Weekly Market Update – March 24, 2023

Quick Takes

• The fast-developing banking crisis continued to be a primary focus for investors for another week. After three mid-sized U.S. banks in just two weeks, as well as Credit Suisse being sent into the arms of its Swiss neighbor UBS, now Germany’s Deutsche Bank is under heavy pressure.
• Despite the bank turmoil, global stocks were able to rally with the S&P 500 Index up +1.4% and the MSCI EAFE Index up +1.5%. Emerging Market stocks, which have trailed most equities in 2023, had its best week since mid-January, rising +2.2%.
• Treasury yields dropped near seven-month lows, reflecting the bond market’s concerns about recession. The 2-year U.S. Treasury yield fell another -7 basis points (bps) to 3.77%, its lowest level since September 2022. The Bloomberg U.S. Aggregate Bond Index rose +0.5%.

Stocks secure second week of gains, bond yields slip further

It was another week of roller coaster trading sessions as markets remain on edge about risks to the banking system, the Fed’s plans for interest rates, and the risks of a recession. The focus on the banking sector will continue this week as the Senate Banking Committee will hold a hearing on the recent bank failures, with the witness list including FDIC Chairman Martin Gruenberg, Federal Reserve Vice Chairman Michael Barr, and Treasury Undersecretary Nellie Liang. The fast-developing banking crisis has claimed three mid-sized U.S. banks in just two weeks as well as sending Credit Suisse into the arms of its Swiss neighbor, UBS. Now shares of Germany’s Deutsche Bank have come under heavy pressure after the costs of insuring the bank against a credit default spiked overnight on Friday. Treasury Secretary Janet Yellen said Thursday that the U.S. government is prepared to take further action if needed to stabilize the banking sector. That helped fuel a rally on Friday that ensured a winning week for most major stock market indexes. In the U.S., the S&P 500 rose +1.4%, the tech-heavy Nasdaq Composite was up +1.7%, and the small cap Russell 2000 gained +0.5%. Overseas equities also advanced, with the MSCI EAFE Index, a proxy of developed market international stocks, gaining +1.5%, and the MSCI Emerging Markets Index rallying +2.2%.

Treasury yields dropped near seven-month lows, signaling the market’s increasing concerns about recession. The decline came despite the Fed raising its benchmark lending rate a ninth time by 25 basis points (+0.25%), as expected, to a range of 4.75% to 5%, but softened its stance on subsequent hikes. The decision was unanimous, and the Fed statement deleted the references to “ongoing increases” in rates. During his press conference, Fed Chairman Jerome Powell said that it is too early to determine the extent of the recent events on the banking system, and it is too early to tell how monetary policy should respond. He added that policymakers do not expect to cut rates this year. The 2-year U.S. Treasury yield fell another -7 basis points (bps) to 3.77%, its lowest level since September 2022. That follows a -75 bps plunge the prior week. The 10-year U.S. Treasury yield was down -5 bps to 3.38%, its lowest level since January 18. As a result, the Bloomberg U.S. Aggregate Bond Index rose +0.5% and the Bloomberg Global Aggregate Bond Index ex U.S. (the benchmark for non-U.S. bonds) was up +0.9%.

Chart of the Week

The preliminary March S&P Global US Composite PMI jumped to 53.3, up from 50.1 in the previous month and firmly above expectations. It was the fastest pace of expansion in private-sector activity since May 2022, as growth for the services sector jumped to 53.8 from 50.6 in February, offsetting the lower manufacturing sector, which still improved to 49.3 from 47.3 in February. Goods producers recorded the first rise in production since October 2022, stemming from the greatest improvement in delivery times on record. New orders increased for the first time since September 2022 as firms scored new clients and introduced new products. Input inflation slipped to its second-slowest pace since October 2020, although price growth remained high by historical standards. Business confidence slipped to a three-month low, falling further below the survey’s long-run average.

Fastest Uptick in Private Sector Business Activity in Nearly a Year
S&P Global Flash US PMI Composite Output Index

*Manufacturing only pre-October 2009.
Source: S&P Global, US Bureau of Economic Analysis (BEA)

Economic Review

• The Commerce Department reported that February advance Durable Goods Orders fell -1.0%, below expectations for an increase of +0.2%, but an improvement from January’s negatively revised -5.0% (originally -4.5%). Excluding transportation, durable goods orders were unchanged, also below expectations for +0.2% and less than January’s negatively revised +0.4% increase. Core Capital Goods Orders, a proxy for business spending, rose +0.2%, above expectations for a -0.2% decline, but shy of the +0.3% rise in January. Overall, the data suggest that higher rates may be starting to curb investment spending.
• U.S. economic growth fell back to earth in February after jumping in January, according to the Chicago Fed National Activity Index (CFNAI), a composite of 85 indicators of national economic activity, which dropped to -0.19 in February from +0.23 in January. All four broad categories of indicators used to construct the index were negative contributors in February, with three categories deteriorating from January. The biggest drag came from production-related indicators.
• The Kansas City Feds Manufacturing Survey showed March factory activity was flat at 0. Current business conditions were mixed. The production index rose from -9 in February to +3, but new orders fell from -6 to -13. Employment was solid, with respondents reporting an increase in headcounts and the overall employment index rose from +11 to +18. For those watching inflation, the prices paid index ticked up from +26 to +30, its highest figure in six months.
• February Existing Home Sales, which make up most of the housing market, jumped +14.5% to an annual rate of 4.58 million units, the best month since July 2020 and well above expectations of +5% or 4.20 million units. The increase ends twelve straight monthly declines, the longest streak of back-to-back monthly decreases on record for data back to 1999. Single-family home sales in particular are at the highest ever since the NAR began tracking the number in 1999. Year-over-year, existing home sales were down -22.6%, the 19th straight month of annual declines. The Median Existing Home Price fell -0.2% from last year, to $363,000, the first year-over-year decline since February 2012 – snapping 131 straight months of annual gains, which was the longest-running streak on record. Expressed in terms of the months-supply metric, there was a 2.6-month supply of homes for sale in February, down from 2.9 in January.
• February New Home Sales were up +1.1% for the month, to an annual rate of 640,000 units, ahead of expectations for -3.1% drop, or an annual rate of 650,000 units and from December’s upwardly revised 670,000 units (originally 633,000). Sales are -19% below their year-ago level when ultra-low interest rates were fueling strong demand. The Median New Home Price rose +2.7% from last year to $438,200.
• The weekly MBA Mortgage Application Index rose +3.0%, the third week of gains after the prior week’s +6.5% increase, as the Refinance Index rose +4.9% and the Purchase Index was up +2.2%. The increase came as the average 30-year mortgage rate fell -23 basis points to 6.48%, which is up 2.21 percentage points versus a year ago.
• Weekly Initial Jobless Claims fell by -1,000 to 191,000 for the week ended March 18, under expectations for 197,000 and the prior week’s upwardly revised 192,000. It was the ninth week in the past 10 that initial claims have been below 200k. Continuing Claims for the week ended March 11 rose by +14,000 to 1,694,000, above expectations of 1,690,000.

The Week Ahead

The release next week of updated data on consumer confidence, inflation, and economic growth will be in focus. Following a bevy of inflation reports last week, this week brings the Personal Consumption Expenditures (PCE) report which includes the Fed’s most watched measure, Core PCE. The final read on Q4-2022 economic growth will be released with Thursday’s Gross Domestic Product (GDP) report. Several housing reports are on deck with FHFA and S&P CoreLogic Home Price Indices, Pending Home Sales, and weekly MBA Mortgage Applications. The Conference Board Consumer Confidence report and University of Michigan Consumer Sentiment will provide a sense of the consumer’s state of mind.

Did You Know?

FAST FALL – Total deposits across all US commercial banks stood at roughly $17.6 trillion at the start of March 2023. Deposits are still up $4.2 trillion from pre-COVID levels on 2/19/20, but they’re down -2.6% year-over-year, which is a record annual decline dating back to at least 1974 (source: St. Louis Fed, MFS).

HALF INSURED – Just under half (47.8%) of deposits at FDIC-insured US financial institutions were uninsured as of March 16th, 2023 (i.e cash sitting in a bank account that is above the $250,000 threshold that the FDIC insures for each account, source: Bloomberg, MFS).

YIELDS GONE WILD – Through Wednesday, March 15, the 2-year U.S. Treasury yield experienced daily moves of at least 0.2 percentage points for five straight trading days. Since 1977, the only other 5-day streak was in December 1980 when the 2-year yield was more than three times higher than current levels (source: Bloomberg, MFS).

This Week in History

A MUTUAL FUND IS BORN – On March 21 in 1868, in London, the prospectus for the earliest known mutual fund was published, as the Foreign and Colonial Government Trust offered its shares to the public for £85. It invested in emerging markets bonds: Argentina, Australia, Chile, Egypt, Peru, and Turkey, as well as the U.S. (source: The Wall Street Journal).

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

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.