Weekly Market Update – October 13, 2023

Quick Takes

• Hamas terrorists launched the deadliest attack on Israel in its history on Saturday, October 7. Within hours of the surprise attack, Prime Minister Netanyahu declared, “Israel is at war.” The conflict has the potential to become a proxy war between the U.S. and Iran.
• The Israel-Gaza conflict sent oil prices up nearly +6% for the week while safe haven assets rallied. Gold was up +5.5% over the week, the U.S. dollar gained +0.6, and the 10-year Treasury note yield fell below 4.58%.
• Despite the battle in the Mideast, the S&P 500 Index closed up +0.5% for the second week in a row, following four weeks of negative performance. However, the Nasdaq Composite Index and Russell 2000 Index couldn’t stay positive and lost -0.2% and -1.5%, respectively.

Markets digest Israel-Hamas war and inflation data

The sleepy, slow news days of summertime are well behind us. Suddenly, investors find themselves grappling with not just Federal Reserve policy and corporate earnings but now dealing with a burgeoning autoworker strike here in the U.S. and the fog of war in the Mideast.  It was a volatile week on Wall Street, with markets opening on edge Monday after Hamas terrorists launched the deadliest attack on Israel in its history on Saturday. Within hours of the surprise attack, Israeli Prime Minister Benjamin Netanyahu declared, “Israel is at war.” Israel’s military ordered more than a million people to evacuate Gaza, indicating the start of a ground offensive. 

Despite the concern that the conflict has the potential to become a proxy war between the U.S. and Iran, the S&P 500 Index actually closed up +0.5% for the second week in a row following four weeks of negative performance. However, the Nasdaq Composite Index and Russell 2000 Index weren’t able to stay positive and lost -0.2% and -1.5%, respectively. Developed market international stocks (as measured by the MSCI EAFE Index) advanced +1.0, and the MSCI Emerging Markets Index was up +1.5%.

The Israel-Gaza war sent crude oil prices up nearly +6% for the week, while gold rallied +5.5%. The U.S. dollar gained +0.6%. Other safe haven assets were bid up early in the week but lost some of their luster by the end of the week. The 10-year Treasury note yield fell below 4.58% on Wednesday but moved back up to 4.61% to close the week – still a -19 basis point decline from the prior week (bond prices move inversely to bond yields). The Bloomberg U.S. Aggregate Bond Index gained +1.0% for the week, and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) were up +0.5%. 

It was a mixed week on the economic front, as inflation data largely came in stronger-than-expected but was countered by somewhat dovish signals from Federal Reserve officials. Consumer inflation (CPI) exceeded expectations, and even the so-called supercore CPI measure — core services except for housing — watched closely by the Fed, rose +0.6% for the month of September, its third consecutive monthly increase. Inflation expectations over the next year also came in higher than expected in the most recent University Of Michigan Consumer Sentiment Survey, while the preliminary sentiment index itself dropped to its lowest level since May. The minutes of the Federal Open Market Committee’s September meeting reinforced that rates will stay higher for longer as all of the members of the committee agreed that policy must remain restrictive for some time.

Chart of the Week

Inflation rose again in September, and by more than expected, reinforcing the difficulty the Federal Reserve (the Fed) will have in getting back to its target of a +2% annual rate. The headline Consumer Price Index (CPI) rose +0.4% in the month of August, down from last month’s unrevised +0.6% but higher than the +0.3% consensus expectations tracked by Bloomberg. Core CPI, which excludes the more volatile food and energy prices, was up +0.3% for the month, unchanged from last month and in line with expectations. On a year-over-year (YoY) basis, headline CPI rose +3.7%, unchanged from the annual rate last month but higher than the +3.6% expected. For Core CPI, the YoY rate was +4.1%, matching expectations and down from +4.3% the month before. Both measures are well off their 2022 peak levels but remain about twice the Fed’s +2% target.   Shelter 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. On a monthly basis, shelter accounted for more than half the rise in the CPI. Services prices, considered a key for the longer-run direction for inflation, also posted a +0.6% gain, excluding energy services, and were up +5.7% on a YoY basis. Energy costs rose +1.5%, including a +2.1% pickup in gasoline prices and +8.5% in fuel oil, and food was up +0.2% for the third month in a row. On a 12-month basis, food costs climbed +3.7%, including a +6% increase for food away from home, while energy costs were off -0.5% YoY. With services and shelter costs the main culprits of the ‘sticky’ inflation, there’s little chance of the Fed achieving its goal anytime soon without those components coming down.

Getting to 2% inflation won’t be easy

U.S. Consumer Price Index (CPI) Year-over-Year percent change

Data as Of Oct 12, 2023.
Note: Shaded area indicates recession.
Source: Bureau of Labor Statistics, CNBC.

Economic Review

• September wholesale inflation was hotter than expected, with headline and core prices accelerating from the prior year. The Producer Price Index (PPI) rose +0.5% for the month, above expectations of +0.3% but down from 0.7% the prior month. Year-over-year (YoY) PPI was up +2.2%, higher than the expected +1.6% and last month’s +2.0, which was revised up from the initially reported +1.6%. Core PPI, which strips out volatile food and energy costs, was up +0.3% for the month, above expectations and the prior month, which were both +0.2%. Year-over-year, Core PPI was up +2.7%, ahead of expectations for +2.3% and the prior month’s +2.5% (revised up from +2.2%).  For the second straight month, goods prices outpaced service costs, a break in the recent trend. The cost of wholesale energy was up another +3.3% following the prior month’s +10.3% surge. August to drive the increase in the PPI. The cost of services, a major driver of inflation, rose a modest +0.2% last month. 
• September Import Prices rose modestly, up +0.1%, below expectations for +0.5% and the prior month’s +0.6% (revised up from +0.5%). Year-over-year, import prices were down -1.7%, versus expectations for -1.4% and the prior month’s -2.9% drop (revised up from -3.0%). Imported fuel prices rose +6.7% in August, the biggest gain since March 2022, after a +3.6% rise the prior month. Nonfuel import prices were declined for the month. Export Prices were up +0.7%, following the prior month’s +1.1 jump.
• The preliminary October report of the University of Michigan Consumer Sentiment Index fell for the third straight month to 63.0 from 68.1 the prior month, missing expectations for 67.0 and hitting the lowest level since May. The Current Economic Conditions component dropped to 66.7 from 71.4 the prior month. The Consumer Expectations component sank to 60.7 from 66.0 the prior month. One-year inflation expectations jumped to +3.8% from +3.2%, which is the highest level since April. The five-year inflation expectations also rose to +3.0% from +2.8% the month before. “Assessments of personal finances declined about -15%, primarily on a substantial increase in concerns over inflation, and one-year expected business conditions plunged about -19%,” said Joanne Hsu, director of UMich consumer surveys.
• The Small Business Optimism Index slipped in September and remains below the long-term average, as inflation remains a top problem. The National Federation of Independent Business (NFIB) reported that business optimism fell to 90.8 for the month from 91.3 the prior month, missing expectations for 91.0. The decline was led by a -6 percentage point drop in the Expect Economy to Improve index, dropping it to -43%, the lowest of the 10 components. Expected Credit Conditions also deteriorated by -4 points to a net -10%. Five of the components increased, led by Current Job Openings index, which increased +3 percentage points to +43% of respondents. Not surprisingly, +23% plan to raise compensation in the next three months, though that is down three points from the prior month. Concerns over inflation were unchanged but remain extraordinarily high as energy prices have risen. Inflation was tied with quality of labor as the most important problem in September.
• The Census Bureau reported Wholesale Trade for August, which saw year-over-year Inventories drop for the sixth straight month.  Inventories fell -0.1% to a seasonally adjusted $900.2 billion, in line with expectations and the prior month’s drop, which were both -0.1%. Year-over-year inventories were down -1.0%. Sales jumped +1.8% to a seasonally adjusted $662.3 billion but were down -1.7% from the revised year-ago level. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio fell to 1.36 months from 1.39 months in the prior month.
• Weekly MBA Mortgage Applications rose +0.6% for the week ended October 6, following the prior week’s -6.0% decline. The Purchase Index rose +1.0% following a -5.7% drop the prior week, and the Refinance Index inched up +0.3% following a -6.6% decline the prior week. The average 30-Year Mortgage Rate rose to 7.67%, which is +1.06 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims were unchanged at 209,000 for the week ended October 7 (revised up from 207,000), under expectations for 210,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +30,000 to 1,702,000 in the week ended September 30, above consensus for 1,676,000, and up from last week’s reading of 1,672,000 (revised up from 1,664,000).

The Week Ahead

Economic data reports this week include the Census Bureau’s Retail Sales data, the Federal Reserve’s latest Beige Book, and the Conference Board’s Leading Economic Index, which has posted 17 straight months of declines. There is also plenty of housing data on deck, with the National Association of Home Builders Housing Market Index for October, the Census Bureau reports September Housing Starts, and the National Association of Realtors releases Existing Home Sales for September. Investors will also get a glimpse into the health of corporate America, with more than 50 S&P 500 companies reporting earnings, including Bank of America and Goldman Sachs on Tuesday, Tesla and Netflix on Wednesday, American Airlines and Taiwan Semiconductor on Thursday, and American Express and Schlumberger on Friday. On October 19, Federal Reserve Chairman Jerome Powell will deliver a key speech as the blackout period for Fed speakers ahead of the next FOMC meeting rapidly approaches.

Did You Know?

DIET COLA – The cost-of-living adjustment (COLA) for Social Security in 2024 will be +3.2%, the Social Security Administration reported. This translates to an average increase of about $60 a month for recipients. In the prior two years, retirees got much bigger than usual COLA as inflation soared. In 2023, Social Security recipients received a +8.7% bump, the highest COLA in more than 40 years. The average COLA over the last 20 years is +2.6%, according to the nonpartisan Senior Citizens League (Source: Social Security Administration, The Wall Street Journal).

ARE WE THERE YET – NASA has launched its first mission to study a metal-rich asteroid. The spacecraft is heading to Psyche, first discovered in the 1850s, and scientists say the $1 billion-plus mission could tell us more about Earth’s origins. They believe Psyche is the exposed metallic core of a planet that never formed. Most asteroids are made of rock and ice. The spacecraft is expected to reach Psyche in 2029 (Source: The Wall Street Journal).

RECORD PRODUCTION – U.S. crude oil production hit a weekly record early this month. The Energy Information Administration said weekly crude output climbed to 13.2 million barrels a day in the week ended Oct. 6, beating the previous record of 13.1 million barrels set in March 2020. The production data, alongside a larger-than-expected increase in inventories, originally pushed crude prices lower, but with the Middle East conflict, prices were up +6% over the past week (Source: The Wall Street Journal).

This Week in History

RACE – On October 12, 1990, the great bull market of the 1990s began as the Dow Jones Industrial Average edged up +9.90 points to close at 2,407.92. Stocks would more than quadruple throughout the following decade (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.