Weekly Market Update – November 1, 2024

Quick Takes

• Weakening labor data and skepticism about artificial intelligence (AI) capital expenditures resulted in a second straight losing week for the headline S&P 500 Index. The S&P 500 fell -1.4% after slipping -1.0% the prior week, its first two-week losing streak since early August.
• U.S. employers added just +12,000 new Non-Farm Payrolls (NFP) during October. That was sharply lower than Wall Street forecasts for 100,000 new jobs, and the weakest pace since late 2020 but was likely heavily influenced by the Boeing strike and two major hurricanes.
• U.S. Treasury yields rose again last week, as the 10-year U.S. Treasury note yield hit its highest level in four months and is now higher for seven consecutive weeks. As a result, U.S. and non-U.S. bond indices fell -0.6% and -0.5% respectively.

Source: Bloomberg. Data as of November 1, 2024.
Price Returns for Equity, Total Returns for Bonds.
* 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.

Economic and AI jitters hinder stocks, bond yields move higher

Disappointing economic data and questions about the artificial intelligence (AI) hype hampered stocks and resulted in a second straight losing week for the headline S&P 500 Index. The S&P 500 fell -1.4% after slipping -1.0% last week, its first two-week losing streak since early August. A heavy flow of economic data throughout the week included lower than expected U.S. GDP growth for the third quarter, the lowest job openings in three and a half years, and the weakest jobs growth since late 2020. In addition, a mixed bag of quarterly earnings reports from mega cap technology stocks had investors reassessing the efficacy of heavy capital expenditures the tech titans are making to be the leaders in AI. Microsoft and Meta were both down after issuing subpar quarterly guidance, and Technology sector overall was down -2.8% for the week. As a result, the tech-heavy Nasdaq Composite Index was down -1.5%, breaking a 7-week win-streak. On the other hand, small cap stocks were able to rebound, as the Russell 2000 Index eked out a +0.1% gain for the week. 

Performance was only slightly less negative for stock indexes overseas. Developed market international stocks (as measured by the MSCI EAFE Index) and emerging market stocks (the MSCI Emerging Markets Index) were down -1.1% for the week. The eurozone economy expanded +0.4%, double its second-quarter growth rate. Germany unexpectedly avoided a recession, while France and Spain also reported stronger-than-expected economic growth. Japan equity markets rose over the week as the Bank of Japan (BoJ) held rates steady. On the other hand, Chinese stocks declined despite a pickup in economic activity. Non-U.S. assets have been hampered by a resurgent U.S. Dollar with the U.S. Dollar Index up for five straight weeks, completing its best month since April 2022.

Bond yields initially fell on the surprisingly weak employment report Friday morning as investors grew concerned about slowing economic growth, but yields eventually reversed and finished the week higher. Markets likely recognized that the jobs report was negatively impacted by the combination of two major late summer hurricanes as well as the Boeing machinist strike. For the week, the benchmark 10-year U.S. Treasury note yield rose +14 basis points to end the week at 4.38%, the highest level in four months. It has now risen for seven consecutive weeks. The shorter 2-year U.S. Treasury yield was up +10 basis points to close at 4.21%. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index slipped -0.6% for the week, and non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -0.5%. 

The Week Ahead

This week’s presidential election is sure to suck most of the oxygen out of the news coverage, but there is a fair amount on the economic and earnings calendars. The Federal Open Market Committee (FOMC) concludes a two-day meeting on Thursday afternoon with an interest-rate decision and press conference with Fed chairman Jerome Powell. Markets are still pricing in a quarter-point reduction in the federal-funds rate. Other data includes the service sector Purchase Managers Indices (PMIs) from ISM and S&P Global. Consumer Credit and Consumer Sentiment will also be reported on Thursday and Friday, respectively. Approximately 100 S&P 500 companies will report quarterly earnings during the week, including well-known names such as Marriott International and Wynn Resorts on Monday; DuPont, Ferrari, and Super Micro Computer on Tuesday; Arm Holdings, CVS Health, Qualcomm, and Toyota Motor on Wednesday; Airbnb, Moderna, Monster Energy, and Warner Bros. Discovery on Thursday; and NRG Energy and Paramount Global close the week on Friday.

Chart of the Week

The monthly Employment Situation report showed that job creation in October slowed to the weakest pace since late 2020 as the Boeing strike and hurricanes dented labor markets. On Friday the Labor Department reported that U.S. employers added just +12,000 new Non-Farm Payrolls (NFP) during the month, sharply lower than Wall Street forecasts for 100,000. That compares to +223,000 in September, which was revised lower by -31,000 from the originally reported +254,000 jobs, and August job gains were revised lower by -81,000. The report noted that the Boeing strike likely subtracted -44,000 jobs in the manufacturing sector, which lost -46,000 positions overall. Additionally, the report mentioned hurricanes Helene and Milton but said, “it is not possible to quantify the net effect” of the storms on the jobs total. The government created +40,000 new jobs in October, accounting for all of the increase, as Private-sector jobs fell by -28,000 in the month. That was far below expectations for a gain of +70,000 and down from +192,000 the prior month (which itself was revised lower from +223,000). It was the first negative reading for Private Payrolls since December 2020 in the aftermath of the pandemic. Health Care led hiring with +52,000 jobs. The Unemployment Rate was unchanged at +4.1% from as expected. The unemployment rate had been as low as +3.4% just 15 months ago but has slipped from a three-year peak of +4.3%. Inflation watchers noted that Average Hourly Earnings rose +0.4% for the month, above expectations for a +0.3% rise and up from +0.3% the prior month (which was revised lower from +0.4%). Year-over-year, Average Hourly Earnings increased to +4.0% from +3.9%, in line with expectations for +3.8%. The Fed would like to see wage growth slow to around +3% annually or less, a level it sees as consistent with low inflation. Average Weekly Hours was unchanged at 34.3, a tick higher than the 34.2 expected. Labor-Force Participation ticked down to 62.6% from 62.7%, where it was expected to stay. Futures markets are still pricing in a likelihood that the Fed will cut interest rates by a quarter point at each of its two remaining meetings this year, with the Federal Open Market Committee (FOMC) announcing its decision for the November meeting on Thursday afternoon.

Honey who shrunk the jobs?

Monthly U.S. Job Creation (January 2022 – October 2024)

Source: U.S. Bureau of Labor Statistics via FRED, CNBC.

Did You Know?

MISSING PAYMENTS – The probability of consumers missing a debt payment in the next three months surged to +14.2% in September, the highest level since the onset of COVID in early 2020. Consumers making over $100,000 per year reported their highest delinquency probability since September 2014 (Source: NY Fed Survey of Consumer Expectations, MFS)

W-HOA – Homeowner Association Fees (HOA) increased by a median of +5.7% year-over-year in July across 43 large US metropolitan areas. The three largest increases were all in Florida: Tampa (+17.2%), Orlando (+16.7%) and Fort Lauderdale (+16.2%). The large increases in the Sunshine State were attributed to new safety regulations and soaring property insurance rates. (Source: Redfin)

FLORIDA STICKS OUT – Hurricane Milton is the fifth hurricane to hit the U.S. mainland in 2024. Since 1851, only three years — 1886, 1985, and 2020 — had more US landfalls (six each). Including this year, 125 hurricanes have made landfall in Florida since 1851 — nearly twice as many as Texas, the next closest state (Source: NOAA, MFS).

This Week in History

WORMHOLE – On November 2, 1988, the “Great Worm” infected 6,000 computers. Created by Robert Morris, then a 23-year-old graduate student at Cornell University, it marked a new dawn in vulnerabilities of interconnected computer systems and changed the landscape of cybersecurity forever. Initially, it was intended to be a harmless informative test, but it turned into a full blown crisis when a flaw in the worm’s code caused it to replicate uncontrollably, infecting 6,000 computers (approximately 10% of the internet in 1988) rendering them inoperable (Source: First Trust).

Economic Review

• The U.S. economy grew at a +2.8% pace in the third quarter, according to the initial estimate. That is down from the +3.0% rate in the second quarter and fell short of Wall Street expectations for a +2.9% rate of growth. Personal Consumption, the main engine of the economy, rose at +3.7% annual pace, which is the largest increase in six quarters. That was much higher than the +3.3% rate of consumer spending Wall Street expected and up from a 2.8% rate the prior quarter. Government spending and business investment also added to headline GDP, with government spending making its largest contribution to growth in a year. A higher trade deficit and a smaller increase in inventories, or unsold goods, subtracted from GDP. The Personal Saving Rate fell to +4.8% from +5.2% the prior quarter. Profits increased +1.7% (not annualized) after declining -1.4% in the first quarter. Gross Domestic Income (GDI) rose at a 3.1% pace. Whereas GDP measures spending on goods and services, GDI measures income generated and costs incurred from producing those same goods and services. It is generally considered a more accurate barometer of U.S. growth. But whether looking at GDP or GDI, the economy looks to be in decent shape, although some areas, such as hiring and manufacturing have shown some weakness. The PCE Price Index increased +1.5% versus +2.5% in the second quarter. The Core PCE price index, which excludes food and energy, increased +2.2%, compared to +2.8% in the second quarter.
• Personal Spending rose a solid +0.5% in September, up from an upwardly revised +0.3% the prior month and ahead of expectations for +0.4%. After adjusting for inflation, Real Personal Spending was up +0.4%, also above expectations (+0.3%) and up from an upwardly revised +0.2% the prior month. Meanwhile, Personal Income rose +0.3%, in line with expectations and up from +0.2% the prior month (unrevised). The Personal Savings Rate slipped to +4.4 from +4.6% the prior month.
• The October Job Openings Labor Turnover Survey (JOLTS) showed Job Openings plunged to the lowest level since January 2021, at 7.443 million from 7.861 million (revised down from 8.040 million). That was far below expectations for 8.000 million. Job Openings peaked at 12 million in 2022, but companies have since cut back on hiring. Job openings are an indication of the health of the labor market and the broader U.S. economy. The ratio of Job Openings to Unemployed Workers was unchanged at 1.1 and is down from a peak of 2.0 in 2022 and at the prepandemic level, the Fed wants to see it at. The Number of People Quitting Jobs slowed to 2.9 million from 3.1 million the prior month, which is the first time they’ve dropped below 3 million in four years and are now well below prepandemic levels. The record hit 4.5 million job quitters in late 2021. The Quits Rate fell to 1.9% from an upwardly revised 2.0% the prior month and is now the lowest since May 2020 and another sign the labor market remains soft. People tend to quit less often when the economy softens and jobs become harder to find. The Hiring Rate edged higher to 3.5% from 3.3%, which was the lowest level in 11 years, excluding the COVID pandemic era. 
• The Institute for Supply Management’s (ISM) Manufacturing PMI fell to 46.5% in October, the lowest level since July 2023. It was short of expectations for a 47.6% reading and down from an unrevised 47.2% the prior month. The manufacturing PMI has now contracted for seven straight months and has been stuck in contraction territory for 23 of the last 24 months (levels below 50 indicate contracting economic activity). The Employment component improved a bit to 44.4% from 43.9% but remains in contraction for the fifth straight month. Likewise, the key New Orders component was up to 47.1% from 46.1% the prior month but has been stuck in contraction for 25 of the past 26 months. The Production component dropped to 46.2% from 49.8%. The Prices Paid index, a measure of inflation, surged to 54.8% from 48.3%, the largest jump since January.
• The final S&P Global U.S. Manufacturing Purchasing Managers Index (PMI) for October was revised up to 48.5 from the preliminary estimate of 47.8 two weeks ago, remaining in contraction for four months now (levels above 50 indicate economic expansion, while levels below 50 indicate contraction). Manufacturers continued to reduce Employment, and New orders decreased for the fourth month running with respondents citing uncertainty ahead of the Presidential Election as a key reason for the declines. The best news in the report may have been the increasing confidence that output will expand over the coming year, with sentiment rising for the second month running to the highest since May. Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “The US manufacturing downturn extended into its fourth successive month in October, marking a disappointing start to the fourth quarter for the goods-producing sector. Although the rate of decline moderated, order books continued to deteriorate at a worryingly steep pace, and a further build-up of unsold stock hints at further production cuts at factories in the coming months unless demand revives.”
• The Conference Board’s Consumer Confidence Index surged to 108.7 in October, the highest level in nine months, from 99.2 the prior month (revised up from 98.7) and far above Wall Street expectations for 99.5. That effectively reversed the entire steep decline in September but is still far below the pre-pandemic high of 135.8. Consumer confidence tends to signal whether the economy is getting better or worse. The Present Situation gauge jumped to 138.0 from 123.8 the prior month (revised lower from 124.3). The Expectations gauge — which reflects consumers’ six-month outlook — improved to 89.1 from 82.8 (revised up from 81.7). Levels 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. The proportion of consumers anticipating a recession over the next 12 months dropped to its lowest level since the question was first asked in July 2022.
• The Commerce Department reported that Construction Spending inched up +0.1% in September, a four-month high, and unchanged from the prior month after it was revised up from the initially reported -0.1%. Expectations were for a flat reading. Over the past year, construction spending is up +4.6%, versus an annual rate of +4.1% the previous month. Total Private Construction was flat after a gain of +0.2% the month before, and total Public Construction was up +0.5% compared to a flat reading the prior month. Private Residential Spending rose +0.2% month-over-month, and private Nonresidential Spending was down -0.1%. The report showed that single-family construction was up +0.4% and multifamily construction was down -0.1%.
• The National Association of Realtors (NAR) reported that Pending Home Sales jumped to a six-month high, up +7.4% in September, compared to last month’s +0.6% increase and far ahead of Wall Street expectations for a +1.9% gain. Year-over-year sales were up +2.2%, better than the -1.1% expected and up from the -4.3% annual pace the prior month. From a regional perspective, all four regions were positive, led by a +9.8% increase in the West. The Midwest was up +7.1%, the South increased +6.7%, and the Northeast was up +6.5. “Contract signings rose across all regions of the country as buyers took advantage of the combination of lower mortgage rates in late summer and more inventory choices. Further gains are expected if the economy continues to add jobs, inventory levels grow, and mortgage rates hold steady,” Lawrence Yun, chief economist at the NAR, said in a statement.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit yet another all-time high in August, marking 19 straight monthly increases, but the pace of increases has slowed significantly as the index increased a seasonally adjusted +0.35%. That was better than expectations for a +0.20% increase and the prior month’s +0.25% pace (revised down from +0.27%). On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +5.20%, above expectations for +5.10% but down from the prior month’s +5.93% annual gain. That’s the slowest annual price appreciation since September 2023. New York remained in the top spot over Las Vegas with the biggest year-over-year home-price gains (up +8.1% and +7.3% respectively). Denver replaced Portland with the slowest annual pace in Portland (at 0.7% and 0.8% annual rates respectively). All 20 cities registered annual increases for the ninth consecutive month.
• The competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) also showed U.S. home prices move up in August, as the government agency reported prices rising +0.3% after moving up +0.2% the prior month (revised up from the +0.1% originally reported which is where they were expected to stay). The government data showed home prices up +4.2% year-over-year compared to +4.5% the prior month. “The slow but continued house price growth and the effect of locked-in interest rates led to persistent housing affordability challenges,” said Dr. Anju Vajja, Deputy Director for FHFA’s Division of Research and Statistics.
• Texas factory activity improved in October, with the Texas Manufacturing Outlook Survey up to -3.0 from -9.0 the prior month and easily beating expectations for a -9.4 reading. Still, it was the 30th consecutive month with a contractionary reading. Underlying details showed notably strength in the Production index, which surged to +14.6 from -3.2, the highest reading in more than two years. The Employment index, which had rebounded the prior month to expansion, dropped back to contraction at -5.1. The Texas Service Sector Outlook General Business Activity Index also improved, moving to expansion at +2.0 from -2.6 from the prior month.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), dropped to 41.6 in October from an unrevised 46.1 the prior month, which was far below expectations for a 47.0 reading. Readings below the 50 level indicate contraction. This is the eleventh consecutive reading in contraction territory. New Orders, Employment, Inventories, Production, and Order Backlogs all signaled contraction. Only the Prices Paid and Supplier Deliveries components showed expansion.
• Weekly MBA Mortgage Applications fell -0.1% for the week ending October 25, following the prior week’s -6.7% drop. The Purchase Index rebounded +5.0% following a -5.1% drop the prior week. The Refinance Index dropped -6.3%, following the prior week’s -8.4% fall. The average 30-Year Mortgage Rate rose to 6.73%, the highest level since late July.
• Weekly Initial Jobless Claims retreated -22,000 to 216,000 for the week ending October 26, below expectations for 230,000. The prior week was revised higher to 228,000 from 227,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -26,000 to 1,862,000 in the week ending Oct 19, above expectations for 1,880,000. Last week’s reading of 1,897,000 was revised down to 1,888,000.

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.