Updated 4/22/2024

Equities fell for a third straight week as investors wrestled with expectations of the Fed’s future monetary policy, a possible intensification of the Iran-Israel conflict, and corporate earnings potential. The price change of select U.S. indexes for the week was: S&P 500 (-3.05%), Dow (+0.01%) and the Nasdaq (-5.52%). The 10yr. Treasury note yield rose 0.12 percentage points to 4.62%.

After a 25% sprint higher in five months, the S&P 500 index has been showing signs of fatigue since the start of Q2. Last week, the mega-cap and semiconductor trade that became a ‘safe haven’ for investors during times of rate uncertainty, lost momentum and broke down. Of the 11 major sectors in the S&P 500, the technology sector was the worst performer, falling -7.3%. Utilities, consumer staples and financials were positive over the week.

Although it seems counterintuitive, equity prices are struggling in response to the steady stream of surprisingly strong economic data. Thus far, the economy has been able to maintain a higher-than-expected employment rate while the rate of inflation slowed. However, the more recent reports have suggested the consumer is not slowing down his/her activity as much as it was expected, making it increasingly difficult for the Federal Reserve to move away from its restrictive monetary policy without possibly overstimulating the economy and driving inflation higher.

On Monday, the government reported retail sales were up 0.8% in March compared to February, and up 3.6% from the same period last year. This also included an upward revision to the February figures to show a 0.9% monthly gain instead of the 0.6% reported. Sales at restaurants, which are considered a good economic indicator, also rose 0.4% and are up 6.5% in the past year.

The strong retail data lifted forecasts for Q1 2024 GDP. Markets are now pricing in 1 to 2 rate cuts this year, which is in-line with what the FOMC members seem to be thinking as well.

Also contributing to the volatility over the week was the uncertainty around Israel’s anticipated response to Iran’s recent missile and drone attack. Israel vowed it would respond and did so on Thursday evening with what was ultimately determined to be a scaled back event.

Following the initial reports of the strike, oil prices jumped more than 3% late Thursday night before trading lower after Iran downplayed the attack. Iran previously warned Tehran would deliver a "severe response" to any hostile action taken by Israel, but fears of escalation were subdued after a senior official said Iran as looking at it more as an "infiltration" rather than an "external attack". Iran didn’t indicate any plans for an immediate retaliation and instead downplayed the military activity.

On Friday, Microsoft, Apple, and Alphabet each fell by about one and a quarter percent, while Amazon slid by -2.56%, Meta shed -4.13%, and market darling Nvidia dropped -10.00%.

Looking Ahead:

We are anticipating a very busy week of economic data points, corporate earnings, and headlines out of Washington. The Fed will be in a quiet period ahead of next week’s meeting.

Key reports this week include the initial look at Q1 GDP and the Personal Income and Outlays (PCE Index) which we’ve noted is the Fed’s preferred inflation read.

According to FactSet, roughly 14% of the S&P 500 companies have reported quarterly results. Of those that reported, 74% have reported actual EPS above estimates, which is below the 5-year average of 77% but equal to the 10-year average of 74%. In aggregate, companies are reporting earnings that are 7.8% above estimates, which is below the 5-year average of 8.5% but above the 10-year average of 6.7%. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the fourth quarter is 0.5% today, compared to an earnings growth rate of 0.9% last week and an estimated earnings growth rate of 3.4% at the end of the first quarter (March 31).

Reporting kicks into high gear this week as 158 S&P 500 companies (including 11 Dow 30 components) are scheduled to report results for the fourth quarter. This includes reports from Verizon, UPS, GM, Visa, AT&T, Boeing, Ford, Caterpillar, Chevron, Exxon, and a few of the heavy weights…Tesla, Meta, Alphabet, and Microsoft.

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Probability of an interest rate change at next FOMC meeting:

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Select Economic Data Releases

*Colored icon denotes a new data release.
Gross Domestic Product

The first look at Q1 GDP will come this week.  The final revision of Q4 GDP rose to 3.4% first revision of 3.2%.  U.S. GDP grew at 4.9% annual pace in the third quarter.  Q2 GDP grew at a 2.1% annualized rate but consumer spending turned out to be weaker than originally reported. The growth was driven by robust consumer and business spending.  U.S. GDP increased at a 2.0% growth rate during Q1.  GDP was trimmed again to a 2.6% pace during Q4.  The increase in consumer spending was reduced in the latest estimate to 1% from 1.4% last month and an original 2.1%.  The annual growth rate remained at 2.1% for 2022.  The economy grew at an upwardly revised annual pace of +3.2% in the third quarter, rebounding from two consecutive declines in the first half of the year.  The final read of Q2 GDP confirmed the economy declined by -0.6%, marking the second quarter in a row of negative growth.  

Employment Data

Employers added 303K jobs in March, blowing past the expected gain of 200K. The unemployment rate also fell a tick to 3.8% and stayed below 4% for the 26th month in a row, the longest stretch since the 1960s.  The February nonfarm payrolls grew a robust 275K but unemployment rose to 3.9%.  The January jobs report showed a revised gain of 229K, still much stronger than the expected gain of 185K. Unemployment rate stayed at 3.7% and hourly wages grew by 0.6%.  The December jobs report was revised down to 290K new workers.  Employers added 199K jobs in November, which was greater than the estimated gain of 190K jobs. Additionally, the rate of unemployment unexpectedly fell back to 3.7% from 3.9%.  Hiring slowed in October with employers adding a modest 150K jobs.  The unemployment rate rose to 3.9%. Health-care providers created about half of all the new private-sector jobs in October.  Job gains in September were revised lower to 297K...still a very strong gain.  Unemployment held at 3.8% and wage growth slowed to 0.2%.  Employers added 227K new jobs in August, but the unemployment rate rose to 3.8% as more people entered the workforce.  July gains were revised up to 236K from 157K. 

Retail Data

The government reported retail sales were up 0.8% in March compared to February, and up 3.6% from the same period last year.  Retail sales rose +0.9% in February after falling a revised -1.1% in January.  Sales at retailers jumped +0.6% in December to cap off a fairly robust holiday-shopping season and underscore the resilience of a still-growing U.S. economy.  For 2023, retail sales grew by 5.6%.  Retail sales rose +0.3% in November marking a good start for U.S. holiday shopping season.  Sales at U.S. retailers slipped -0.1% in October, marking the first decline in seven months.  Auto dealers, which have 20% impact on the index, posted a -1% drop.  Retail sales rose 0.7% in September on strong auto sales and internet buying.  U.S. retail sales grew for a fifth month in a row, but mostly due to higher gas prices.  The overall August sales increase was 0.6%, but sales at gas stations jumped 5.2%.  Sales at U.S. retailers rose 0.7% in July and posted the biggest increase in six months, helped by strong Internet purchases on Amazon Prime Day.  U.S. retail sales rose only 0.2% in June, pointing to weak spots in the economy.  Sales at retailers rose 0.3% in May and showed surprising resilience, underscoring the durability of the current U.S. economic expansion.  The April retail sales report showed a 0.4% uptick from March, but analysts were calling for a rise of 0.8%.  Overall, it wasn't considered a negative event as April's sales activity was a reversal of the prior two-months decline. 

Housing Data

New-home construction fell -14.7% in March to post the biggest drop in four years. Housing starts fell to a 1.32M annual pace from 1.55M in February. Building permits, a sign of future construction, also fell -4.3% to a 1.46M rate.  Pending home sales rose 1.6% in February and sales of newly built homes slowed by -0.3%.  Sales of existing homes rose by 9.5% in February to an annualized rate of 4.38M, exceeding expectations of a 3.95M homes.  Sales of newly built homes in the U.S. inched up 1.5% to an annual rate of 661K in January, even as mortgage rates rose.  Pending home sales, on the other hand, posted biggest drop (-4.9%) in five months in January.  Existing home sales rose by 5.8% to an annual pace of 4.0M in January, better than the expected pace of 3.97M.  Sales of newly built homes in the U.S. jumped 8% to an annualized rate of 664K in December.  Sales of existing homes Home sales fell by 1% to an annual rate of 3.78M in December, the lowest level in more than a decade.  Construction of new homes jumped more than 14% in November and sales of existing homes grew for the first time in six months.  New home sales fell -5.6% to a seasonally adjusted annual rate of 679K in October, from a revised 719K in September.  Sales of existing homes fell -4.1% in October to a seasonally adjusted annual rate of 3.79M, according to the National Association of Realtors. It was the 5th straight month of decline and is now at the lowest level since the summer of 2010.  They are down 14.6% from a year ago. 

Leading Indicators

The index fell again in March.  The decline was -0.3%.  The +0.2% rise for index of leading indicators in February was the first increase in almost two years.  Leading indicators for the U.S. economy fell -0.4% in January, declining for a 22nd month in a row (the third-longest losing streak ever) but the U.S. still doesn’t appear to be heading toward a recession..  The index of leading economic indicators fell by -0.1% in December.  The leading indicators index continues to forecast a recession, falling -0.5% November to make it 20 straight.  With 19 straight monthly declines, the Index of Leading Economic Indicators is on its biggest losing streak since the Great Recession.  The LEI index fell -0.8% in October.  The LEI index fell another -0.7% in September, but the U.S. is still on track to post a sizable increase in economic growth in the third quarter.  The leading economic index fell -0.4% in August, which was better than the expected decline of -0.5%.  A -0.4% decline in the leading indicators index in July marked the 16th straight decline.  The LEI fell -0.7% in June.  The U.S. leading index fell -0.6% in May marking the 14th month in a row, continuing to signal recession.  The LE for the U.S. declined again in April, falling -0.6 percent 107.5.  The Conference Board reported the U.S. leading economic index fell -1.2% in March, a 12th straight decline.  The index is down -4.5% over the past 6 months. 

Inflation

The important PCE inflation data is coming this week.  The headline CPI rose a sharp 0.4% in March, moving up the annualized rate to 3.5% and the core rate was unchanged from February at 3.8%.  Producer price inflation is not showing the same level of intensity, rising just 0.2% at the headline level and 0.1% for the core in March.  Inflation is proving to be stickier than originally thought.  In February, the CPI moved up to 3.2% over the past 12 months and the PPI rose 1.6%.  PCE inflation rose 0.3% in January, the fastest monthly pace in four months.  However, the PCE index fell a couple of points to an annualized rate of 2.4% from 2.6%.  Consumer prices rose a sharper-than-expected 0.3% in January and the rate of inflation remained stuck above 3%. Wholesale costs rose 0.3% in January, the fastest pace in five months.  Core PCE softened to 2.9% year-over-year in December.  The consumer price index rose 0.3% in December to mark the biggest gain in three months.  The annual rate of inflation rose to 3.4%.  Core inflation showed moderation, falling from 4.0% to 3.9%.  Core producer price inflation rose 0.2% in December and now stands at a 2.5% annual rate.  

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