Weekly Market Update – September 22, 2023

Quick Takes

• U.S. stocks and bonds fell for a third straight week. The S&P 500 Index, Nasdaq Composite Index, and Russell 2000 Index all ended the week with losses of about -3% to -4%. Non-U.S. stocks fell about -2.1%. Meanwhile, U.S. and non-U.S. bonds were down -0.5%.
• The Federal Open Market Committee (FOMC) met this week and held rates steady, as expected, and signaled that a U.S. recession was less likely. But in a surprise, their economic projections were more hawkish than expected and indicated rates will be higher for longer.
• Among other reports, the August Leading Economic Index fell for the 17th month in a row, the preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) fell to its lowest level since February, and homebuilder confidence fell to its lowest level in five months.

Another rough week for stocks and bonds

The major U.S. stock indices have fallen for three weeks in a row to their lowest levels since early June. The S&P 500 Index was down -2.9% to its lowest level since June 12. The tech-heavy Nasdaq Composite Index lost -3.6% to end the week at its lowest level since June 8. Small caps fared even worse, with the Russell 2000 Index dropping -3.8%, now at its lowest level since June 1. It was the worst week for all three indexes since March. Although the Fed kept interest rates steady at its meeting on Wednesday, investors were no longer able to ignore their hawkish stance. Markets are clearly nervous about what is next from the Fed and whether the so-called ‘soft landing’ scenario is still plausible. Adding to concerns was the United Auto Workers strike, which was expanded to 38 General Motors and Stellantis parts-distribution facilities. Yields on Treasurys have continued to march higher as heightened risks of another government shutdown have added pressure for them to go higher. This is different from the debt ceiling debate that nearly shut down the government in the spring. This shutdown would see federal entities close down, and federal workers would have their paychecks delayed, but debt payments would continue to go out. But a non-default shutdown may not be too much of a hurdle for markets. The Wall Street Journal reports that there have been 20 federal government shutdowns since 1976, averaging eight days long. Stocks have risen during some and fallen in others, and the S&P 500’s average return is exactly 0.0% for all shutdowns since 1976.

Unlike last week, overseas stocks couldn’t buck the U.S. trend and remain positive, but they still managed to outperform their U.S. counterparts. Developed market international stocks (as measured by the MSCI EAFE Index) and the MSCI Emerging Markets Index fell -2.1%. The U.S. Dollar remains a headwind for non-U.S. assets as it rose another +0.25% for the week, the tenth consecutive positive week and at the highest level since early March.

With Treasury yields on the rise, Treasury notes are headed for their third consecutive losing year, something that has never happened before. The yield on the 10-year U.S. Treasury note crossed above 4.50% during the week and closed at 4.43%, the highest close since October 2007. The 2-year U.S. Treasury yield rose +8 basis points to 5.11%, its highest level since July 2006. Consequently, the Bloomberg U.S. Aggregate Bond Index fell -0.5%. It has declined for three straight weeks and is down in seven of the last nine weeks (bond prices move inversely to bond yields). Non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) also fell -0.5% for the week and are down in 12 of the last 14 weeks. 

Chart of the Week

On Wednesday, the Federal Reserve (Fed) voted unanimously to hold interest rates steady in a range of 5.25% to 5.5%, but they exposed some division over whether they should raise them once more this year, with most voting members expecting one more quarter-point interest rate hike before the end of the year. According to the Fed’s dot-plot forecast, 12 Fed officials penciled in another 25 basis point rate hike this year, while seven projected no more hikes. Most economists also expect the Fed to hike once more this year. In a clear hawkish message, the Fed indicated interest rates were expected to be “higher for longer” by cutting its forecast for rate cuts in 2024 from four to two, which would keep their benchmark rate still slightly above 5% by the end of 2024. In its latest statement, Fed officials upgraded their assessment of the economy, saying that activity was expanding at a “solid pace,” up from the description in July of “moderate” growth. Fed Chairman Jerome Powell said that officials didn’t need to decide yet whether to lift rates and that a hike would depend on the economic data. The Fed’s next meeting is on October 31- November 1.

Federal Reserve officials voted to hold interest rates steady

Federal-Funds Rate Target

Source: The Wall Street Journal.

Economic Review

• The Conference Board’s Leading Economic Index (LEI) fell for the 17th month in a row in August, down -0.4%, beating expectations for a -0.5% decline, but down a tick from the prior month’s -0.3% (which was -0.4% originally but was revised up to -0.3%). At 105.4, the LEI is the lowest level since June 2020. The last two times the index has fallen consecutively for this long coincided with the recessions that started in 1973 and 2008. The breadth of the index was negative, with six of the ten indicators tracked by the Conference Board negative, one unchanged, and three positive. On a year-over-year basis, the index was down -7.6%. Non-financial components, specifically New Orders and Consumer Expectations for Business Conditions, were the largest detractors, and two of the three Financial Component indicators, the Leading Credit Index and Interest Rate Spread, continued their slide. According to the Conference Board, “the U.S. Leading Economic Index has now fallen for nearly a year and a half straight, indicating the economy is heading into a challenging growth period and possible recession over the next year.”
• The preliminary “flash” S&P Global U.S. Purchasing Managers Indexes (PMIs) fell to its lowest level since February, slipping to 50.1 in September from 50.2 the prior month. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI remains in contraction, improving to 48.9 from 47.9 the prior month, beating expectations of 48.2. The Services PMI slipped to an eight-month low of 50.1 from 50.5 the prior month, below expectations for 50.7. New orders, a sign of future demand, fell at the “strongest pace this year,” S&P said. However, businesses were hiring more people, which is a sign demand remains steady. Respondents still cite concerns with inflation, in large part due to higher energy prices.
• Homebuilder confidence fell again in September, with the National Association of Home Builders (NAHB) Housing Market Index (HMI) falling -5 points to 45, well under expectations to remain at 49 and the prior month’s 50 (levels above 50 indicate “good” building conditions). September marked the lowest level in five months as demand sinks, with mortgage rates now above 7%. The share of builders cutting home prices to boost demand rose to its highest level in nine months, moving up to 32% in September from 25%. Like the prior month, all three subcomponents declined, with Current Sales down -6 points, Sales Expectations (in the next six months) down -6 points, and Traffic of Prospective Buyers off -5 points. Sentiment fell across all four major US regions. 
• August Housing Starts fell -11.3% to a seasonally adjusted annual rate of 1,283,000 units, down from a negatively revised 1,447,000 units in July (originally 1,452,000), far below expectations for 1,439,000 units and the lowest level since June 2020. Single-family fell -4.3%, while multi-family units plunged -26.3%. Building Permits, one of the leading indicators tracked by the Conference Board, rose +6.9% after the prior month’s unrevised +0.1% increase and well above expectations for a -0.2% decline. It was the best month for new permits since October 2022. Single-unit permits were up +2.0%, while permits for buildings with at least five units or more surged by +14.8%. 
• The National Association of Realtors (NAR) reported that Existing Home Sales fell again in August to a seven-month low, intensifying the worst U.S. housing slump in more than a decade. Existing home sales make up most of the housing market but fell -0.7% to a seasonally adjusted annual rate of 4.04 million, shy of expectations for 4.10 million and the prior month’s unrevised 4.07 million. The Midwest was the only region to rise, up +1.0%, but the other regions were unchanged or down. Sales dropped the most in the West, down -2.6%. On a year-over-year basis, home sales were down -15.3%. The Median Existing Home Price rose to $407,100 from $405,700 the prior month and is up +3.9% from a year ago. Homes for sale fell to 1.10 million, down -0.9% from July and down -14.1% from a year ago, but up from June’s record low of 960,000 units.
• Manufacturing in the Federal Reserve’s Third District fell in September, with the Philly Fed Manufacturing Business Outlook Survey falling back to -13.5 from an unrevised +12.0 the prior month, far below expectations of -1.0. This is the 14th negative reading in the last 16 months (readings below zero indicate contracting economic conditions). New Orders plunged to -10.2 from +16.0 the previous month. The Shipments index fell 9 points to -3.2. The Six-Month Business Outlook rose to +11.1 from +3.9. On the negative side, the Prices Paid index increased again, and Employment fell further into contraction.
• Weekly MBA Mortgage Applications rose +5.4% for the week ended September 15, following the prior week’s -0.8% decline. The Purchase Index rose +2.3% following a +1.3% rise the prior week, and the Refinance Index surged +13.2% following a -5.4% decline the prior week. The average 30-year Mortgage Rate rose to 7.31%, which is +1.06 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims fell -20,000 to an eight-month low of 201,000 for the week ended September 9, below expectations for 225,000 and last week’s 221,000 (revised up from 220,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -21,000 to 1,662,000 in the week ended September 9, below consensus for 1,692,000 and down from last week’s reading of 1,683,000 (revised down from 1,688,000).

The Week Ahead

The economic calendar gets busier next week after two relatively light weeks. A big focus will come at the end of the week with the Personal Consumption Expenditures (PCE) Price Index for August due on Friday and may offer further clues to the path of the economy and inflation. Core PCE, which excludes food and energy components, is the Federal Reserve’s preferred inflation gauge and is expected to be up +3.9% from a year ago. Other reports due next week include the Conference Board’s Consumer Confidence Index for September on Tuesday, New Home Sales for August on Tuesday, Durable Goods for August on Wednesday, and the third and final estimate of second-quarter Gross Domestic Product (GDP) growth on Thursday, which was reduced to 2.1% from 2.4% last month in the second estimate.

Did You Know?

A LOT OF TWINKIES – A deal to sell Hostess, the maker of the Twinkie and other snack cakes, to J.M. Smucker is valued at $4.6 billion. Hostess’s journey from near death—twice—to the subject of a frenzied bidding war has played out as the nation’s food giants scramble to appeal to consumers after raising prices on nearly everything they sell at grocery stores (Source: The Wall Street Journal).

HOURLY WAGES – The starting wage for temporary workers at GM, Ford, and Stellantis factories is $16. The use of temps is a main point of debate as the United Auto Workers continue their strike. The union wants fewer of these workers and a faster path to full-time status, which can roughly double their pay over eight years. The Detroit Three say that temps provide flexibility, which is key for the transition to electric vehicles and production fluctuations. They offered about $20 an hour in the next four-year contract and have pointed to tens of thousands of temps who became full-timers in recent years (Source: The Wall Street Journal).

EXPENSIVE APPLE – The average nightly rate for a New York City hotel in August hit $260—roughly +17% more than the same month in 2019 and the Big Apple’s highest rate for August since 2008, according to data firm CoStar. The U.S.’s hardest-hit hotel market is poised for a comeback thanks to increased tourism, restrictions on Airbnb listings, and a limited supply of rooms (Source: CoStar, The Wall Street Journal).

This Week in History

WHEN GENIUS FAILED – 25 years ago this past weekend, Roger Lowenstein wrote “When Genius Failed.” The book is the epic tale of hubris and financial peril that came to a dramatic climax when hedge fund Long Term Capital Management (LTCM) had to be rescued by a group of firms corralled by the Federal Reserve. The fund’s bets were so large and used so much borrowed money that they threatened to blow the global financial system. LTCM’s roster included two Nobel Prize winners and a dream team of modern finance, giving them – and the financial world – false confidence in the fund’s safety” (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.