Weekly Market Update – November 17, 2023

Quick Takes

• Investors celebrated last week following Tuesday’s release of the Consumer Price Index (CPI) for October showed lower consumer inflation than Wall Street expected. Wholesale inflation was also softer than expected, and Retail Sales fell for the first time in six months. 
• Stocks rallied hard on the weak inflation data, with the S&P 500 and Nasdaq hitting three-week win streaks following gains of +2.2% and +2.4%, respectively, for the week. The small-cap Russell 2000 didn’t have a three-week streak but was up +5.4% for the week.
• Bonds also rallied as yields sank. The yield on the 10-year U.S. Treasury fell -18 basis points, and the 2-year U.S. Treasury yield dropped -22 basis points for the week. Bond prices move opposite of yields, and the Bloomberg U.S. Aggregate Bond Index gained +1.4% for the week.

Soft CPI sends yields down and stocks up

Stocks achieved a third straight week of gains, as bond yields retreated on a wave of economic data that showed softer-than-expected inflation data that will help put the Federal Reserve (the Fed) at ease that they’re making progress on their battle with inflation. The S&P 500 Index rose +2.2% on the week, good for a cumulative three-week gain of +9.6%, which is its best such stretch since June 5, 2020. The Nasdaq Composite Index was up +2.4% on the week, also a three-week win streak for a cumulative three-week gain of +11.8%, its best three-week percentage gain since April 24, 2020. Small-capitalization stocks, which have trailed for most of 2023 and were down the prior week, saw the Russell 2000 Index bounce back with a +5.4% return last week. Investors have been looking for market breadth to improve, so this recent run has been encouraging. The so-called Magnificent 7, primarily mega-cap technology stocks, have driven the top-heavy, concentrated returns for much of this year and constitute virtually all of the major indices’ gains year to date. Non-U.S. stocks did well, too, as the U.S. dollar was down -1.8%, helping boost overseas returns. Developed market international stocks (as measured by the MSCI EAFE Index) jumped +4.4%, while the MSCI Emerging Markets Index was up +3.0%.

The surprisingly tame inflation data helped push the yield on the benchmark 10-year U.S. Treasury note down -19 basis points for the week to 4.44%. The shorter end 2-year U.S. Treasury note yield sank -22 basis points to close at 4.89%. The Bloomberg U.S. Aggregate Bond Index gained +1.4%, and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) popped +2.4% higher. 

Investors began their celebration on Tuesday when the latest Consumer Price Index (CPI) was released and showed lower consumer inflation than Wall Street expected. The S&P 500 was up nearly +2% Tuesday, and the 10-year Treasury yield fell -19 basis points. The very next day, the Producer Price Index (PPI) also showed softer-than-expected wholesale inflation in October. Retail sales for October were released Wednesday, too, and fell for the first time in six months, reinforcing the concept that the Fed was accomplishing their goals and may not need to raise rates further. Industrial Production data in both the U.S. and Eurozone also fell short of expectations. By the end of the week, investors abandoned bets that the Fed will hike one last time while pricing in early rate cuts. The probability of a rate cut in May jumped from 22% at the beginning of the week to near 90% at the close Friday.  

Like the prior Friday, when ratings agency Moody’s Investor Services downgraded their outlook for the U.S. government rating, this Friday brought another surprise for investors. Arguably, the leading Artificial Intelligence (AI) firm, OpenAI, saw its board oust the CEO, Sam Altman, shocking the industry. AI has been a leading catalyst for the market’s rally in 2023, particularly for the mega-cap tech firms. OpenAI, whose biggest single investor is Microsoft, closed down nearly -2% for the day.

Chart of the Week

The Commerce Department reported that the October advance read on Retail Sales saw the first decline since March. U.S. retail sales fell -0.1% in the month of October, and while that was above expectations for a -0.3% decline, it was far below a +0.9% increase the prior month, revised up from +0.7%, breaking a six-month streak of advances. Auto dealers posted a -1% decline in sales to weigh down the headline number. Auto sales account for about 20% of all retail sales. Receipts at gasoline stations also slipped due to cheaper gas prices and less demand after the end of the summer driving season. Sales ex-autos and gas were up +0.1%, which was just below expectations for +0.2% gain and well below the prior month’s +0.8% (revised up from +0.6%). Furniture and home furnishing store sales declined -2.0% month-over-month, following a -0.6% decrease in September. On the positive side, electronics and appliance store sales jumped +0.6% month-over-month following a +0.4% increase in September. The Control Group, a figure used to calculate GDP, was up +0.2%, matching expectations, but well below the prior month’s +0.7% (revised up from the originally reported +0.6%). Year-over-year retail sales growth tumbled as comparisons were very difficult, coming in at +2.5%, compared with a revised +4.1% in September. Many segments posted year-over-year sales declines led by furniture stores, gas stations, and building supply stores. Retail sales represent about one-third of all consumer spending and are seasonally adjusted but not inflation adjusted. So slower spending in part reflects the cost for many goods that have fallen in recent months. The soft sales data bolsters the case for the Fed to hold off on further rate hikes at its meeting next month.  

Retail Sales Fall for First Time Since March

U.S. retail sales, change from prior month

Note: Seasonally adjusted
Source: U.S. Census Bureau via St Louis Fed, The Wall Street Journal.

Economic Review

• Inflation stalled in October, with the headline Consumer Price Index (CPI) remaining unchanged for the month as cheaper gasoline helped keep the cost of living in check. October was the lowest monthly increase for CPI in the last 15 months, coming in under expectations for a +0.1% increase and was down from +0.4% the prior month. That helped year-over-year CPI recede to 3.2% from 3.7% the prior month. Core CPI, which excludes the more volatile food and energy prices, was modestly higher, up +0.2% for the month, down from last month’s +0.3%, which is where it was expected to stay. On a year-over-year (YoY) basis, Core CPI rose +4.0%, down from the +4.1% annual rate last month, which is where it was forecast to remain. Both measures are well off their 2022 peak levels but still remain stubbornly above the Fed’s +2% target, and the Fed views the higher Core CPI as a better predictor of future inflation trends. The cost of gasoline dropped -5.3% last month and largely accounted for the flat CPI in October. However, food costs were up +0.3% in October and up +5% from last year, on top of big gains in 2021 and 2022 as well. Shelter, the biggest expense for most families, was up +0.3%, with rents up +0.5% for the month and up +7.2% from last year. costs were the main factor in the inflation increase. The index for shelter, which makes up about one-third of the CPI weighting, accelerated +0.6% for the month and +7.2% from a year ago. Markets cheered the lower-than-expected results, thinking it would be enough to hold off any more hikes by the Fed. 
• October wholesale inflation was also softer than expected, with the headline Producer Price Index (PPI) falling -0.5% versus the prior month’s +0.4% and expectations for +0.1%. Year-over-year (YoY) PPI was up +1.3%, well under expectations for +1.9% and the prior month’s +2.2%. Core PPI, which strips out volatile food and energy costs, was up +0.1% for the month, below expectations for +0.3% and the prior month’s +0.2% (revised down from +0.3%). Year-over-year (YoY) Core PPI was up +2.4%, under expectations for +2.7%, which is also what it was the prior month. For the second straight month, goods prices fell -1.4%, while services costs were flat for the first time in six months. 
• October Import Prices fell -0.8%, worse than expectations for -0.3% and the prior month’s +0.4% (revised up from +0.1%). Year-over-year, import prices were down -2.0% versus the prior month’s -1.5% drop (revised up from -1.7%). Imported fuel prices slide -6.3%, nearly offsetting the prior month’s +6.7% gain and driving much of the overall October decline. Nonfuel import prices declined by just -0.2% for the month. Export Prices fell -1.0% and are down almost -5% over the past year.
• On Monday, the Treasury Department reported that the U.S. Federal Budget Deficit narrowed to $67 billion in October, the first month of fiscal 2024, down from $88 billion in the same month last year and smaller than the $70 billion forecast by Wall Street economists. In October, government receipts hit a record high as Californians paid tax bills that had been deferred by the Internal Revenue Service earlier this year after the state was hit with severe late-winter storms. Federal Receipts rose nearly +27% on a year-ago basis to a record $403.4 billion, while Government Outlays increased more than +15% year over year to $470 billion. Interest paid on the national debt almost doubled compared with the prior year. The Treasury paid $88.9 billion in interest, up from $47.6 billion in the same month last year. Deficit spending has put the U.S.’s fiscal situation on an unsustainable path, and on November 3rd, Moody’s Investors Service changed the outlook on the U.S. government’s ratings to negative, citing high interest rates and political dysfunction in preventing meaningful legislation to mitigate the deficits.
• The Small Business Optimism Index was relatively flat in October as the National Federation of Independent Business (NFIB) reported that business optimism edged up +0.1 points to 90.7, a smidge above expectations for 90.5. That remains low by historical standards and marks the 22nd consecutive month in which the index was below the 49-year average of 98.  The slight increase was led by a +3 percentage point increase in the Expect Real Sales Higher index to -10%. Earnings Trends led to the downside with a -8 percentage point decline to -32%. Those that Expect the Economy to Improve was unchanged at -43%, the lowest of all 10 index components. 22% of owners reported that inflation was their single most important problem in operating their business, down one point from last month. 43% (seasonally adjusted) of business owners reported job openings that were hard to fill, unchanged from September and remains historically very high.
• Homebuilder confidence fell for the fourth straight month in November, with the National Association of Home Builders (NAHB) Housing Market Index (HMI) falling -6 points to 34, under expectations for a reading of 40, which is where it was the prior month. November was the lowest level since January and far off the 56 registered in July. Builders are offering sales incentives to boost demand, with the share of builders cutting home prices rising to the highest level since November 2022, to 36%, up from 32% the prior month. Like the prior three months, all three subcomponents declined, with Current Sales down -6 points, Sales Expectations (in the next six months) down -5 points, and Traffic of Prospective Buyers off -5 points. About 60% of builders were also using incentives — other than price cuts — to improve sales in November. The rise in mortgage rates near 8% has triggered a sharp reversal in homebuilder sentiment. The NAHB said it was forecasting a +5% increase in single-family starts in 2024 as “financial conditions ease with improving inflation data in the months ahead.” 
• October Housing Starts rose for a second straight month, up +1.9% to a seasonally adjusted annual rate of 1,372,000 units, up from a negatively revised 1,346,000 units the prior month (originally 1,358,000) and above expectations for 1,350,000 units. Housing starts peaked at 1,800,000 million in April 2022. Both single-family and multi-family construction increased. Housing starts rose most in the Midwest and West, up +12% in each region. The Northeast was the laggard, with starts down -14.5%. Single-family rose +0.2%, while multi-family units rebounded +17.6% after the -26.3% plunge the prior month.  Building Permits, one of the leading indicators tracked by the Conference Board, rose +1.1% after the prior month’s -4.4% drop (revised down from +4.5%) and above expectations for a -1.4% decline. Single-unit permits were up +0.5%, while permits for buildings with at least five units or more rose by +2.2%.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, rose +13.7 points to 9.1 for November, far above expectations to come in at -3.0 and the prior month’s unrevised -4.6 reading (readings below zero indicate economic contraction). It was the highest reading since April. New Orders slipped -0.7 points to remain in negative territory at -4.9. Expectations for six months ahead slumped -24 points to negative 0.9. On the positive side, shipments rose +8.6 points to 10.
• Manufacturing in the Federal Reserve’s Third District improved in November, with the Philly Fed Manufacturing Business Outlook Survey increasing +3.1 points to -5.9, remaining in economic contraction territory for the 16th month in the last 18 months. That was better than expectations of -8.0 (readings below zero indicate contracting economic conditions). New Orders fell -3 points but stayed positive at +1.3. The Shipments slumped from +10.8 to -17.9 in November. The Six-Month Business Outlook slipped from +9.2 to -2.1, which is the first negative reading since May.
• October Industrial Production dropped -0.6%, more than prior month’s 0.1% reading (revised down from +0.3%) and worse than expectations for -0.4%. Manufacturing output rose +0.5%, reversing a -0.5% drop the prior month. Much of the decline was due to the -10% drop in output for motor vehicles and parts tied to the United Auto Workers strike against the Big Three domestic auto manufacturers. Manufacturing fell -0.7% but was up +0.1%, excluding the auto sector. Defense orders continued to trend higher, rising +1.7%, the 10th consecutive monthly increase. Capacity Utilization, a measure of potential output, dropped to 78.9% from 79.5% the prior month (which was revised down from 79.7%) and below expectations for 79.4%.
• Weekly MBA Mortgage Applications rose +2.8% for the week ended November 10, following the prior week’s +2.3% gain. The Purchase Index was up +3.3% following a +3.0% advance the prior week, and the Refinance Index increased +2.0% following a +1.6% increase the prior week. The average 30-Year Mortgage Rate remained at 7.61% from the prior week, which is +0.71 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims increased +13,000 to 231,000 for the week ended November 11, the highest level in seven weeks, and above expectations for 220,000 as well as last week’s 218,000 (revised up from 217,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) increased +32,000 to 1,865,000 in the week ended October 28, above consensus for 1,843,000 and last week’s reading of 1,833,000 (revised down from 1,834,000).

The Week Ahead

The calendar is front-loaded in the coming week, with equity and bond markets closed Thursday in observance of Thanksgiving. Markets also close early on Friday, with trading on the Nasdaq and New York Stock Exchange ending at 1 p.m. ET and the bond market closing at 2 p.m. ET. Economic reports get going when the Conference Board releases its Leading Economic Index (LEI) for October on Monday. The LEI has declined for 18 straight months and is expected to decline again for October. The National Association of Realtors reports Existing-Home Sales for October on Tuesday morning, and that afternoon, the Federal Open Market Committee (FOMC) releases its early November meeting minutes. Weekly mortgage applications and jobless claims come on Wednesday, along with Durable and Capital Goods Orders, as well as Consumer Sentiment from the University of Michigan. S&P Global releases both its manufacturing and services Purchasing Managers’ Indexes (PMIs) for November on Friday.

Did You Know?

SHUTDOWN AVERTED – Last week, President Biden signed a short-term government funding bill passed by Congress, avoiding a federal shutdown and pushing the debate over the federal budget into next year. The bill will maintain government spending at current levels for two more months, giving lawmakers time to negotiate appropriations bills for the rest of the fiscal year. The measure did not include the $106B that the White House requested for Israel and Ukraine aid, as well as humanitarian funding for Palestinians and other supplemental requests (Source: The Wall Street Journal).

CHEAPER THANKSGIVING – The typical 10-person turkey fest will cost $61.17—a -4.5% decline from last year’s record-high $64.05 but +25% higher than 2019’s total. Many factors that sent food prices soaring since 2022 have abated. Commodity prices for wheat, corn, cooking oils, and other staples that skyrocketed after Russia invaded Ukraine are down, as are avian influenza infections that decimated U.S. poultry flocks (Source: American Farm Bureau Federation, The Wall Street Journal).

S&P SHORT-TERMISM – The average lifespan of S&P 500 listed companies was 61 years in 1958. Today, it is less than 18 years. By 2027, 75% of companies currently listed on the S&P 500 are likely to disappear from being bought out, merged, or going bankrupt (Source: McKinsey).

This Week in History

PHONE IT IN – On November 13, 1878, the first telephones were installed on the trading floor of the New York Stock Exchange, just over two years after Alexander Graham Bell’s invention changed communications forever (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.