling crisis, along with more positive feelings over softening inflation,” said Joanne Hsu, director of the survey.
• The Commerce Department reported New Home Sales surged +12.2% in May to a seasonally adjusted annual rate of 763,000 units, way above expectations for 676,000 units and April’s negatively revised 680,000 units (originally 683,000). Sales in all four major regions increased, led by the Northeast with +17.6% growth for the month, while the Midwest trailed with a modest +4.1% increase. Year-over-year, sales are up +20.0%. The Median New Home Price fell to $416,300, or about -7.6% from a year earlier, slowed by weakness in the more expensive Northeast and West regions. May’s inventory of new homes for sale remained low at 428,000, which represents 6.7 months of supply at the current rate of sales, down from 7.6 months in April and 8.3 months a year ago in May 2022.
• According to the National Association of Realtors, Pending Home Sales fell -2.7% in May to the lowest level this year, massively underperforming expectations for just a -0.5% drop and last month’s flat movement. Sales in the Midwest fell to the lowest level since April 2020, and two of the three other regions also saw sales decline. Year-over-year sales were down -20.8%, slightly worse than expectations of -20.5%, with the last positive reading occurring in December of 2021. The home resale market continues to be battered by low supply and high borrowing costs, as most homeowners are comfy with their comparatively low mortgage rates.
• U.S. house prices rose again in April with the Federal Housing Finance Agency (FHFA) House Price Index (HPI) up a seasonally adjusted +0.7%, above expectations for +0.5% and a downwardly revised +0.5% increase in March (originally +0.6%). The index is now up +3.1% year-over-year, lower than it was in March, meaning housing prices are increasing at a slower rate. Of the nine regions measured by the FHFA, none declined monthly, rising the most in the New England (+2.4%) and Mid-Atlantic (+1.4%) regions.
• According to the Case-Shiller S&P CoreLogic National Home Price Index, U.S. housing prices rose for a third straight month in April, as the index increased a seasonally adjusted +0.5%, up from +0.4% in March. Homebuyers are displaying strong demand despite high mortgage rates, and the low number of homes for sale has resulted in prices being driven up in the past three months. Prices are gaining momentum every month but still recovering from last year’s levels, as the index is down -0.2% year-over-year (YoY), down from +0.7% in March. That’s the first annual decline since April 2012. Miami, Chicago, and Atlanta reported the highest year-over-year gains in April. The Southeast (+3.6%) continues as the country’s strongest region, while the West (-6.9%) remains the weakest.
• The weekly MBA Mortgage Application Index was up +3.0% for the week ended June 23, following the prior week’s +0.5% gain. The Purchase Index was up +2.8% following a +1.5% rise the prior week and the Refinance Index was up +3.3% following a -2.1% dip the prior week. The average 30-Year Mortgage Rate rose after three weeks of declines, up +2 basis points to 6.75%, which is +0.91 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims fell -27,000 to 239,000 for the week ended June 24, significantly lower than expectations for 265,000 and last week’s 265,000 reading (revised up from 264,000). The drop is the largest for unemployment benefit applications since October 2021. The number of people already collecting unemployment claims (i.e. Continuing Claims) fell -19,000 to 1,1742,000 in the week ended June 16, better than expectations for 1,765,000 and below last week’s reading of 1,761,00 (revised up from 1,759,00).

The Week Ahead

The Fourth of July holiday-shortened week includes housing reports (Construction Spending, weekly MBA Mortgage Applications), ISM and S&P Global Purchasing Manager Indexes (PMIs), and the FOMC meeting minutes, but the headline event comes Friday with the June Employment Report. Economists’ consensus collected by Bloomberg are forecasting 225,000 jobs added during the month and for the unemployment rate to dip to 3.6% from 3.7%. Average hourly earnings are forecast to be 0.3% month-over-month and 4.2% year-over-year.

Did You Know?

REPAIRS COSTS RISE – The increase in the average cost of an auto repair has risen +19% over the last year, according to May data from the Bureau of Labor Statistics’ Consumer Price Index for urban consumers. Repairs are also taking longer. A shortage of parts and technicians, more complex auto technology, and older cars on the road are creating a perfect storm (Source: The Wall Street Journal).

NEW ECONOMY BEATS OLD ECONOMY – Through 6/30, the Nasdaq 100 Index was up +39.4% year to date versus a gain of just +4.9% for the Dow Jones Industrial Average. The 34.5 percentage point spread between these two large-cap US equity indices is easily the widest through the first half of any year since the Nasdaq 100 began in 1985 (Source: Bespoke Investment Group).

OFFICE SPACE – One of America’s most prominent landlords is spending $1.2 billion to overhaul two of its office buildings near Manhattan’s Penn Station. Vornado Realty Trust is betting more commuters will return to the workplace if the trip is easy. The midtown transit hub serves several subway lines, Long Island, New Jersey, and, starting in 2027, Westchester County, N.Y., and Connecticut (Source: The Wall Street Journal).

This Week in History

TRANSATLANTIC TRAVEL – On June 28, 1939, Pan American Airways began the world’s first regularly scheduled transatlantic passenger service when its Dixie Clipper pontoon plane took off from Port Washington on New York’s Long Island, bound for the Azores, Lisbon, and Marseilles. Ticket price: $375 (one way), more than $8,000 in today’s money. The 22 passengers got six-course dinners and a scheduled flight time of a mere 22 hours (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. 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.