Weekly Market Update – March 01, 2024

Quick Takes

• The continued frenzy in artificial intelligence stocks helped propel the Nasdaq Composite index to a record-high close on Friday, joining the S&P 500, which also closed the week at fresh highs. It was the first all-time high for the Nasdaq since November 2021.  
• Treasury yields fell over the week as dreary factory data and waning consumer confidence led investors to think the Federal Reserve will cut interest rates by summer after all. Core PCE, the Fed’s preferred inflation gauge, rose +2.8% from last year, a tick below December’s +2.9%. 
• In new news that feels like old news, congressional leaders struck a last-minute deal to avert a partial government shutdown, reaching an agreement on six of the 12 funding bills that had been stalled for months, which temporarily funded agencies through March 8 and March 22.

AI helps the Nasdaq join the S&P 500 in record territory

The latest market milestone of significance was the Nasdaq Composite index, closing at record levels for the first time since November 2021. The technology-dominant index has been fueled by a frenzy for artificial intelligence (AI) stocks such as Nvidia, NetApp, and Advanced Micro Devices. For the week, both the S&P 500 and Nasdaq ended at fresh highs and gained +0.9% and 1.7%, respectively. Both indexes have had positive gains for seven of the last eight weeks. In a welcome sign, the week’s gains came from a broadening of the markets as the Russell 2000 index of small cap companies led the big cap indexes, gaining +3.0% for the week. The Russell remains below its all-time high by double-digits, but market watchers have been looking for other stocks to participate in the rally other than the Magnificent 7 mega-cap tech stocks and AI names. However, not everything was working for stocks. The overall positive momentum was somewhat overshadowed by the substantial -25% plunge in New York Community Bancorp following its disclosure of significant internal control weaknesses. Yet another dramatic plummet for this well-known regional bank shows the trouble is still lurking in the financial sector, particularly for businesses with exposure to commercial real estate. Moving overseas, developed market international stocks (as measured by the MSCI EAFE Index) were up +0.7%, while the MSCI Emerging Markets Index fell, losing -0.4%.

A decline in Treasury yields also helped support stocks and bonds, as dreary factory data and waning consumer confidence led investors to think the Federal Reserve will cut interest rates by summer after all. Data released on the January Personal Consumption Expenditures (PCE) Price Index, which the Fed watches more closely than the Consumer Price Index (CPI), showed inflation seems to be making progress towards the Fed’s 2% annual goal. The Core PCE index, which excludes volatile components like food and energy costs, rose by +0.4% in January – a substantial surge from a +0.1% increase in December. However, comparing January to the preceding year, Core PCE saw an annual rise of +2.8%, slightly lower than December’s +2.9%. For the week, the U.S. 10-year Treasury yield shed -7 basis points to yield 4.18%, and the shorter 2-year U.S. Treasury yield dropped -16 basis points to finish the week at 4.53%. The Bloomberg U.S. Aggregate Bond Index was up +0.5% for the week, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was up +0.1%.

On the political front, there was new news that felt like the same old news. Congressional leaders struck a last-minute deal to avert a partial government shutdown, reaching an agreement on six of the 12 funding bills that had been stalled for months. One set of federal agencies, including the Departments of Commerce, Energy, and Justice, will be temporarily funded through March 8, and the rest, including the Departments of Defense and Homeland Security, through March 22. “We are in agreement that Congress must work in a bipartisan manner to fund our government,” U.S. Senate and House leaders said in a joint statement.  

Chart of the Week

The Conference Board’s Consumer Confidence Index retreated to 106.7 in February from a six-month high of 110.9 the prior month, which was revised sharply lower from the 114.8 originally reported. That marked the biggest downward revision since February 2022. It also badly missed expectations for 115. The Present Situation gauge fell to 147.2 from 154.9 the prior month (revised down from 161.3). The Expectations gauge — which reflects consumers’ six-month outlook — fell to 79.8 from 81.5 (revised down from 83.8). Below the 80 mark on the expectations index often signals a recession within the next year. In good times, the index can top 120 or more. Less than 15% think business conditions will be better in six months. Weakening consumer sentiment was broad-based across income groups and across age demographics, but consumers younger than 35 and older than 54 saw the greatest deterioration in confidence.

Consumer confidence falls for the first time in four months

Conference Board Consumer Confidence and 6-Month Expectations

Source: The Conference Board, Bloomberg.

Economic Review

• U.S. economic growth for the fourth quarter was downgraded a bit to a +3.2% annual pace, slower than expected in the advanced estimate. Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was up a +3.5% annual rate for Q4-2023, up from +3.2% in the advance estimate. Personal Consumption increased +3.0%, up from +2.8% in the advance estimate. But Government Spending also remains an unusually large contributor, rising +4.2%, up noticeably from the advance estimate of +3.3%. That’s well above the 10-year average of +1.8%. Business Investment was weaker than previously reported, at +0.9% from +2.1% in the initial estimate. Inventories rose at a small +0.07%, down from +1.3% the prior quarter, reflecting a slower production of goods. Exports increased +6.4% following a +5.4% gain in the prior quarter. The GDP Price Deflator was revised up a bit to +1.6% from +1.5% in the advance estimate. Most other figures in the report were little changed. GDP is updated twice after its initial publication.
• The cost of goods and services rose modestly in January, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.3%, matching expectations and above the +0.1% rate the prior month (revised down from +0.2%). On a year-over-year basis, the PCE Price Index was up +2.4%, also matching expectations and down from +2.6% and the prior month. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.4%, in line with expectations and above the prior month’s +0.1%. Year-over-year, the Core-PCE Price Index is up +2.8%, in line with expectations, and down from +2.9% the prior month. The key takeaway is that the Federal Reserve is unlikely to cut interest rates until rates show more progress to getting to their 2% target. 
• The final reading of the January University of Michigan Consumer Sentiment Index slipped to 76.9 from 79.6 in the preliminary look a couple of weeks earlier, where it was expected to stay. That is still at the highest level since July 2021. The Current Economic Conditions component dipped to 79.4 from the preliminary estimate of 81.5 and is down from 81.9 the prior month. The Consumer Expectations component also fell, down to 75.4 from the preliminary level of 78.4.1 and is down from 77.1 the prior month. One-year inflation expectations are +3.0%, matching expectations. The five-year inflation expectations also came in at +2.9%, also in line with expectations.
• Personal Spending rose just +0.2% in January, in line with expectations, but down from the prior month’s unrevised +0.7. It was the smallest increase in three months. After adjusting for inflation, Real Personal Spending was down -0.1% from +0.6% the prior month (revised up from +0.5%). Spending appears to be boosted by debt, with consumers paying more in interest expense from higher rates on loans and credit cards. The drop in spending may have been from a nationwide cold snap and a drop in auto sales. Meanwhile, Personal Income rose +0.1%, short of expectations for +0.4%, and the prior month’s unrevised +0.3%. The Personal Savings Rate rose a tick to 3.8% from 3.7% the prior month, which was the lowest level in a year. 
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment sank to -6.1 % in January, down from -0.3% the prior month (revised down from a flat reading) and below expectations for -5.0%. The decline was exaggerated by a brief lull in orders for Boeing passenger planes. Durable Goods Orders Excluding Transportation were down a milder -0.3% but still badly missed expectations for +0.2%, and were below the prior month’s -0.1% (revised sharply down from the originally reported +0.5%). The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, increased +0.1% following a -0.6% drop the prior month, which was revised from +0.2%. 
• The Institute for Supply Management’s (ISM) Manufacturing PMI declined to 47.8% in February from an unrevised 49.1% the prior month, which was short of expectations of 49.5%. The manufacturing PMI has remained in contraction territory for 16 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 dropped -3.3 points back into contraction territory to 49.2%. The Production component slid -2.0 points to 48.4% after crossing into expansion territory the prior month. The Employment componen t also fell, slipping -1.2 points to 45.9%. The Prices Paid index, a measure of inflation, dipped -0.4 points to 52.5%.  
• Texas factory activity rebounded in February, with the Texas Manufacturing Outlook Survey improving to -11.3 from an unrevised -27.4 the prior month (revised down from the original, above expectations for -15.0. The Fed’s 11th District bounced from its lowest level since May and saw Production, New Orders, and Employment returned to positive territory. Indicators of future conditions six months from now improved and are closer to their customary optimistic levels. The Texas Service Sector Outlook Survey also rebounded, but more modestly, to -3.9 from -9.3 the prior month.  
• The Richmond Fed Manufacturing index rebounded to -5 from an unrevised -15 the previous month, better than the expectations for a decline to -9. Of its three component indexes, only Employment moved into positive territory, improving to +7 from −15 the previous month. The New Orders index rebounded to -5 from −16, and Shipments were unchanged at −15. The Richmond Fed Business Conditions index retreated to -7 from -3.
• 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 February to 44.0 from an unrevised 46.0 the prior month and missed 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, Inventories, and Order Backlogs fell at a slower pace and signaled contraction. Prices Paid rose at a faster pace, signaling expansion — the only component to do so.
• The Kansas City Fed Manufacturing Survey rebounded in February, with the index rising to -4 from -9 the month before, but was worse than expectations for a -2 reading. The Production index, on net, jumped from -17 to +3, while New Orders improved to -2 from -19. The Prices Paid declined to +15 from +24 the prior month, while Prices Received fell to -2 from +7. The Kansas City Fed Service Sector Outlook Survey rose to +12 from -2 the prior month. 
• The Commerce Department reported New Home Sales inched up just +1.5% in January, below expectations for +3.0% and down from a rapid +7.2% pace the prior month (which was revised down from +8.0%). That equates to 661,000 units versus the prior month’s 651,000 units (revised down from the originally reported 664,000). Mortgage rates rose to a six-week high at the end of January, which may have hindered some buyers. New-home sales remain far below the recent peak of over 1 million units in August 2020.  Year-over-year, sales of new homes are up +1.8, down from the 4.4% annual pace the prior month. The Median New Home Price rose to $420,700 from $413,200 the prior month. The inventory of new homes for sale was up a tick to 8.3 months of supply at the current rate of sales, from 8.2 months the prior month. Sales were weakest in the South (-15.6%) and strongest in the Northeast (+72%), with West up +38.7% and the Midwest up +7.7%.  
• The National Association of Realtors (NAR) reported that Pending Home Sales fell -4.9% in January, far short of expectations for a +1.5% increase and the prior month’s +5.7% rise (revised sharply lower from the originally reported +8.3%). It was the largest sequential drop since August 2023, when they fell -5%. Year-over-year sales were down -6.8%, lower than the -4.4% drop expected and the prior month’s -1.0% decline. From a regional perspective, the South–the country’s largest housing market–was down -7.3%. They also fell in the Midwest, dropping -7.6%. The Northeast and West saw modest gains of +0.8% and 0.5%, respectively. Pending home sales tend to lead existing home sales by a month or two. 
• The Commerce Department reported that Construction Spending fell -0.2% in January, breaking a 12-month winning streak, and was down sharply from the +1.1% increase the prior month (revised up from +0.9%). That was shy of expectations for a +0.2% increase. Total Private Construction was up +0.1% month-over-month, and total Public Construction was down -0.9%. Total Residential Spending increased +0.2% month-over-month while total Nonresidential Spending fell -0.1% month-over-month.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit an all-time high in December, marking the eleventh straight month of increases, as the index increased a seasonally adjusted +0.21%, a tick above expectations for a +0.20% increase but down from the prior month’s +0.24% pace (revised up from +0.15%).  On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +6.13%, slightly below expectations for +6.05% and above the prior month’s +5.41% annual gain. San Diego posted the biggest year-over-year home-price gains, up +8.8%, replacing Detroit. All 20 cities registered annual increases for the first time in 2023.
• 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 +0.1% in December, which was a slowdown from the +0.4% increase the prior month and missed expectations for a +0.3% increase. The government data shows home prices up +6.6% year-over-year. Affordability and elevated mortgage rates continue to weigh on demand. All census divisions posted gains on an annual basis but were mixed on a monthly basis.
• Weekly MBA Mortgage Applications fell -5.6% for the week ended February 23, following the prior week’s -10.6% plunge. The Purchase Index fell -4.5% following a -10.1% decline the prior week and the Refinance Index sank -7.3% following a -11.4% drop the prior week. The average 30-Year Mortgage Rate slipped to 7.04% versus 7.06% the prior week, the first decline after five straight weekly increases. 
• Weekly Initial Jobless Claims rose by +13,000 to 215,000 for the week ended February 24, above expectations for 210,000 and the prior week’s 202,000 (revised up from 201,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +45,000 to 1,905,000 in the week ended February 17, above consensus estimates for 1,875,000 and last week’s reading of 1,860,000 (revised down from 1,862,000).

The Week Ahead

Data is light this week but includes some big employment reports. On Thursday, the key Job Openings and Labor Turnover Survey (JOLTS) report is released and is followed on Friday by the Bureau of Labor Statistics report of February employment figures. In January, surprisingly strong growth brought 353,000 jobs but economists polled by Bloomberg only estimate a gain of 200,000 nonfarm payrolls for February. Other economic-data highlights include the Institute for Supply Management’s Services Purchasing Managers’ Index (PMI) for February on Tuesday and the Federal Reserve’s second Beige Book of 2024 on Wednesday. Outside the U.S., the European Central Bank will announce their monetary policy decision on Thursday. Earnings season is almost over, and reports to watch this week include GitLab, Target, CrowdStrike, Brown-Forman, Campbell Soup, Broadcom, Costco Wholesale, and Kroger. 

Did You Know?

GONE PHISHING – The increase in phishing emails in the 12-month period starting in November 2022, when ChatGPT was publicly released, has increased a whopping 1,265%, according to cybersecurity vendor SlashNext. That translates to an average of 31,000 phishing attacks sent every day. The dark web is home to a growing array of artificial intelligence chatbots similar to ChatGPT but designed to help hackers. Businesses are on high alert for a glut of AI-generated email fraud and deepfakes (Source: SlashNext, The Wall Street Journal).

THE EARLY BIRD GETS NO MEETINGS – The share of meetings that occurred between 8 a.m. and 9 a.m. last year was just 3%, according to scheduling platform Calendly. Meetings at 8 a.m. are a point of contention; employees want flexibility in their work-life schedules, while early-meeting proponents say they’re useful for coordinating teams spread across time zones (Source: Calendly, The Wall Street Journal).

BEER WARS – Modelo Especial’s share of all beer sold in U.S. retail stores in the weeks before and after the Super Bowl was 8.7%. Bud Light, which had hoped the big game would end its sales slump, represented 7.3%, according to consulting firm Bump Williams. Last May, Modelo unseated Bud Light as the top-selling U.S. beer by dollar sales, following a boycott that began in April after a Bud Light promotion featured transgender influencer Dylan Mulvaney. (Source: Bump Williams, The Wall Street Journal). 

This Week in History

RAILROADED – On February 28, 1827, the company behind the Baltimore and Ohio Railroad was incorporated, giving rise to an industry that would provide extraordinary growth in the decades to come (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.