The September Issue of the ETF Investor Guide is AVAILABLE NOW!
Links to the September Data Files have been posted below.
Market Perspective: Bonds Rewarding Conservative Investors
The largest technology stocks helped float the Nasdaq to an increase of 0.57 percent last month, while worries about the banking system amid rising rates helped sink the Russell 2000 Index 2.57 percent. The 10-year Treasury yield was poised for a major bullish breakout or an important double top heading into September, but it’s left trades in limbo by chopping sideways. At the same time, energy and inflation-related ETFs have surged in momentum, with some energy sector indexes climbing to new all-time highs. The market is contemplating whether inflation is really finished, with crude oil up nearly 40 percent since June, but the market is still being led by tech stocks. Economic growth looks solid for the quarter, with all three Federal Reserve banks that have forecasting models boosting their estimates.
If the top-10 Nasdaq stocks were their own index, they would already be at a new all-time high this year. Meanwhile, the Russell 2000 Index is still 25 percent below its 2021 high and only about 8 percent above its 2022 low. The difference comes mainly from a combination of three factors. First, investors historically view smaller-cap stocks as riskier and therefore sell them during periods of higher volatility. Second, many investors are funneling cash on autopilot, most of it into passive market-capitalization-weighted funds such as the S&P 500 Index. Third, the largest stocks are currently in the technology sector, helping boost indexes with hefty tech exposure such as the Nasdaq.
At some point, investors will buy bonds because the yields will be too enticing, but that point may not have been reached yet. Money is flowing into bonds, but not enough to offset sellers and newly issued bonds. The 10-year Treasury yield sits at 4.3 percent, but a breakout might carry it to 5.5 percent or 6.0 percent. A strict economic analysis argues bonds are well overdue for a rally given the slide in inflation readings and various data points such as the low manufacturing PMIs in key export economies such as China and Germany. Bonds are heavily shorted in the futures market as well. If bonds rally, a massive short squeeze could propel bonds and significantly lower yields…Continue Reading
The past week was a significant one for traders as several economic data points were released which provided some additional clarity if a rate cut was still on the table for the first few months of the year. While the prevailing narrative was that a rate cut was possible in March, it’s unlikely that one happens until May at the earliest.
On Tuesday, it was revealed that CPI was up .3 percent for the month, which was higher than the .2 percent estimate prior to the news release. The inflation rate was 3.1 percent on an annualized basis, which was higher than the 2.9 percent estimate. Housing costs were seen as the main culprit for the higher-than-expected figures, and it’s likely that housing costs will remain elevated even as prices in other areas of the market moderate.
Evidence of that moderation came on Thursday when it was revealed that retail sales on a monthly basis had dropped .8 percent as opposed to .2 percent as analysts had expected. Core retail prices dropped .6 percent on the month, which could be seen as an indication of consumer weakness. As consumer spending drives the market, a sustained drop may lead to a further drop in inflation even as housing costs remain elevated.
Also on Thursday, unemployment claims figures were released, and it was revealed that 212,000 people filed for benefits during the previous seven days. On Friday, the PPI figures showed a .3 percent increase in prices during the last month. This means that consumers were spending more for goods even though they were buying less of what they wanted or needed. Also on Friday, the University of Michigan released its consumer sentiment and inflation expectations reports. Consumer sentiment was at 79.6 percent, which is slightly lower than estimates prior to its release while inflation was expected to be at 3 percent 12 months from now.
The Dow was down 65 points this week to close at 38,627. On Monday, the market made a high of 38,908 before retreating to make a low of 38,055 on Tuesday. However, buyers would get back into the market and allow it to trend back toward the high the rest of the week.
Like the Dow, the Nasdaq would also finish the week in the red having lost 1.5 percent over the last five trading days. Also like the Dow, the Nasdaq would make a high on Monday before making a low on Tuesday. The high of the week was 16,063 while the low was 15,561.
Finally, the S&P 500 finished the week down .48 percent to finish at 5,005. On Monday, the market hit its low of 5,001 while its high of 5,037 was reached on Wednesday. The S&P would then spend the second half of the week in freefall as investors digested the mixed bag of economic news.
In international news, inflation reports were issued in Great Britain, Switzerland and New Zealand. In Great Britain, inflation came in at 4 percent for the year while prices went up by .2 percent on a monthly basis in Switzerland. New Zealand expects inflation to come in at 2.5 percent for the following quarter.
The upcoming week is expected to be another consequential one. On Wednesday, FOMC meeting minutes will be released, which are expected to reveal that the Fed is being cautious about cutting rates too soon. On Thursday, unemployment claim numbers as well as manufacturing and services PMI data will be released.
Outside of the United States, Canada will release its inflation figures for January on Tuesday and retail sales figures on Thursday. Australia will release its own central bank’s policy meeting minutes on Monday night while manufacturing and services data will be released Wednesday night from most of the European Union’s developed nations.
The first full week of February was a relatively quiet one in terms of news, but the information that did come out had a significant impact on markets. It will also likely have an impact on what the Fed decides to do in March and beyond in relation to interest rates. At the beginning of the week, there was chatter that a March rate cut was looking less likely, but a revision to a key January report might change that.
Last Sunday night, a 60 Minutes interview featuring Fed Chairman Jerome Powell revealed some key insight into his thinking. He said that there were likely to be three rate cuts in 2024 with the first one likely coming in May. During the interview, he also reiterated that the risk of a recession was still low and that the economy was still solid despite the rapid rise of interest rates over the past couple of years.
On Monday morning, the ISM Services PMI report was released and came in at 53 percent. This was higher than the 50.6 percent from last month and the analyst estimate of 52 percent prior to the release. This reading indicates that the service sector is still growing and may be a key part of economic stability and growth during the rest of the calendar year.
On Thursday morning, unemployment claims numbers were released and revealed that 218,000 people sought benefits during the previous seven days. This was lower than the estimated 221,000 claims and lower than the 227,000 claims made last week.
Although there were no scheduled news releases on Friday, an important revision was announced. It was reported that the December inflation report, which was released on Jan. 11, was revised downward from .3 percent to .2 percent on a monthly basis. The new figure was in line with what analysts had expected when the report was released.
The change will have a negligible impact on annual CPI figures, but it may help to calm the nerves of those who may have thought that the inflation fight wasn’t over. It is worth noting that November’s inflation report was revised upward from .1 percent to .2 percent on a monthly basis.
On Feb. 13, the January CPI report will be released, which is expected to confirm that inflation is moderating in the short-term and decelerating in the longer run. Analysts expect that monthly CPI will be .2 percent while yearly CPI will fall from 3.4 percent to 2.9 percent.
Markets had another up week as the Dow finished .35 percent higher to close at 38,671. On Monday, the Dow reached a low of 38,263 and made a high of 38,727 on Wednesday.
The Nasdaq was up 2.45 percent this week to finish at 15,990, which is an all-time high for the index primarily comprised of tech stocks. It would make a low of 15,475 on Monday before rebounding, climbing the rest of the week and closing at its weekly high.
Finally, the S&P 500 finished the week up 1.49 percent to finish at 5,026. As with the Nasdaq, the S&P would make its weekly low of 4,919 on Monday before reversing, climbing and finishing at its weekly high.
In international news, Australia’s central bank decided to hold its interest rate steady at 4.35 percent. However, unlike in the United States, the Royal Bank of Australia (RBA) has warned that interest rates could still go higher if data warrants. On Wednesday night, it was revealed that the inflation rate fell .8 percent on an annualized basis while prices fell 2.5 percent on an annualized basis. On Friday, Canada’s central bank revealed that the unemployment rate there fell to 5.7 percent from 5.9 percent last month.
The CPI report will be released Wednesday. Retail sale data will be released on Thursday with the belief that sales fell by .2 percent over the past month. That would be a steep decline from a .6 percent increase in December. Friday sees the release of PPI data with the expectation that prices increased .1 percent on a month basis in January. Finally, the University of Michigan will release its consumer sentiment and inflation expectation reports on Friday.