Economic Update 4-22-2024

• Economic data for the week included gains in retail sales and industrial production, as well as for several regional manufacturing indicators. However, the index of leading economic indicators turned downward again, as did existing home sales and housing starts.
• Equities fell around the world last week, as higher-for-longer expectations for interest rates and geopolitical conflict in the Middle East put a damper on the mood. Bond prices also fell, being negatively impacted by the rise in rates. Commodities were mixed, with metals prices sharply up, and oil down as geopolitical tensions eased by the end of the week.

U.S. stocks fell back for the third straight week, as the mood soured over concern around rising Middle East tensions and possibly higher-for-longer interest rates. By Friday, the measured response of Israel toward Iran appeared to calm markets a bit, after initially fearing a more robust escalation. Fed chair Powell implied that inflation has indeed been stickier than expected, noted by the comment, “It’s likely to take longer than expected to achieve that confidence,” and it may take the Fed longer than expected to hit its target (which was no surprise to markets). However, this was taken as another sign that the number of cuts assumed for this year may need to be rethought. Additionally, the New York Fed president implied that higher rates could be considered “to achieve their goals” if the data warranted that, while the Atlanta Fed president indicated policymakers wouldn’t be able to cut until year-end. Markets are obviously especially sensitive to interest rate policy semantics at this point. A variety of well-watched economists/strategies have extended their timeline for the first Fed cut from June to July or even September, but not all have.

By sector, defensive utilities and consumer staples led the way with gains of nearly 2%, while technology underperformed by the greatest degree (down over -7%, as NVIDIA corrected by nearly -15% after weaker forward guidance), followed by consumer discretionary and communications. Tesla pulled back by nearly -15% as well, with recently-sluggish sales numbers, and the subsequent announcement of a layoff consisting of 10% of its workforce (14,000 employees). Real estate also fell over -3% along with the impact from higher rates. Earnings for Q1 continued to roll in, with nearly 15% of S&P 500 companies now having reported, per FactSet. Three-quarters of these companies have reported an earnings surprise with nearly 60% with a positive revenue surprise. The blended (actual plus expected) earnings growth rate for the quarter has fallen back a bit to 0.5% year-over-year, which consists of five of the ‘Magnificent 7’ companies (NVIDIA, Amazon, Meta, Alphabet, and Microsoft) expected to see earnings growth of 64%, while the other 495 members of the S&P seeing declines of -6%. However, there is a lot of data left to be reported.

From a technical standpoint, the S&P is down -5% from its late-March peak, and fell below its 50-day moving average for the first time since this run of strength began last October, although it remains well above the 200-day moving average, the latter seen as a more classic indicator of intermediate-term market chart strength. Although it never feels like it at the time, especially after a strong upward move, market declines of -5% or so have historically occurred several times a year.

Foreign stocks declined by fared better than U.S. stocks, particularly in the Eurozone and U.K. Inflation in the U.K. improved to 3.2%, but not as low as expected, providing another catalyst for higher global yields. However, the ECB reiterated that June continues to be a likely target for a policy easing start date. Also, the IMF has raised its global growth forecast for 2024 from 2.9% to 3.2%—largely due to robust conditions in the U.S. Emerging market stocks were mixed with gains in China, on the heels of better manufacturing results and stronger-than-expected 5.3% GDP, offset by declines in the rest of Asia and Mexico. Part of this is related to effects from the continued-strong U.S. dollar, due to still-likely-to-stay-favorable interest rate differentials versus Europe and Japan as markets attempt to hash out timing of central bank moves.

Bond prices fell back as interest rates ticked higher, along with the gnawing feeling about policy rates staying higher for longer. U.S. Treasuries outperformed credit, along with negative equity sentiment for the week. The exception was floating rate bank loans, which earned positive returns along with the rising rates. Foreign bonds were generally held back by a stronger U.S. dollar. The 10-year Treasury note has risen nearly a percentage point year-to-date, now around 4.7%, as bond markets have also internalized the Fed’s higher-for-longer messaging. In fact, the weakness in the yen has led to ongoing speculation of possible government intervention to provide some support.

Commodities were mixed last week, with sharp gains in industrial and precious metals offset by lower energy prices. Crude oil fell over -3% last week to $82/barrel. Recent oil prices movements have been unsurprisingly tied to the Israel-Iran conflict; however, the overall impact has been fairly muted after the constrained response on both sides, at least through last week, as well as OPEC spare capacity currently that is thought to provide a better buffer against any reductions (or fears of reductions) in production.

Period ending 4/19/2024	1 Week %	YTD %
DJIA	0.05	1.37
S&P 500	-3.04	4.58
NASDAQ	-5.52	2.01
Russell 2000	-2.76	-3.54
MSCI-EAFE	-2.29	0.83
MSCI-EM	-3.58	-1.36
Bloomberg U.S. Aggregate	-0.61	-3.11

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2023	5.40	4.23	3.84	3.88	4.03
4/12/2024	5.45	4.88	4.54	4.50	4.61
4/19/2024	5.45	4.97	4.66	4.62	4.72

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.