Weekly Market Update – October 25, 2024

Quick Takes

• U.S. stocks ended their longest weekly winning streak of the year as the S&P 500 slipped -1.0% last week, ending six positive weeks. The small cap Russell 2000 was down -3.0%, but the Nasdaq Composite was able to buck the trend and eke out a small gain of +0.2%.
• Developed market international stocks also fell, with the MSCI EAFE Index down -2.0% for the week, as economic activity in the U.K., France, and Germany was sluggish. The MSCI Emerging Markets Index was down -1.8% despite modest gains by Chinese equities.
• Treasury rates retreated throughout the week, driven by lowered expectations for Fed rate cuts. The yield on the 10-year and 2-year U.S. Treasury notes each jumped +16 basis points to end the week at 4.24% and 4.10%, respectively. U.S. and non-U.S. bond indices fell -0.9%.

Source: Bloomberg. Data as of October 25, 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.

Win streak ends for stocks, but bonds didn’t fare much better

U.S. stocks couldn’t keep their longest weekly winning streak of the year alive. The S&P 500 Index slipped -1.0% last week, ending six positive weeks. Small caps struggled even more, with the Russell 2000 Index falling -3.0%. The Nasdaq Composite Index was able to buck the trend and eke out a small gain, to extend its win-streak to 7 weeks, but just barely with a +0.2% advance. It was an unusually volatile week, with disparate performance across the main indices and sectors after weeks of relatively low dispersion and steady gains. Large cap stocks were hampered by disappointing quarterly earnings from big blue chip names like 3M, Boeing, GE Aerospace, and Honeywell, plus a pullback in McDonald’s following reports of an E. coli outbreak across 13 states. The Nasdaq, on the other hand, was helped by an upside surprise in profits by Magnificent Seven member Tesla, which released one of its best quarterly earnings reports in years and forecasted stronger growth in 2025. The stock surged 22.0% for the week, its best week since a +27% return for the week of July 5th. You have to go back to January 2023 to find a better week, and over that span, there were 9 weeks that the stock had double-digit losses. Tesla now has a market capitalization larger than the combined values of General Motors and Ford. We’ll see if the other Magnificent Seven cohort can keep up Tesla’s momentum, with five more reporting earnings this week. Alphabet (Google) releases earnings on Tuesday; Microsoft and Meta Platforms (Facebook) report on Wednesday; while Amazon.com and Apple report on Thursday. Combined, those companies represent $12 trillion in market cap, or about 23% of the S&P 500. 

Performance wasn’t any better overseas. Developed market international stocks (as measured by the MSCI EAFE Index) fell -2.0% for the week, while emerging market stocks (the MSCI Emerging Markets Index) were down -1.8%. Business activity in the euro area remained in contractionary territory in October, according to S&P Global’s early estimate of the composite Purchasing Managers’ Index (PMI), which combines manufacturing and service sector activity. The preliminary euro area PMI was 49.7 in October, down from 49.6 in September (PMIs below 50 indicate economic contraction). France and Germany, the two largest economies in Europe, were the primary contributors to the weakness. The United Kingdom (U.K.) preliminary October composite PMI also disappointed, hitting an 11-month low of 51.7, down from 52.6 in September. Chinese equities were up modestly but not enough to offset weakness across the remaining emerging markets complex. The U.S. dollar was also up slightly, gaining +0.8%, which is a headwind for non-U.S. assets.

A broad-based sell-off in the bond market, driven by lowered expectations for Federal Reserve (Fed) rate cuts, also put pressure on stocks. Equities seemed to take cues from U.S. Treasurys after the futures market priced in lower odds of Fed rate cutting. Treasury rates retreated throughout the week, with the yield on the benchmark 10-year U.S. Treasury note jumping +16 basis points to end the week at 4.24%. The shorter 2-year U.S. Treasury yield was also up +16 basis points to close at 4.10%. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index slipped -0.9% for the week, as did non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index. 

The Week Ahead

The economic calendar is busy this week, with the highlight of the week coming on Friday with the October Employment Situation Report. Economists are expecting the Bureau of Labor Statistics (BLS) to report a gain of 108,000 nonfarm payrolls, after a 254,000 increase in September. The unemployment rate is expected to hold steady at 4.1%. On Tuesday, the BLS will also publish the Job Openings and Labor Turnover Survey (JOLTS) for September. Other data to watch will be the Bureau of Economic Analysis’s advance estimate of third-quarter Gross Domestic Product (GDP) on Wednesday and the Personal Consumption Expenditures Price Index for September on Thursday. It is also the biggest week of third-quarter earnings, with more than 150 S&P 500 companies scheduled to report profits. Next week’s earnings reports, the employment report, and the approaching U.S. election on November 5th has the potential to make for some wild action in the markets in the week ahead. Outside the U.S., the Bank of Japan (BoJ) will announce a monetary-policy decision on Thursday. The BoJ is expected to keep its benchmark interest-rate target at 0.25%, but any deviation from that could also jolt the market, as it did back in the first week of August. 

Chart of the Week

Home sales fell to the lowest level in 14 years, as home buyers withdraw ahead of the November elections. The National Association of Realtors (NAR) reported that Existing Home Sales fell -1.0% in September to a seasonally adjusted annual rate of 3.84 million units, below expectations for 3.88 million units, which is where it was the prior month after being revised higher from 3.86 million units. Year-over-year existing sales are down -3.5% versus the -4.2% annual rate the prior month. The Median Existing Home Price fell to $404,500, the third consecutive monthly decline after seven months of increases, but that is the highest price ever for the month of September. Year-over-year, home prices were up +3.0%, up from +2.5% the prior month. The Inventory of Homes for Sale was up +0.7% from the prior month and +22.7% from last year, to 1.35 million units, which is the highest level since October 2021. Unsold Inventory is at a 4.3-month supply, up from 4.2 months the prior month. Homes Listed for Sale remained on the market for 28 days on average, up from 26 days the previous month. First-Time Buyers were 26% of sales in the month, unchanged from the month before and stuck at an all-time low. Historically, these buyers make up closer to 40% of home sales, but affordability has been hit hard in the last two years due to fast-rising home prices and higher mortgage rates. All-Cash Sales rose to 30% of transactions. For the month, sales fell in three regions: the Northeast was up +4.2%, and the West was up +4.1%. The South was down -1.7% and the Midwest was down -2.2%.

Sales of existing homes are on track for the worst year since 1995

U.S. Existing Home Sales

Note: Seasonally adjusted at annual rate.
Source: National Association of Realtors, The Wall Street Journal.

Economic Review

• The preliminary “flash” S&P Global U.S. Composite Purchasing Managers Index (PMI) was 54.4 in September, slipping from 55.7 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI improved to 47.8 from 47.3 the prior month, a bit better than expectations for 47.5. The Services PMI ticked up to 55.3 from 55.2 the prior month and ahead of expectations for 55.0. The service side of the economy — such as retailers, banks, and hospitals — employs most Americans and has driven the expansion since the pandemic. The S&P Global “flash” PMI surveys are among the first indicators of each month to give a sense of how well the U.S. economy is doing. The best news in the report may have been the smallest increase in prices since May 2020, mainly in the service sector. Services have been the biggest source of inflation in the past two years. Employment fell for the third month in a row, but businesses turned more optimistic about the coming year. New Orders, a sign of future sales, rose at the fastest clip in 17 months. Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “October saw business activity continue to grow at an encouragingly solid pace, sustaining the economic upturn.” 
• The Conference Board’s Leading Economic Index (LEI) fell again in September, declining -0.5%, worse than the Wall Street forecast for a -0.3% drop, which is what the prior month’s fall was after being revised down from -0.2%. The index has declined in 29 of the last 30 months (rising only in February 2024). Breadth of the index was mixed, with five of the ten indicators tracking positive, four negative, and one unchanged. Stock Prices were the biggest contributor, rising +0.11%, with the Initial Jobless Claims the second best at +0.04%. ISM New Orders were the biggest detractor for the third straight month, falling -0.20% after a -0.23% decline the prior month. The LEI Coincident Index was up +0.1% for the month after a +0.2% rise the previous month. Meanwhile, the LEI Lagging Index was down -0.3% after being flat the previous month. “Overall, the LEI continued to signal uncertainty for economic activity ahead and is consistent with The Conference Board expectation for moderate growth at the close of 2024 and into early 2025,” according to Justyna Zabinska-La Monica, senior manager of business cycle indicators. 
• The Federal Reserve Bank of Chicago reported that U.S. economic activity was sluggish in September, as the Chicago Fed National Activity Index (CFNAI) fell to -0.28 from -0.01 the prior month (which was revised lower from the originally reported +0.12). That is far below the recent February high of +0.35. Readings below zero indicate below-trend-growth in the national economic activity. The CFNAI three-month moving average increased to -0.16 from -0.21 the month before but remains well off the low of -0.35 in December 2022. During the last 20 years, there has been a 91% correlation between the three-month index level and the quarterly change in real GDP. Two of the four broad categories of indicators used to construct the index increased from a month earlier. The Personal Consumption and Housing category contributed -0.01 in August, up from -0.03 the prior month. The Production and Income category contributed -0.21, down from +0.04 the prior month. The Employment, Unemployment, and Hours category contributed -0.03, down from neutral the prior month. The Sales, Orders, and Inventories category contribution was -0.03, unchanged from the prior month. Overall breadth of the index improved, with only 38 of the 85 individual indicators making positive contributions, down from just 39 the prior month.
• On Wednesday, the Federal Reserve released its Beige Book, which is a collection of business anecdotes from the 12 Federal Reserve districts used by policymakers to prepare for their next monetary policy decision. According to the latest book, the U.S. economy continued to paint a weak picture, with nine out of 12 regional district banks reporting flat or a slight decline in activity. Most districts reported declining manufacturing activity, and consumers were shopping for bargains. Housing activity continued to expand across the country, but uncertainty about the path of mortgage rates was keeping some homeowners on the sidelines. The survey said that inflation continued to cool in most districts. Prices of some food products, like eggs and dairy, did rise sharply. The sluggish report reinforces most economists’ expectations that the Fed will cut rates by a quarter percentage point at their next meeting in November.
• The final reading of the September University of Michigan Consumer Sentiment Index rose to a six-month high of 70.5, up from the preliminary 70.1 estimate, above expectations for a 69.0 reading, and higher than the prior month’s final reading of 68.9. Still, it remains far below the prepandemic peak of 101 in February 2020 and the post pandemic high of 88.3 in April 2021. The Current Economic Conditions component rose to 64.9 from the initial estimate of 62.7 and is up from the prior month’s 63.3. The Consumer Expectations component was revised higher to 74.1 from the initial estimate of 72.9 but down from 74.4 the prior month. One-year inflation expectations were +2.7%, down from the +2.9% initial estimate and unchanged from the prior month’s level. The five-year inflation expectations level was unchanged from the prior estimate and last month’s level of +3.0% as expected. 
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances and transportation equipment fell -0.8% in September, slightly better than the -1.0% decline expected. That follows a -0.8% slide the prior month (revised down from the initial flat 0.0% reading). The decline was largely due to fewer Boeing aircraft orders. Durable Goods Orders Excluding Transportation were up +0.4%, far above expectations for a -0.1% increase and only a bit lower than the prior month’s +0.6% gain (revised up from the originally reported +0.5% increase). The important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, improved +0.5% from an unrevised +0.3% the prior month and easily beat expectations for a +0.1% increase. Core Capital Goods Shipments, which are factored into GDP, fell -0.3% after dipping -0.1% the month before (revised lower from 0.0%). 
• The Richmond Fed Manufacturing Index improved to -14 in October from an unrevised -21 the previous month, beating expectations for an improvement to -17. All three component indexes improved but remain in contraction territory. The Shipments component rose to -8 from -18 the prior month. The New Orders index, part of the Shipments component, improved to -17 from -23. The Employment index improved to -17 from -22.  
• The Kansas City Fed Manufacturing Survey rose to -4 in October from -8 the month before. That was better than expectations for -7. Underlying details showed improvement in virtually all components, with the indexes for Production, Shipments, New Orders, Employment, and Average Workweek all better. The Kansas City Fed Service Sector Outlook Survey fell to +5 from -2 the prior month.
• The Commerce Department reported New Home Sales surged +4.1% in September to an annual rate of 738,000 units, compared to -4.7% drop the prior month (of 709,000 units, revised down from 716,000). That was the highest level since May 2023 and much better than expectations for a +0.8% increase to a 720,000 unit annual rate. New Home Sales data tend to be volatile month-on-month and are often revised. New-home sales remain far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes were up +6.3% compared to +9.8% the prior month. By region, month-over-month sales were up +23.7% in the Northeast, +5.8% in the South, flat in the West, and -2.5% in the Midwest (-5.8%). The Median New Home Price rose -4.6% year-over-year to $420,600 from $429,800 the prior month. The inventory of new homes for sale fell -3.8% after rising +6.8% the prior month. The months of supply at the current rate of sales was 7.6, up from 7.9 the prior month.
• Weekly MBA Mortgage Applications fell sharply for the week ending October 18, down -8.7% following the prior week’s -17.0% plunge. The Purchase Index fell -5.1% following a -7.3% drop the prior week. The Refinance Index dropped -8.4%, following the prior week’s -26.3% freefall. The average 30-Year Mortgage Rate was unchanged at 6.52%.
• Weekly Initial Jobless Claims retreated -15,000 to 227,000 for the week ending October 19, below expectations for 242,000. The prior week was revised higher to 242,000 from 241,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +28,000 to 1,897,000 in the week ending Oct 12, above expectations for 1,875,000. Last week’s reading of 1,867,000 was revised up to 1,869,000.

Did You Know?

FREIGHT FALLING – Freight shipments continue to fall, according to Cass Information Systems’ Transportation Index Report. After seasonal adjustments, freight shipments fell -1.45% month/month in September to their lowest level since July 2020 (Source: Cass Information Systems).

SHOP FROM HOME – Retail sales exceeded expectations for the fourth month in a row in September, rising 0.4% month/month. Online sales accounted for 17.44% of total sales, the second highest share on record, trailing only the 19.2% share at the height of the lockdowns in April 2020 (Source: US Census).

CORPORATE AI – Mentions of Artificial Intelligence (AI) and AI-related topics in earnings conference calls of more than 7,000 firms surged more than six-fold in the year after the release of ChatGPT. While earnings calls in Q4 2022 averaged just 0.35 sentences related to AI, the average frequency increased to 2.17 in Q3 2023 (Source: St. Louis Fed, MFS).

This Week in History

COPY THAT – On October 21, 1938, Chester F. Carlson created the world’s first photocopy in a lab in the Astoria neighborhood of Queens, N.Y. It took 21 years to bring his invention to market. (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.