Weekly Market Update: Equities Close Flat, Russell 2000 Outperforms and Energy Stocks Lag

What We Are Watching This Week

  • U.S. Consumer Price Index
  • Producer Price Index
  • U.S. Fed Interest Rate Announcement
  • U.S. Retail Sales

Highlights From Last Week

  • S&P U.S. Services PMI
  • ADP Employment Report
  • U.S. Employment Report
  • Factory Orders and productivity
  • Consumer Credit

The major stock indexes had a relatively flat to slightly higher week, with a late rally contributing to this outcome. The small-cap Russell 2000 Index performed better than the S&P 500 for the third time in the past four weeks, reducing its year-to-date underperformance. Growth stocks continued to outperform value stocks, but energy stocks in the S&P 500 and the TSX lagged as domestic oil prices dropped below $70 per barrel for the first time since June.

In Europe, the STOXX Europe 600 Index increased for the fourth consecutive week, finishing 1.30% higher. This positive trend was driven by expectations that central banks might lower interest rates next year due to slowing inflation and signs of economic struggles in European economies. Major European stock indexes also saw gains, with France’s CAC 40 up 2.46%, Germany’s DAX up 2.21%, Italy’s FTSE MIB up 1.59% and the U.K.’s FTSE 100 up 0.33%.

According to the Commerce Department on Monday, the week’s economic data kicked off with October orders for manufactured goods decreasing by 3.6%, slightly below the expected 3.5% decline. This marks the second drop in the past eight months. The decline was primarily driven by a sharp decrease in orders for non-defense aircraft, notably Boeing passenger planes. Orders were down by 1.2% in October when excluding the transportation sector. Durable goods orders fell by 5.4%, unchanged from the previous estimate, with durables declining in three of the last four months. Non-durable goods orders also decreased by 1.9%. Economists closely monitor orders for non-defense capital goods, excluding aircraft, which fell by a revised 0.3% in October, slightly worse than the initial estimate of a 0.1% decrease. Shipments of these goods, a factor in the GDP report, remained flat in October after a 0.1% drop in the previous month.1

On Tuesday, ISM reported that the business conditions index for service companies bounced back to 52.7% from the previous month’s low of 51.8%, surpassing economists’ expectations of 52.4%. This index, which signifies economic expansion above 50%, has maintained this trend for 11 consecutive months. The report revealed that 15 industries experienced growth in November, with only three reporting decreased activity. New orders in the service sector held steady at 55.5%, and the prices paid by service industries for inputs saw a slight dip to 58.3%. The ISM service employment index also improved, rising from 50.2 to 50.7. Additionally, S&P Global’s report confirmed growth in the service sector, with the PMI rising to 50.8 in November, matching the “flash” reading for the month. Anthony Nieves, head of the ISM Services Business Survey Committee, noted that while holiday season preparations were less robust than in previous years, they fared better than last year. Respondents in transportation and warehousing reported solid activity as the fourth quarter reached its conclusion. Although U.S. employment growth has slowed in the past year, it remains solid. This continued demand for workers in U.S. service industries is expected to play a role in the Federal Reserve’s decision to maintain a “higher for longer” monetary policy stance.2

In November, job listings in the United States declined to 9.4 million from the revised figure of 9.9 million in September. This trend in job postings provides insights into the state of the labor market and the broader economy. Notably, job openings have steadily decreased from a peak of 12 million in 2022. The Federal Reserve sees this decline as a sign that higher interest rates are curbing economic growth and reducing labor demand. This could alleviate wage pressure and aid the central bank’s goal of achieving a 2% inflation target. Conversely, the number of people quitting their jobs remained stable at 3.6 million. It had peaked at 4.5 million last year before receding. Individuals tend to stay in their current jobs when economic conditions weaken and job opportunities become scarcer. Key details show that job openings declined notably in sectors like healthcare, finance, real estate, retail and hospitality, which had previously experienced robust hiring. The ratio of job openings to unemployed workers decreased from 1.5 in September to 1.3 in November, nearing the pre-pandemic norm of around 1.2 after peaking at 2.0 in 2022. Additionally, the quits rate among private-sector workers remained unchanged at 2.6%, returning to pre-pandemic levels. The U.S. is expected to add 190,000 new jobs in November, following a modest increase of 150,000 jobs in October. Overall, the labor market seems to be cooling off, aligning with the Federal Reserve’s efforts to manage inflation without triggering a recession. Consequently, it is widely anticipated that the central bank will maintain its current interest rate levels at its upcoming meeting.3

Private sector employment in November increased by 103,000 jobs, with annual pay rising by 5.6% year-over-year, as reported in the ADP National Employment Report. The hospitality and restaurant industries were prominent job creators during the post-pandemic recovery but are now returning to a more moderate hiring and wage growth trend, according to Nela Richardson, ADP’s chief economist. In November, job-stayers experienced a 5.6% pay increase, the slowest since September 2021, while job-changers saw an 8.3% pay gain, the smallest year-over-year increase since June 2021. This reflects a narrowing pay gap between job stayers and job changers, the smallest in three years of data.4

In the third quarter, U.S. worker productivity surged at a revised annual rate of 5.2%, the fastest pace since 2020 and the quickest, excluding the pandemic, since 2009. The initial estimate was 4.7%. Over the past year, productivity has risen by 2.4%, following a 1.2% gain in Q2, marking the first consecutive quarters of growth since early 2021. Output was revised to a 6.1% increase, while hours worked saw a 0.9% growth rate. Unit-labor costs fell 1.2% in Q3, with a 1.5% rise over the year. Debate continues on whether this productivity surge is sustainable.5

The Bank of Canada has maintained its target for the overnight rate at 5%, the Bank Rate at 5¼%, and the deposit rate at 5%. The central bank continues its policy of quantitative tightening. Economic growth in Canada stagnated in the middle of 2023, with a 1.1% contraction in real GDP in the third quarter following 1.4% growth in the second quarter. Higher interest rates are curbing spending, with minimal consumption growth and essentially flat business investment over the past year. The labor market has weakened, with slower job creation, declining job vacancies and a modest rise in the unemployment rate. Despite this, wages are still increasing by 4-5% but overall, the data suggests the economy is no longer in excess demand.6

The number of Americans filing for unemployment benefits barely changed at 220,000, with a slight increase from the previous week’s revised figure of 219,000, indicating that layoffs remain very low despite reduced hiring by businesses. Continuing claims fell by 64,000 to 1.86 million, suggesting a gradual job search for some individuals. Economists caution that jobless claims can fluctuate sharply during the holiday season due to temporary hiring.7

According to the Federal Reserve, total consumer credit in the U.S. increased by $5.2 billion in October, a decrease from the prior month’s gain of $12.2 billion. This corresponds to a 1.2% annual growth rate, down from the 3% rate in the previous month. Economists had anticipated a $9.1 billion gain in consumer credit for October. Revolving credit, like credit card debt, grew at a 2.7% rate in October compared to the previous month’s 4.1% rate, while nonrevolving credit (e.g., auto and student loans) increased at a 0.7% rate after a 2.5% rate in the prior month. Experts suggest tightening credit standards and higher interest rates are beginning to impact credit growth.8

On Friday, the BLS reported the U.S. added 199,000 new jobs in November, slightly surpassing economists’ expectations of 190,000, but the report highlighted some softening in the labor market due to high interest rates. The return of striking workers accounted for part of the job growth, with most new jobs in healthcare and government, while other major industries either hired minimally or cut jobs. The unemployment rate fell to a four-month low of 3.7%, as half a million people joined the labor force and more job seekers found employment. Average hourly earnings rose by 0.4%, the largest increase in four months, with a 4% yearly wage growth, which the Federal Reserve aims to see slow to around 3% before ruling out further interest rate hikes.9

As we look ahead, investors are banking on a successful shift by central banks from restrictive policies to a more neutral stance to sustain and build upon this year’s gains. We anticipate that both the Federal Reserve and the Bank of Canada will opt for rate cuts rather than hikes, though the timing of such actions may introduce volatility.

Sources:

1 https://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

2 https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/november/

3 https://www.bls.gov/news.release/pdf/jolts.pdf

4 https://adp-ri-nrip-static.adp.com/artifacts/us_ner/20231206/ADP_NATIONAL_EMPLOYMENT_REPORT_Press_Release_2023_11%20FINAL.pdf

5 https://www.bls.gov/news.release/pdf/prod2.pdf

6 https://www.bankofcanada.ca/2023/12/fad-press-release-2023-12-06/

7 https://www.dol.gov/ui/data.pdf

8 https://www.federalreserve.gov/releases/g19/current/

9 https://www.bls.gov/news.release/empsit.nr0.htm

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

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The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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