Weekly Market Update – May 24, 2024

Quick Takes

• Most stocks outside the Technology sector were flat to down as minutes from the Federal Reserve’s May meeting raised concerns of persistent inflation, indicating the central bank may not cut interest rates anytime soon. 
• The S&P 500 and Nasdaq indexes made new all-time highs during the week and maintained five-week win streaks. But small caps stocks, non-U.S. stocks as well as U.S. and non-U.S. bonds all moved lower for the week.
• Yields were up, especially the short end of the curve, as the hawkish Fed minutes reinforced the “higher for longer” view. The 2-year U.S. Treasury yield jumped +12 basis points to close the week just shy of 5%. 

Stocks and bonds were mixed to down on hawkish Fed notes

Last week saw a wide divergence in performance for major indices across asset classes. The technology-heavy Nasdaq Composite Index was the leader, gaining +1.4% for the week and hit new record highs. The broader S&P 500 Index was essentially flat, up a scant +0.03%, but technically enough to keep its five-week win streak alive with the Nasdaq. The small-cap Russell 2000 Index lagged the market with a -1.2% drop. T. Rowe Price pointed out that the disparate returns were also reflected in the substantial underperformance of the S&P 500 Equal-Weighted Index, which trailed the headline S&P 500, which is market-weighted and dominated by mega-sized constituents, by -125 basis points (-1.25 percentage points). According to Bloomberg data, that was the widest weekly discrepancy since January 19. 

Inflation and interest rate concerns spooked the markets, particularly on Wednesday afternoon through Thursday. On Wednesday afternoon, the Federal Reserve’s minutes from its May Fed policy meeting were released. The hawkish tone of the minutes reinforced the “higher for longer” message and weighed on investor sentiment. The minutes indicated worries by Fed members about the lack of progress on taming inflation and a willingness to tighten policy further if inflation risks persist. Markets recovered somewhat on Friday, but with markets closed the following Monday in observance of the Memorial Day holiday, trading was anemic, with the New York Stock Exchange seeing its lowest trading volume of the year, making it hard to place much conviction in the rebound. The exception to the mixed performance for the week was the tech-heavy Nasdaq, which got a big boost from Nvidia following yet another stellar quarterly earnings report fueled by the insatiable demand from Artificial Intelligence development that requires its computer chips.  

Overseas stocks struggled, with developed market international stocks (as measured by the MSCI EAFE Index) dropping -0.9% for the week and the MSCI Emerging Markets Index slumping -1.5%. 

Fixed-income markets didn’t like the hawkish Fed minutes, which sent bond yields higher and bond prices lower. The 10-year U.S. Treasury yield moved up +5 basis points to end the week at 4.47%. But it was short rates that reacted most to the Fed notes, with the 2-year U.S. Treasury yield jumping +12 basis points to finish the week at 4.95%. The Bloomberg U.S. Aggregate Bond Index dipped -0.3% for the week, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) dropped -0.8%. 

Chart of the Week

The Federal Reserve Bank of Chicago reported that U.S. economic activity slumped in April, as the Chicago Fed National Activity Index (CFNAI) sank to -0.23 from -0.04 in March (which itself was revised sharply lower from the originally reported +0.15). Readings below zero indicate below-trend-growth in the national economic activity. All four of the broad categories of indicators used to construct the index were negative for the month, and three decreased in April from March. The Production and Income category contributed negatively, at -0.11, and was down from -0.01 the prior month. The Employment, Unemployment, and Hours category was a negative contributor at -0.02, down from +0.02 in March. The Personal Consumption and Housing category contribution was -0.07, down from March’s +0.01 contribution. The Sales, Orders, and Inventories category contribution was -0.03 the prior month and was the only improvement of the four broad categories, up from -0.06 in March. Overall breadth of the index was poor, with just 20 of the 85 individual indicators making positive contributions.

U.S. Economic Activity Fell in April

Chicago Fed National Activity Index (CFNAI)

Source: Federal Reserve Bank of Chicago, Bloomberg.

Economic Review

• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) rebounded to 54.4 in May, up from 51.3 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI improved to 50.9 from 50.0 the prior month, handily beating expectations of 50.7. The Services PMI jumped to a 12-month high of 54.8 from 51.3 the prior month and well ahead of expectations for 51.2. The results show an economy that may be bouncing back from a slowdown in April. New Orders, a sign of future sales, grew rebounded in May after dropping the prior month for the first time this year. Employment declined, but the rate of job losses moderated. On the inflation front, the Prices Paid component accelerated sharply and Selling Prices were increased as well. “Input costs rose at the fastest pace in six months, while firms increased their selling prices to the largest extent since April last year,” S&P said. The ‘flash’ surveys are the first indicators of each month to give a sense of how the U.S. economy is performing. According to S&P chief business economist Chris Williamson, the S&P surveys suggest “the final mile down to the Fed’s 2% target still seems elusive.” 
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment rose +0.7% in April from +0.8% the prior month (revised sharply lower from the originally reported +2.6%), beating expectations for a -0.8% drop. Durable Goods Orders Excluding Transportation were up +0.4% versus the prior month’s +0.0% level (revised down from the originally reported +0.2%), beating expectations for +0.1%. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.3% following a -0.1% dip the prior month (revised down from +0.1%), ahead of expectations for +0.1%.
• The final reading of the May University of Michigan Consumer Sentiment Index improved to 69.1 from 67.4 in the initial reading, where it was expected to stay. That was above expectations for it to tick up to 67.7 but was well below the prior month’s 77.2 and marks the lowest final monthly reading in six months. It also remains far below the pre pandemic peak of 101. The Current Economic Conditions component was revised up to 69.6 from the initial estimate of 68.8 but was down from 79 the prior month. The Consumer Expectations component was also revised up to 68.8 from the initial estimate of 66.5 but was down from 76 the prior month. One-year inflation expectations ticked down to +3.3%, below expectations to move up to +3.4% and the preliminary estimate of +3.5%. The five-year inflation expectations came in at +3.0%, unchanged from the prior month and a bit below expectations of +3.1%, where the preliminary reading was. The month-to-month plunge in sentiment may point to consumers struggling with inflation and may be a hurdle for spending, which the prior week’s flat Retail Sales for April seemed to indicate.
• The U.S. housing market remains under pressure as mortgage rates hover over 7%. The National Association of Realtors (NAR) reported that March Existing Home Sales fell by -1.9% to a seasonally adjusted annual rate of 4.14 million units, below expectations for 4.23 million units and 4.22 million units the prior month (revised higher from the originally reported 4.19m units). Year-over-year existing sales are down -5.7% versus the -4.7% annual rate the prior month. The Median Existing Home Price was $407,600, up from $392,900 the prior month and up +5.7% from a year ago. That was the tenth consecutive month of year-over-year increases and the highest ever price for the month of April. Home prices peaked in June 2022, when the median price of a resale home hit $413,800. The inventory of homes for sale was up +9% from the prior month and +16.3% from last year, to 1.21 million units, which is the highest level since October 2021. The NAR said that sales of homes priced $1 million or more, in particular, posted the biggest increase among all price categories, surging 40% from a year ago. Homes listed for sale remained on the market for 26 days on average, down from 33 days the previous month. Last November, homes were only on the market for 24 days. First-time buyers were 33% of sales in the month, up from 32% the month before. All-cash sales held steady at 28% of transactions. For the month, sales fell in all regions, with the largest decline in the Northeast at -4.0%, while the West was down -2.6%, the South -1.6%, and Midwest off -1.0%. 
• The Commerce Department reported New Home Sales fell -4.7% in April, worse than the -2.2% drop expected and far below the +5.4% the prior month (though that was revised down from +8.8%). That equates to 634,000 units versus the prior month’s 665,000 units (revised down from the originally reported 693,000). New Home Sales data tend to be volatile month-on-month and are often revised. New-home sales remain far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes fell -7.7%, the first annual decline since March of 2023.  By regions, month-over-month were only positive in the Midwest, up +10%, but fell in the Northeast by nearly +21% and were down -7.3% in the West and -4.8% in the South. The Median New Home Price fell to $433,500 from $439,500 the prior month. The inventory of new homes for sale was up +7.1% for the month and +21.3% from the prior year.  Months of supply at the current rate of sales was 9.1 compared to 8.5 the prior month. Like with Existing Home Sales, builders are cutting prices and upping incentives to lure buyers. In May, about 25% of builders cut prices, according to the most recent sentiment survey by the National Association of Home Builders.
• The Kansas City Fed Manufacturing Survey improved to -2 in May from -8 the month before, which was far better than expectations for -7. The New Orders index fell to -6 from -13, while the Production index rose to -1 from -13. The Employment index rebounded to +9 from -2. The Prices Paid ticked up again to +19 from +18 the prior month, while Prices Received jumped to +7 from 0. The Kansas City Fed Service Sector Outlook Survey fell to +7 from +9 the prior month. 
• Weekly MBA Mortgage Applications were up +1.9% for the week ended May 17, following the prior week’s +0.5% rise. The Purchase Index was down -1.2% following a -1.7% decrease the prior week. The Refinance Index rose +7.4% following a +4.7% increase the prior week. The average 30-Year Mortgage Rate fell to 7.01% after dipping to 7.08% the week before. 
• Weekly Initial Jobless Claims fell -5,000 to 215,000 for the week ended May 18, above expectations for 220,000. The prior week was revised to 223,000 from 222,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,794,000 in the week ended May 11, above consensus estimates for 1,793,000. Last week’s reading of 1,794,000 was revised down to 1,786,000.

The Week Ahead

In the holiday-shortened week, investors will likely be focused on the week’s inflation data, which doesn’t come until Friday when the personal income and spending report is released, along with the Federal Reserve’s favored inflation gauge – the Core Personal Consumption Expenditures (PCE) Price Index. With last week’s interest rate cut uncertainties weighing on the markets, those reports have the potential to move markets. There will also be readings on inflation from Europe and Japan. Other economic data includes the Conference Board’s Consumer Confidence Index for May on Tuesday, as well as home price indexes for March from S&P CoreLogic Case-Shiller and the FHFA. The Federal Reserve will publish its latest Beige Book report on Wednesday. On Thursday, the Bureau of Economic Analysis will release its second estimate of first quarter Gross-Domestic-Product (GDP) growth, and the National Association of Realtors will report its Pending Home Sales Index for April.

The first quarter earnings season is largely over, but a few major names will be reporting this week, including Best Buy, Costco, HP Inc., and Salesforce.

Did You Know?

6-MONTH ELECTION COUNTDOWN – Since WWII, the S&P 500’s average change for the six months leading up to the presidential election has been +4.21%, with gains 84% of the time. The largest gain was +22% leading up to the 1980 election, while the largest decline was -29% before the 2008 election (Source: Bespoke Investment Group).

ELECTION ODDS – On May 15, betting sites that place odds on the outcome of the 2024 presidential election showed former President Donald Trump in the lead with his odds of winning at 50.0% compared to odds of 41.7% for President Joe Biden. (Source: electionbettingodds.com, MFS).

TAXES AND JOBS – Job postings tracked by job-listing website Indeed.com are now -5% below pre pandemic levels in the 20% of states with the highest state income taxes, while job postings in the 20% of states with the lowest taxes remain +37% above prepandemic levels (Source: Indeed.com, MFS).

This Week in History

NOT THE SMARTEST GUYS IN THE ROOM – On May 25, 2006, former Enron Chairman Kenneth Lay and former President Jeffrey Skilling were convicted of fraud and conspiracy in relation to the energy company’s December 2001 collapse. The Smartest Guys in the Room was a 2005 American documentary film based on the best-selling 2003 book of the same name by Fortune reporters Bethany McLean and Peter Elkind that chronicled the company’s faulty and corrupt business practices (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.