Weekly Market Update – October 11, 2024

Quick Takes

• U.S. stocks extended their win streak to five weeks for the first time since May. The benchmark S&P 500 Index also closed above the 5,800 point milestone for the first time on its way to another all-time high and a +1.1% gain for the week.
• Treasury rates in the bond market continued higher, with the yield on the benchmark 10-year U.S. Treasury note moving up +13 basis points, following the prior week’s +22 basis point increase, putting the yield at 4.10%, its highest level since July.
• The Consumer Price Index (CPI) was up +0.2% in September, topping expectations of +0.1% and matching the prior month’s unrevised rate. Year-over-year (YoY) CPI grew at a +2.4% rate, above expectations for +2.3% and down from the prior month’s +2.5% annual rate.

Source: Bloomberg. Data as of October 11, 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.

Stocks post five-week win streak, the longest since May

U.S. stocks extended their win streak to five weeks for the first time since May. The benchmark S&P 500 Index also closed above the 5,800 point milestone for the first time, on its way to another all-time high and a +1.1% gain for the week. The Nasdaq Composite Index also gained +1.1%, while the small cap Russell 2000 Index was up +1.0%. The Technology sector led gains with a +2.5% advance for the week, led by Artificial Intelligence kingpin NVIDIA, although fellow mega-cap tech stock Alphabet (parent company of Google) struggled following reports that the Justice Department was considering a breakup of the company. Tesla was also weak following an underwhelming response to the company’s highly anticipated unveiling of its new robotaxis. Utilities, which had been leading the last few months, fell -2.5%, hampered by rates that continued higher on hotter-than-anticipated consumer inflation. The upside surprise in consumer inflation, reported on Thursday, led to a big recalibration in expectations for Federal Reserve (Fed) interest rate cuts at their next policy meeting in November. According to the CME FedWatch Tool, futures markets ended the week pricing in a 14.1% chance that the Fed will pause their rate cuts at November’s meeting. It had been a near certainty that the Fed would deliver at least another quarter point cut in November prior to last week’s inflation data. Minutes from the Fed’s September policy meeting, released Wednesday afternoon, revealed that several members leaned towards a 25-basis-point (0.25 percentage points) rate cut as opposed to the 50-basis-point cut delivered in despite only one member officially dissenting.

Treasury rates in the bond market jumped on the Fed minutes and inflation reports, with the yield on the benchmark 10-year U.S. Treasury note ending +13 basis points higher, following the prior week’s +22 basis point increase, putting the yield at 4.10%, its highest level since July. The shorter 2-year U.S. Treasury yield rose +3 basis points to close at 3.96%. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index slipped -0.5%, and non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -0.7%. Non-U.S. bonds and stocks continue to be hamstrung by a rebound in the U.S. dollar, which was up +0.4% for the week, following the +2.1% surge the previous week.

Developed market international stocks (as measured by the MSCI EAFE Index) barely eked out a gain, up +0.2%, but emerging market stocks lost their momentum from the prior week’s massive Chinese stimulus, and the MSCI Emerging Markets Index fell -1.7% for the week.

Chart of the Week

The rate of inflation for consumer goods and services rose slightly in September. The headline Consumer Price Index (CPI) was up +0.2% for the month, a tick higher than expectations of +0.1% and matching the prior month’s unrevised rate. Year-over-year (YoY) CPI grew at a +2.4% rate, also a tick above expectations of +2.3% and down from the prior month’s unrevised +2.5% annual rate. However, Core CPI, which excludes the more volatile food and energy prices, was up +0.3% for the month, unchanged from the prior month and just above expectations for +0.2%. YoY Core CPI was +3.3%, above expectations for +3.2% which is where it was the prior month. It was the first increase in the annual rate of Core CPI in a year and a half and indicates that inflation remains sticky in some major parts of the economy. The Federal Reserve and Wall Street generally considers the Core CPI as a better predictor of future inflation, so the fact it was also a bit faster than expected may add a wrinkle to the Fed’s plan to cut rates twice more this year. The Fed is still widely expected to keep cutting interest rates even if inflation runs steady at current levels, but this may introduce the possibility that the Fed could pause in November and wait for more data before reducing rates again.

Inflation Rate Hits 2.4% in September, Topping Expectations

Consumer Price Index (year-over-year % change)

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

Economic Review

• Wholesale inflation was unchanged in September. The headline Producer Price Index (PPI) was flat (+0.0%) for the month, down from the +0.2% rate the prior month and below expectation to be +0.1%. Year-over-year (YoY) PPI came in at 1.8%, above expectations for +1.6% but down from the prior month’s +1.9% rate (which was revised up from +1.7%). Core PPI, which strips out volatile food and energy costs, was up +0.2%, down from last month’s +0.3% and in line with expectations. YoY Core PPI was up +2.8%, above expectations for +2.6% which is where it was the prior month (revised up from +2.4%). Goods inflation fell -0.2% for the month and offset the price of Service inflation, that was up +0.2% for the month. The cost of Services has been the biggest source of inflation lately, while Goods prices have fallen over the past year.
• The preliminary reading of the October University of Michigan Consumer Sentiment Index fell to 68.9, from a four-month high of 70.1 the prior month, and badly missing expectations for 71.0. The Current Economic Conditions component was 62.7, down from the last month’s 63.3 and short of expectations for 64.0. The Consumer Expectations component, however, fell to 72.9 from 74.4, well below expectations for 74.8. One-year inflation expectations rose to +2.9%, which was above expectations for a 2.7%, which is where it was the prior month. The five-year inflation expectation was +3.0%, in line with expectations and down a tick from the prior month’s +3.1%.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index ticked up to 91.5 from an unrevised 91.2 the prior month. Businesses Expecting Higher Real Sales increased the most, up +9 points, but is still a net negative -9%. Businesses increasing Current Job Openings fell the most, losing -6 points to a positive +34%, the highest of the ten components. Overall, five of the ten components rose, three fell, and two were flat. Of note, the small businesses have never been more uncertain. The Uncertainty Index shot up +11 points to 103, the highest level on record. “Small business owners are feeling more uncertain than ever,” said NFIB Chief Economist Bill Dunkelberg. “Uncertainty makes owners hesitant to invest in capital spending and inventory, especially as inflation and financing costs continue to put pressure on their bottom lines. Although some hope lies ahead in the holiday sales season, many Main Street owners are left questioning whether future business conditions will improve.” 
• U.S. Consumer Credit rose by $8.93 billion in August, which was well short of expectations for $12.0 billion and down sharply from the prior month’s $26.63 billion (which was revised higher from the initially reported $25.45 billion). That’s just a +2.1% annual growth rate, down from a +6.3% annualized growth rate the prior month. Typically, the use of credit only rises that slowly around a recession, a sign that households are feeling more financial distress. Growth for revolving credit, such as credit cards, fell by -1.2% after, which is the second decline in the past three months. That follows a +9.2% jump the prior month, which was the most in five months. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, increased +3.3% following the prior month’s +5.2% rise. 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. Americans have been increasingly relying on credit cards and other forms of financing to support spending as wage growth slows, pandemic savings fade, and higher prices continue to bite.
• According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit narrowed to -$70.4 billion in August from -$78.9 billion the prior month, which was the widest in 19 months. That was slightly narrower than the expected -$70.5 billion. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. Exports, primarily Capital Goods and Consumer Goods, rose by +$5.3 billion from the prior month, while Imports fell by $3.2 billion. Over the eight months of the year, exports are up +3.9% compared to the same period last year, while imports have risen +4.9%.
• The Census Bureau reported Wholesale Inventories for August rose +0.1%, a tick below expectations of +0.2% which is where they were the prior month. Year-over-Year (YoY) inventories were up +0.6%. Inventories are goods produced for sale that have not been sold yet. Inventories have only added to GDP growth once in the past five quarters. Wholesale Trade Sales were down -0.1%, a sharp decrease from the unrevised +1.1% rise the previous month and well below an expected +0.4% rise. They are up +1.1% from 2023 levels. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio was unchanged at 1.35 months. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves.
• Weekly MBA Mortgage Applications fell -5.1% for the week ending October 4, following the prior week’s -1.3% slide. The Purchase Index slipped -0.1% following a +0.7% rise the prior week. The Refinance Index slumped -9.3%, following the prior week’s -2.9% drop. The average 30-Year Mortgage Rate ticked up 6.36% from 6.14% the prior week, the second straight week of increases, which hasn’t happened since May.
• Weekly Initial Jobless Claims increased +32,000 to 258,000 for the week ending October 5, far above expectations for 230,000. The prior week was unrevised. The number of people already collecting unemployment claims (i.e., Continuing Claims) jumped +42,000 to 1,861,000 in the week ending Sept 28, above expectations for 1,830,000. Last week’s reading of 1,826,000 was revised down to 1,819,000.

The Week Ahead

The macro calendar is very light this week. No major releases are scheduled for Monday in observance of Columbus Day, a national holiday. In fact, most of the action doesn’t come until Thursday when reports include the Census Bureau’s advanced reading on Retail Sales for September, the National Association of Home Builders’ Housing Market Index for October, and Industrial Production. On Friday, the Census Bureau will also report Building Permits and Housing Starts data for September. Other noteworthy events include the European Central Bank’s (ECB) interest rate decision on Thursday. The ECB is expected to deliver its third quarter-point interest-rate cut since June, taking its benchmark rate target to 3.25%.

Third-quarter earnings season may fill the news gap from the sparse economic reports, with nearly 10% of S&P 500 companies scheduled to report. Bank of America, Citigroup, Goldman Sachs Group, Johnson & Johnson, United Airlines Holdings, UnitedHealth Group, and Walgreens Boots Alliance all release earnings on Tuesday. ASML Holding, Morgan Stanley, and Prologis publish quarterly results on Wednesday. Thursday’s earnings highlights include Intuitive Surgical, Netflix, and Taiwan Semiconductor Manufacturing, then American Express and Procter & Gamble close the week on Friday. 

Did You Know?

GETTING GREEDY – On October 11, CNN’s Fear and Greed index reached 74, its highest “Greed” reading since March 7, a sign that investor complacency is elevated. A level of 75 to 100 is considered “Extreme Greed”. The index is a compilation of seven different indicators that measure some aspect of stock market behavior, such as market momentum, stock price strength, stock price breadth, put/call options, junk bond spreads, market volatility, and sage haven demand (Source: CNN).

GUIDANCE COUNSELING – Earnings season began last week, with major banks and brokers reporting their third quarter profits. Of the 229 companies that have reported earnings since the last earnings season ended in mid-August, about 15% of them have lowered forward guidance, which is +6 percentage points higher than the 10-year average (Source: Bespoke Investment Group).

VOLATILITY – While October has historically been a better month for the stock market than September, it’s also one of the most volatile months of the year. Since 1945, October has seen the biggest average peak to trough decline of any month for the S&P 500 (-4.6%), and it’s also the month that has had the most 5% or greater drawdowns (Source: Bespoke Investment Group).

This Week in History

POUNDED – On October 7, 2016, the British pound tumbled dramatically in chaotic trading as jitters continued to reverberate through currency markets more than three months after the Brexit vote in which the United Kingdom voted to leave the European Union (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.