Weekly Market Update – September 29, 2023

Quick Takes

• The S&P 500 slipped -0.7% for the week, its fourth straight weekly decline. The tech-heavy Nasdaq Composite and small cap Russell 2000 had slight gains for the week, up +0.1% and +0.5%, respectively. The MSCI EAFE sank -1.6% and the MSCI Emerging Markets fell -1.2%.
• Surging crude oil prices combined with concerns over increased government debt pressured yields higher. The yield on the 10-year U.S. Treasury note surged as high as 4.68% early Thursday, near 16-year highs, before easing to around 4.57% to close the week.
• Over the weekend, Congress averted a government shutdown by passing an extension to fund the government until mid-November. Late Saturday night, President Biden signed the legislation hours before the shutdown was set to occur.

Stocks and bonds can’t get out of their ruts

The S&P 500 Index fell for a fourth straight week, down -0.7%, as September lived up to its reputation for being a challenging month. The tech-heavy Nasdaq Composite Index and small cap Russell 2000 Index managed slight gains for the week, up +0.1% and +0.5%, respectively. The Federal Reserve’s message of higher-for-longer interest rates seems to finally be taken seriously by investors while tightening financial conditions weighed on investors earlier in the week as interest rates, the U.S. dollar, and commodities all rose. International stocks fell even more than their U.S. counterparts. Developed market international stocks (as measured by the MSCI EAFE Index) sank -1.6%, and the MSCI Emerging Markets Index fell -1.2%. The U.S. Dollar remains a headwind for non-U.S. assets as it rose another +0.56% for the week, the eleventh consecutive positive week and at the highest level since November 2022.

The surging crude oil prices combined with concerns over increased government debt pressured yields higher. The yield on the 10-year U.S. Treasury note surged as high as 4.68% early Thursday, near 16-year highs, before easing to around 4.57% to close the week. The 2-year U.S. Treasury yield retreated -7 basis points to 5.04%, its first decline after three straight weekly increases. The Bloomberg U.S. Aggregate Bond Index fell -1.0%, its fourth straight weekly decline, and is down in eight of the last ten weeks (bond prices move inversely to bond yields). Non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) also fell -0.9% for the week and are down in 13 of the last 15 weeks. 

The increasing likelihood of a U.S. government shutdown also weighed on investor sentiment last week. But over the weekend, Congress averted a shutdown by passing an extension to fund the government until mid-November. Late Saturday night, President Biden signed the legislation hours before the shutdown was set to occur.

Chart of the Week

The U.S. consumer remains relatively resilient thanks to a healthy labor market but is now showing some signs that higher interest rates and accelerating energy prices are starting to pressure households. The final reading of the September University of Michigan Consumer Sentiment Index improved to 68.1, up from the initial estimate of 67.7, but is down from 69.5 in August and a 22-month high of 71.6 in July. It is the first month-over-month decline since May. The Current Economic Conditions component rose to 71.4 from 69.8 in the early estimate but is down from 75.7 the prior month. The Consumer Expectations component slipped to 66.0 from the preliminary 66.3 but is still up from the 65.5 level the prior month. One-year inflation expectations fell to +3.2% from +3.4% the prior month. The five-year inflation expectations came in at 2.8% after being at 3.0% for three consecutive months. 

Consumer confidence also fell further from July’s 2-year high, as the Conference Board’s Consumer Confidence Index fell to 103.0 from 108.7 in July (revised up from 106.1) and below expectations for 105.5. The September drop marked a four-month low and an even bigger deceleration than the Consumer Sentiment data from University of Michigan. The present situation index rose to 147.1 from 146.7. The expectations index — which reflects consumers’ six-month outlook — fell sharply, moving down to 73.7 from 83.3. Below the 80 mark on the expectations index often signals a recession within the next year. Confidence fell across all age groups and was most pronounced among consumers with annual incomes of $50,000 or more.

Consumer Sentiment and Confidence Slips

Consumers aren’t as hopeful heading into Q4

Source: Bloomberg.

Economic Review

• U.S. economic growth for the second quarter remained steady with the third and final estimate. Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was unchanged at a +2.1% annual rate, a bit light of the +2.2% expected. Household Consumption turned out to be weaker than originally reported, revised down to +0.8% from the prior estimate of +1.7%. On the other hand, Business Investment was stronger than the last estimate reported, and inventory levels were also revised upward. The GDP Price Deflator was also revised lower to +1.7 from +2.0% from where it was expected to stay. That’s quite a bit lower than the prior quarter’s +4.1%. GDP is forecast to rise +4% or more in the third quarter running from July to September, which will be published at the end of October.
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment unexpectedly rose +0.2% in August, beating expectations for -0.5%, mostly due to higher defense spending, specifically a +19% increase in military aircraft. The prior month was downwardly revised to a -5.6% drop (from -5.2%). Durable Goods Orders Excluding Transportation, were up +0.4%, beating expectations of +0.2% and the prior month’s +0.1% (revised down from the originally reported +0.4%). The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.9% following a -0.4% fall the prior month (revised down from +0.1%).
• U.S. economic activity fell in August, according to the Federal Reserve Bank of Chicago. The Chicago Fed National Activity Index (CFNAI) unexpectedly fell to -0.16 from +0.07 the prior month (revised down from +0.12). That was well below expectations for +0.10%. Readings below zero indicate below-trend growth in the national economic activity. Two of the four broad categories of indicators used to construct the index decreased, and all four made negative contributions. Production-related indicators contributed -0.02 to the CFNAI in August, down from +0.12 the prior month. The contribution of the personal consumption and housing categories moved down to –0.08 in August from +0.03 the prior month. Overall breadth was negative, with only 35 of the 85 monthly individual indicators making positive contributions, while 50 indicators affected the index negatively.
• The cost of goods and services rose in August, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.4%, just under expectations of +0.5%, but up from the prior month’s +0.2%. On a year-over-year basis, the PCE Price Index was up +3.5%, in line with expectations and up from +3.4% the prior month. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, increased +0.1% in light of expectations and the prior month, which were both +0.2%. Year-over-year, the Core-PCE Price Index is up +3.9%, matching expectations and down from +4.3% the prior month. The key takeaway is that inflation continues to moderate, taking pressure off the Federal Reserve to remain hawkish. 
• Personal Spending jumped +0.4% in August, just behind expectations for +0.5% and down from last month’s +0.9% reading (revised up from +0.8%). However, after adjusting for inflation, Real Personal Spending was up just +0.1% compared to last month’s increase of +0.6% and was up +0.8% year-over-year. Consumption was driven by spending on necessities like Housing, Gasoline, and other Energy. Personal Income rose +0.4%, matching expectations and up from last month’s +0.2%. The accelerated pace of Hiring and the increase in Average Hours Worked accounted for much of the increase in income growth. The Personal Savings Rate rose to 3.9% from 4.1% the prior month.
• U.S. trade with the rest of the world shrank -7.3% in August, resulting in the Trade Deficit of $84.3 billion, from $90.9 billion the prior month (positively revised from $91.2 billion), and better than economists’ consensus expectations of $91.4 billion. Both Imports fell -1.2% to $253.1 billion from $256.2 billion the prior month. Exports rose +2.2% to $168.9 billion from $165.3 billion. Lower trade deficits add to Gross Domestic Product (GDP), so the decline in the deficit could give a slight boost to GDP in the third quarter.
• Texas factory activity fell further into contraction territory in September, with the Texas Manufacturing Outlook Survey falling to -18.1 from -17.2 the prior month, below expectations for -14.0. Outlook Uncertainty jumped to +27, the highest since October 2022. The 6 Months Ahead components sank to -16.5 from -3.3 the previous month and after turning positive in July for the first time since April 2022. On the positive side, the Production component, a key measure of state manufacturing conditions, rebounded to +7.9 from -11.2 the prior month, and Employment and Capital Spending rose. The Texas Service Sector Outlook Survey also sank further, dropping to -8.6 from -2.7. The Future (Six Months Ahead) components were negative in contraction territory. 
• The Richmond Fed Manufacturing index improved to +5 in September from an unrevised -7 the previous month, which was far above expectations for -7. September was the first positive reading since April 2022. All three component indexes increased into positive territory. Shipments rose to +7 from -5, New Orders increased to +3, up from -11. The Employment index improved to +7 from -3.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), fell to 44.1 in September from 48.7 the prior month, below expectations of 47.6. The index has remained below 50 (the break-even point distinguishing expanding versus contracting economic activity) for 13 consecutive months. The index peaked at 71.3 in May 2021.
• The Kansas City Fed Manufacturing Survey showed factory activity was flat for the Federal Reserve’s Tenth District in September, with the index sinking to -8 from 0 the month before, far worse than expectations for a -2 reading. The Production component plunged to -13 from +12 the prior month. The Prices Paid, Shipments, and Six-Month Outlook components all fell as well. New Orders were unchanged. Number of Employees and Average Employee Workweek were the only components that rose. The Kansas City Fed Service Sector Outlook Survey was mostly unchanged in September, coming in at 2 versus -1 the prior month.
• The Commerce Department reported New Home Sales plunged -8.7% in August to a seasonally adjusted annual rate of 675,000 units, below expectations for 698,000 units and the prior month’s 739,000 units (revised up from the originally reported 714,000). The rate of new-home sales was dragged down by a sharp drop in the Midwest. The inventory of new homes for sale ticked higher, and with a slower pace of sales, the months’ supply at the current rate of sales climbed to 7.8 in August, up from 7.3 in July. Regionally, the Northeast led the nation in new home sales, posting an increase of +6.7%, while sales fell across the rest of the U.S., with the sharpest drop recorded in the Midwest at -17.2%. Year-over-year, new home sales were up +5.8%. The Median New Home Price fell to $430,300 from $436,700 the prior month. The inventory of new homes for sale rose +11.4, which represents 7.8 months of supply at the current rate of sales, down from 8.0 months the prior month. 
• The National Association of Realtors (NAR) reported that Pending Home Sales slid to the lowest level since April 2020, falling -7.1% in August, far behind expectations for a -1.0% drop and the prior month’s +0.5% increase (revised down from +0.9%). All regions saw declines in August, with the South falling to the lowest level since 2010, while the West had its weakest reading since data began going back to 2001. All four regions have fallen significantly from July 2022. Year-over-year sales were down -18.8%, below expectations of -13.0%.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices rose for a sixth straight month in July, as the index increased a seasonally adjusted +0.87%, a slower rate than the +0.92% the prior month.  All 20 cities tracked in the index posted rising home prices, with Chicago up the most, while Las Vegas lagged. Strong demand continues to overcome a tight supply of homes and high mortgage rates. On a year-over-year basis, home prices in the 20 major metro markets in the U.S. were up +0.13%, the first annual gain since February 2023.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) saw U.S. house prices rise again in July, up a seasonally adjusted +0.8%, above expectations for +0.4% and the +0.4% gain last month (revised up from +0.3%). The index is now up +4.6% year-over-year after rising +3.2% the prior month. Home prices in the New England and Middle Atlantic regions rose 8.1% and 7.1%, respectively, on a year-over-year basis, the largest regional gains in July, according to FHFA data. “Regionally, all nine census divisions posted positive price appreciation over the last 12 months, although the Pacific and Mountain divisions experienced only modest growth,” said Nataliya Polkovnichenko, FHFA’s supervisory economist.
• Weekly MBA Mortgage Applications fell -1.3% for the week ended September 22, following the prior week’s +5.4% jump. The Purchase Index was down -1.5% following a +2.3% rise the prior week, and the Refinance Index slipped -0.9% following a +13.2% surge the prior week. The average 30-Year Mortgage Rate rose to 7.41%, which is +0.89 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims rose +2,000 to 204,000 for the week ended September 16, below expectations for 215,000 and last week’s 202,000 (revised up from 201,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +12,000 to 1,670,000 in the week ended September 9, below consensus for 1,675,000, but up from last week’s reading of 1,658,000 (revised down from 1,662,000).

The Week Ahead

The calendar remains full again in the coming week, with the headline event on Friday with the September Nonfarm Payrolls employment report. The U.S. labor market continues to be resilient, with big implications for the Federal Reserve’s monetary policy. Before that, the U.S. Bureau of Labor Statistics will release the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday and weekly Jobless Claims on Thursday. Economic reports outside the labor data to watch during the week include September Purchasing Managers’ Indexes (PMI) from the Institute for Supply Management (ISM) and S&P Global. Manufacturing PMIs come on Monday, followed by the services equivalent on Wednesday. Construction Spending is released Monday, and Consumer Credit comes out on Friday.

Did You Know?

SPACING OUT – NASA’s Frank Rubio spent 371 days in space, the longest of any U.S. astronaut. He landed in Kazakhstan on a Russian spacecraft after spending an extra six months on the International Space Station. Rubio was supposed to come back to Earth in March, but when his return ship was damaged, he had to wait for another ride, according to NASA (Source: NASA, The Wall Street Journal).

EIGHT IS ENOUGH – There were eight strikes involving 1,000-plus workers each in August, matching the highest number since 2005. More workers are hitting the picket lines because the tactic is working. The figures don’t include the United Auto Workers strike that started earlier in September (Source: Labor Department, The Wall Street Journal).

RING OF FIRE – The estimated value of the deposits of nickel, platinum, palladium, copper, and chromite buried underground in a remote region of Canada known as the Ring of Fire is $67 billion. The area is an untapped source of metals essential for electric-vehicle batteries. Getting to them may be problematic, though. Climate advocates say that the peat bogs on the surface hold more carbon per square foot than the Amazon rainforest and that digging them up could release more greenhouse gas than Canada emits in a year (Source: Wyloo Metals, The Wall Street Journal).

This Week in History

MUST SEE TV – On September 26, 1960, John F. Kennedy and Richard Nixon participated in the first televised presidential debate. Kennedy, the young senator from Massachusetts, impressed voters with his looks and charisma, while Vice President Nixon appeared sweaty and washed out under the bright lights of the TV studio. The debate might not have been the deciding factor in Kennedy’s eventual victory, but it marked a turning point in how candidates campaigned and presented themselves (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.