Weekly Market Update – September 13, 2024

Quick Takes

• The S&P 500 Index rebounded from its worst week since March 2023 (-4.3%) with a +4.0% gain, which is its best week since November 2023. It was the first time since June 2022 that the benchmark index fell at least 4% in one week and then rallied more than 4% the next.  
• The prior week’s pullback had been driven by a growth scare after a batch of soft economic data, particularly with the labor market. Last week the narrative reversed after inflation data continued to moderate and paved the way for the Fed to cut interest rates this week.
• Bonds also rallied as U.S. Treasury yields reached year-to-day lows as the benchmark 10-year U.S. Treasury yield fell -6 basis points to close at 3.65%. With treasury yields falling, the Bloomberg U.S. Aggregate Bond Index advanced +0.5% for the week.

Source: Bloomberg. Data as of September 13, 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.

Market jitters disappear, stocks rally, and bonds rise too

The S&P 500 Index rebounded from its worst week since March 2023 (-4.3%) with a +4.0% gain, which is its best week since November 2023. It was the first time since June 2022 that the benchmark index fell at least 4% in one week and then rallied more than 4% the next. All sectors were up except Energy, which slipped -0.5%. Technology led with a +8.1% gain and powered the Nasdaq Composite Index to a +6.0% gain. Small cap stocks also participated in the rally, with the Russell 2000 Index rising +4.4%. The rally was enough for the major indexes to regain most of their September losses after a tough start to the month. The prior week’s pullback had been driven by a growth scare after a batch of soft economic data, particularly with the labor market. Last week the narrative reversed after inflation data continued to moderate and paved the way for the Federal Reserve (the Fed) to cut interest rates this Wednesday. The only question that remains is how much will the Fed cut? On Wednesday, the odds that the Fed will cut interest rates by a quarter point strengthened rather than a bigger 50 basis point move. That was because Core CPI data came in slightly hotter than expected despite the headline CPI being in line with expectations. Still, according to the CME FedWatch tool, Fed-funds futures still place a 45% chance of the half-point cut, up from 28% on Thursday. It still seems the inflation and labor market data likely haven’t been enough to sway Fed Chairman Jerome Powell and a majority of members of the FOMC to go for a larger cut than 25 basis points. 

In other central bank news, the European Central Bank (ECB) cut interest rates to 3.5% from 3.75%, its second rate cut in three months. That and the U.S. rally helped developed market international stocks (as measured by the MSCI EAFE Index) rise +1.2%. Emerging market stocks (the MSCI Emerging Markets Index) were up a more modest +0.7% as Chinese equities continue to weigh on that index with a -2.2% decline for the Shanghai Composite Index.

Bonds also rallied as U.S. Treasury yields reached year-to-day lows. The yield on the benchmark 10-year U.S. Treasury note fell -6 basis points to close at 3.65%. The shorter 2-year U.S. Treasury note, which is influenced more by the Fed funds rate, was also down -6 basis points to close at 3.58%. With treasury yields falling, the Bloomberg U.S. Aggregate Bond Index advanced +0.5% for the week, and non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were just behind with a gain of +0.4%.

Chart of the Week

The headline rate of inflation for consumer goods and services was unchanged in July, but core prices ticked up. The headline Consumer Price Index (CPI) was up +0.2%, in line with expectations and the prior month’s unrevised rate. Year-over-year (YoY) CPI grew at a +2.5% rate, matching expectations and down from the prior month’s unrevised +2.9% annual rate. That’s the lowest level since early 2021. However, Core CPI, which excludes the more volatile food and energy prices, was up +0.3% for the month, a tick above the prior month’s +0.2%, where it was expected to stay and the biggest increase in five months. YoY Core CPI was +3.2% as expected, unchanged from the prior month, which is its lowest level in three years. The Federal Reserve and Wall Street generally consider the core rate as a better predictor of future inflation. Inflation in some core services categories – including housing rents and car insurance – remains elevated.

U.S. consumer price index

Month-over-month percent change | January 2021–August 2024

Source: U.S. Bureau of Labor Statistics via FRED, CNBC.
Note: Seasonally Adjusted

Economic Review

• Wholesale inflation rose less than expected in July. The headline Producer Price Index (PPI) rose +0.2%, up from +0.1% the prior month, where it was expected to stay. Year-over-year (YoY) PPI came in at 1.5%, matching expectations and down from the prior month’s +2.1% rate (which was revised lower from +2.2%). Core PPI, which strips out volatile food and energy costs, was up a tick to +0.3% from last month’s -0.2% (revised lower from the originally reported flat reading) and above expectations to come in at +0.2%. YoY Core PPI was up +1.7%, in line with expectations and the lowest level in six months. That’s down from the prior month’s +2.1% annual pace (revised lower from +2.2%). Goods inflation was unchanged for the month and the year, but the price of Service inflation rose +0.4% for the month, leaving it at a +2.7% annual rate. Notably, raw-material prices sank by -3.7% largely because of cheaper energy. Typically, PPI tends to take 2-3 months to migrate into CPI. 
• Imports Prices fell -0.3% in August, more than the expected -0.2% decline and down from the prior month’s +0.1% reading. Lower gasoline prices were largely responsible for the negative print, but import prices ex-petroleum also slid -0.1%, down from +0.1% the prior month, revised lower from +0.2% where it was expected to stay. Year-over-year, the cost of imports was up a modest +0.8%, a sharp deceleration from the +1.7% annual rate the prior month (which was revised up from the originally reported +1.6%). Export Prices fell -0.7%, far below expectations of -0.2%, and down sharply from the prior month’s +0.5% (revised down from +0.7%). Export prices slid -0.7% over the past year, far above expectations for a +1.4% rise and the prior month’s +1.2% annual rate (revised down from the originally reported +1.4% rise).
• The preliminary reading of the September University of Michigan Consumer Sentiment Index climbed to 69.0, a four-month high, and up from the 67.9 final reading from the prior month. That was ahead of expectations for 68.5. The Current Economic Conditions component was 62.9, up from last month’s 61.3, which is the weakest level since December 2022. The Consumer Expectations component however, rose to 73.0 from 72.1, ahead of expectations for 72.2. One-year inflation expectations slipped to +2.7%, which was just under expectations for a 2.8% reading, and the lowest level since 2020. However, the five-year inflation expectations came in at +3.1%, up a tick from the prior month’s +3.0%, where it was expected to stay.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index fell by 2.5 points to 91.2, breaking four straight months of increases and erasing all of July’s gain. All but two of the 10 components lost ground, with just Plans to Make Capital Expenditures and Current Job Openings increasing slightly. Business owners Outlook for General Business Conditions dropped -6 to -13. Actual Earnings Changes dropped -7 to -37. “The mood on Main Street worsened in August, despite last month’s gains,” said NFIB Chief Economist Bill Dunkelberg.
• U.S. Consumer Credit surged by $25.5 billion in July, the most since November 2022, far above expectations for $10.4 billion, and up sharply from the prior month’s $5.3 billion (which was revised down from the initially reported $8.9 billion). That’s a +6.0% annual growth rate, up from the +2.7% annualized growth rate the prior month. Growth for revolving credit, such as credit cards, increased by +10.6% from a -0.4% dip the prior month, 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 +14.8% following the prior month’s +5.6% 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.
• The Census Bureau reported Wholesale Inventories for July rose +0.2%, in line with expectations and down from +0.3% the prior month. Year-over-Year (YoY) inventories were up +0.4%. 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 up +1.1%, a sharp increase from the -0.3% the previous month (revised up from -0.6%) and higher than the expected +0.3% rise. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio fell to 1.35 months from 1.36 the prior month. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves.
• Weekly MBA Mortgage Applications rose +1.4% for the week ending September 9, following the prior week’s +1.6% rise. The Purchase Index increased +1.8% following a +3.3% rise the prior week. The Refinance Index slipped +0.9%, following the prior week’s -0.3% dip. The average 30-Year Mortgage Rate slid to 6.29% from 6.43% the prior week, the sixth straight weekly decline and the lowest level since February 3, 2023.
• Weekly Initial Jobless Claims slipped -5,000 to 227,000 for the week ending August 31, just under expectations for 230,000. The prior week was revised up to 232,000 from the originally reported 231,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +5,000 to 1,850,000 in the week ending August 31, in line with consensus estimates. Last week’s reading of 1,838,000 was revised down to 1,845,000.

The Week Ahead

The biggest economic event this week is the highly anticipated interest-rate decision by the Federal Open Market Committee (FOMC) on Wednesday afternoon. Federal Reserve policymakers have signaled they will cut rates at the meeting, but there remains uncertainty about whether it will be by a quarter of a percentage point (0.25%) or by a half point (0.50%). Investors will also be closely watching Fed officials’ updated economic and rate projections for the coming years.

Other economic events are heavy on housing market reports. Tuesday brings the NAHB Housing Market Index. Wednesday has weekly MBA Mortgage Applications, Building Permits, and Housing Starts. And on Thursday, we get Existing Home Sales. Outside of the housing sector, on Tuesday the Census Bureau reports the advanced Retail Sales data for August. On Thursday, the Conference Board will release the latest Leading Economic Index. On Friday morning, the Bank of Japan is expected to keep its benchmark interest rate target unchanged at 0.25%.

Did You Know?

LATE SEPTEMBER DECLINES – Over the last 25 years, September has been the S&P 500’s weakest month, with an average decline of -1.7%. September’s declines tend to be back-end loaded, though, as the index’s average change in the second half (9/15 to 9/30) has been a decline of -1.8% (Source: Bespoke Investment Group).

OFFICE VALUES PLUMMET – According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the value of U.S. office properties declined -14.4% on a year-over-year total return basis through 6/30/24. Besides the previous four quarters, where year-over-year returns were even worse, the only more negative readings were during the Financial Crisis in 2009 (Source: Bloomberg).

CURVE UN-INVERTS – On 9/4/24, the spread between the yields of the 10-year and 2-year US Treasuries turned positive for the first time since 7/1/22, ending what was the longest period of inversion for this part of the yield curve on record. Since 1976, there have been six other periods when the 10-year and 2-year yield curve inverted for at least three months. After the curve un-inverted in those six periods, the S&P 500’s median 6-month performance was a gain of +8.7%, with positive returns five times (Source: Bespoke Investment Group).

This Week in History

CURB YOUR ENTHUSIASM – On September 12, 1836, the New York Stock Exchange prohibited members from trading on the street outside. But open-air trading persisted under the nickname of “the Curb” in what was to become a forerunner of the American Stock Exchange (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.