Weekly Market Update – November 10, 2023

Quick Takes

• Stocks were mixed last week, with the Nasdaq up +2.4% and the S&P 500 Index up +1.3. But the small-cap Russell 2000 sank -3.2%, and the MSCI EAFE Index (developed market international stocks) slipped -0.9%. Tech and Growth stocks surged while Energy and Value stocks fell.
• A week after the 10-year U.S. Treasury yield fell -26 basis points, it rebounded +8 basis points last week to close at 4.65%. The 2-year U.S. Treasury yield popped +22 basis points over the week to close back above 5%.  
• In an unexpected move after markets closed on Friday, Moody’s Investors Service cut their outlook on the U.S. government rating to negative from stable. The primary rationale for the outlook cut was Moody’s view that the downside risks to U.S. fiscal strength have increased.

Powell threatens more hikes, bonds fall, and stocks mixed

Stocks rallied big on Friday, recovering some of the momentum lost earlier in the week, particularly after Federal Reserve Chairman Jerome Powell threw cold water on the market on Thursday, saying higher interest rates might still be needed to tame inflation. But investors convinced themselves on Friday that U.S. rates have peaked, and risk assets got back to their winning ways. Technology stocks led all sectors, with the S&P 500 Technology Sector jumping +4.5% during the week, well ahead of the next best sector, which was Communication Services with a +1.4% gain. Energy was the big loser for the week, with the sector dropping -3.8% over the week, largely due to WTI Crude Oil falling -4.2%. The tech-heavy Nasdaq Composite Index led the major U.S. indices with a +2.4% gain, following last week’s big +6.6% pop. The S&P 500 Index also advanced, albeit a more modest +1.3%, which adds to the prior week’s +5.9% jump. But it was a very different story for smaller cap stocks. The small-cap Russell 2000 Index sank -3.2%, erasing a big chunk of the prior week’s market leading +7.6% surge. Indeed, the market’s strength was exceptionally narrow, following a trend for much of the year, with an equally weighted version of the S&P 500 Index lagging the market-weighted headline index by -1.9 percentage points. The growth versus value factors saw an even bigger disparity over the week, with the Russell 1000 Value Index trailing its Russell 1000 Growth counterpart by -4.0 percentage points—the largest margin since March. Overseas, stocks were also mixed, with developed market international stocks (as measured by the MSCI EAFE Index) slipping -0.9% while the MSCI Emerging Markets Index just barely eked out a gain, up +0.01%.

Yields returned to their ascent after the prior week’s declines. The 10-year U.S. Treasury yield was up +8 basis points (bps) to end the week at 4.65% after the big -26 bps drop the prior week. The 2-year U.S. Treasury yield was up +22 bps, pushing it back above 5% (5.06% to be precise). The higher yields weighed on the Bloomberg U.S. Aggregate Bond Index, which was down -0.3% for the week, and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) fell -0.6%. An unusually weak 30-year Treasury auction on Thursday sparked the rise in yields, and Powell’s hawkish comments later in the day also contributed to the spike in yields when he told a gathering of the International Monetary Fund that policymakers were “not confident” that they had achieved “a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time.”

There were only a few economic data releases last week, with most reporting in line with expectations. The one big exception, highlighted in the Chart of the Week below, was the University of Michigan’s release on Friday of its preliminary gauge of Consumer Sentiment, which unexpectedly fell to its lowest level in six months, while long-term inflation expectations hit a 12-year high. But the biggest news of the week may have been what came after the market closed Friday when Moody’s Investors Service cut their outlook on the U.S. government rating to negative from stable. The primary rationale for the negative outlook change was Moody’s view that the downside risks to U.S. fiscal strength have increased and may no longer be fully offset by its unique credit strengths. Importantly, Moody’s kept its top rating, Aaa, on U.S. credit… for now. As a reminder, another ratings agency, Fitch, downgraded the U.S. government’s long-term rating to AA+ from AAA in August after placing it on rating watch negative in May. Standard & Poor’s famously downgraded the U.S. rating to AA+ in 2011 amid the debt ceiling battle.

Chart of the Week

According to the University of Michigan’s preliminary survey for November, Consumer Sentiment fell for the fourth straight month to 60.4, a six-month low, and down from 63.8 the prior month. That missed expectations of 63.7 and is down considerably from the 22-month high of 71.6 in July. Sentiment fell the most among younger and lower-income Americans. The Current Economic Conditions component dropped to 65.7 from 70.6 the prior month. The Consumer Expectations component sank to 56.9 from 59.3 the prior month. One-year inflation expectations rose to +4.4% from +4.2%, which is the highest level since April. The five-year inflation expectations also rose to +3.2% from +3.0% the month before, matching the highest reading since March 2011. 

Consumers Sentiment sinks, Inflation Expectations surge

High prices and interest rates weigh on Sentiment in November

Source: University of Michigan, Bloomberg.

Economic Review

• U.S. Consumer Credit increased $9.1 billion in September, up from the $15.8 billion drop the prior month (revised up from $15.6), and under expectations for a $9.5 billion increase. Growth for revolving credit, such as credit cards, was up +2.9% to $3.1 trillion. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, was up +1.9% following the prior month’s -9.8% plunge. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt. Tighter lending standards and higher interest rates have slowed the pace of credit usage, particularly for nonrevolving debt.
• The U.S. Trade Deficit grew by $2.9 billion to -$61.5 billion in September, wider than the -$58.7 billion deficit the prior month (revised from -$58.3 billion) and wider than economists’ consensus expectations of -$59.8 billion. Imports rose +2.7% to $322.7 billion from $314.3 billion the prior month, the highest level since February. Exports were up +2.2% to $261.1 billion from $256.0 billion the prior month. Lower trade deficits add to Gross Domestic Product (GDP), so the increase in the deficit could take some air out of GDP next quarter. The deficit is on track in 2023 to be the lowest in three years but is still running high historically.
• The Census Bureau reported Wholesale Trade for September which saw Inventories, or unsold goods, rise by +0.2% following a -0.1% decline the prior month, and higher than expectations to be flat. Year-over-Year inventories were down -1.0%. Sales rose +2.2% from +2.0% the prior month (revised up from 1.8%), well ahead of expectations for a +0.9% rise. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio fell to 1.33 months from 1.39 months in the prior month.
• Weekly MBA Mortgage Applications rose +2.5% for the week ended November 3, following the prior week’s -2.1% decline. The Purchase Index was up +3.0% following a -1.4% drop the prior week, and the Refinance Index increased +1.6% following a -3.5% drop the prior week. The average 30-Year Mortgage Rate slipped to 7.61% from 7.86% the prior week, which is +0.47 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims fell -3,000 to 217,000 for the week ended November 4, just below expectations for 218,000 as well as last week’s 220,000 (revised up from 217,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) increased +22,000 to 1,834,000 in the week ended October 28, above consensus for 1,820,000 and last week’s reading of 1,812,000 (revised down from 1,818,000).

The Week Ahead

The main event on the economic calendar this week will be the Bureau of Labor Statistics (BLS) release of the October Consumer Price Index (CPI) on Tuesday. Economists are forecasting a +3.3% increase from a year ago. On Wednesday, the BLS will report the Producer Price Index (PPI), which measures inflation at the wholesale level. Other economic data include the National Federation of Independent Business’ (NFIB) small business optimism index for October, the Census Bureau’s Retail Sales for October, and housing-market indicators Wednesday through Friday. The late innings of the third-quarter earnings season will continue with earnings from Tyson Foods, Home Depot, Cisco Systems, Target, TJX Cos, Alibaba Group, and Walmart, among others. Oh, and Congress has a Friday deadline to avoid a federal government shutdown.

Did You Know?

AI RECYCLES – An AI-powered optical sorter can pick through 1,000 pieces of recyclable trash in a minute versus up to 80 by a human. Recyclers struggling with a shortage of workers and rising costs are turning to this technology to help make the business more economically viable (Source: The Wall Street Journal).

CREDIT GROWTH – Credit card balances are now $154 billion higher than they were a year ago, the largest annual increase since the Federal Reserve Bank of New York began tracking the data in 1999. The increase in balances is consistent with strong nominal spending and real GDP growth over the same timeframe, the bank said, while noting that delinquencies have been rising from record-low levels (Source: The Wall Street Journal).

BANKS TIGHTEN LENDING – The Fed’s Senior Loan Officer Opinion Survey (SLOOS) shows that bank lending standards remained tight over the past quarter and that demand for credit stayed weak. Though there were pockets of improvement, the survey reports metrics that have historically corresponded with recessions (Source: The Wall Street Journal).

This Week in History

BOSTON CHICKEN BOOM & BUST – On November 8, 1993, Boston Chicken went public in one of the hottest initial public offerings (IPO) in Wall Street history. Less than five years later, it filed for bankruptcy. It was eventually sold to McDonald’s (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.

* 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.