Weekly Market Update: Major Indices Decline Amidst Economic Concerns and Central Bank Actions

• Major equity indices experience a decline as concerns over additional interest rate hikes and economic slowdown weigh on investor sentiment.
• Housing market shows mixed results with an increase in building permits and housing starts, while home prices continue to drop.
• The Federal Reserve hints at future rate hikes as economic indicators show a 14th consecutive monthly decline, while businesses continue to expand at a slower pace.                                              

Major equity indices finished lower this week, with the S&P 500 recording its first drop in six weeks and the Nasdaq’s first weekly decline in two months. Growth once again outperformed value, and large caps outpaced small caps. European stock indices are experiencing declines due to concerns that the possibility of additional interest rate hikes in the United Kingdom could lead to a recession in Britain, which in turn, could have adverse effects on the Eurozone. On Thursday, the Bank of England (BOE) unexpectedly raised its key interest rate by half a percentage point to 5.0% on data that inflation remains persistent. Also, disappointing economic recovery in China and hawkish comments from the U.S. Federal Reserve Chairman Jerome Powell weighed on investor sentiment.  

U.S. economic data was limited due to the Monday holiday. On Tuesday, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development reported that privately-owned building permits increased to an annual adjusted rate of 1,491,000 or up 5.2% from the revised April rate. Privately-owned housing starts jumped 21.7% from the April revised estimate to a 1,631,000 annualized rate. In May, the number of housing completions reached an annualized rate when adjusted for seasonal variations¹. Both single and multi-family construction rose in May. With mortgage rates above 6%, existing homeowners have little incentive to sell. In a recent Redfin analysis of the Federal Housing Finance Agency (FHFA) data, as of the fourth quarter of 2022, the most recent period for which data is available:

• 92% of existing homeowners have mortgages below 6%
• 82.4% have rates below 5%
• 62% have a rate below 4%
• 23% have rates below 3%²

The Labor Department reported on Thursday that, for the week ending June 17, initial unemployment claims remained unchanged at 264,000. Continuing claims for all programs for the week ending June 3 was 1,674,824 – an increase of 55,481 from the previous period³. The U.S. National Association of Realtors reported that sales of existing homes increased by 0.2% to an annual rate of 4.3 million in May. However, the median price for existing homes fell 3.1% to $396,100. Home prices have dropped for the fourth month in a row. Homes listed for sale average 18 days on the market compared to 22 days in April, and all-cash buyers made up 25% of the sales⁴.

Also, on Thursday, the Conference Board reported that the economic index dropped 0.7% in May. The May reading is the 14th consecutive monthly decline. The index comprises ten indicators designed to show whether the economy is improving or deteriorating. Six of the indicators declined in May. The Conference Board Coincident Economic Index (CEI) for the U.S. increased by 0.2 percent in May 2023 to 110.2 after rising by 0.3 percent in April. The CEI’s component indicators (payroll employment, personal income less transfer payments, manufacturing trade and sales and industrial production) are included among the data used to determine recessions in the U.S. While recent data for industrial production have contributed negatively to the coincident index, sales, employment and income growth remained positive⁵.    

The S&P Global Flash US PMI Composite Output Index slipped to 53.0 from April’s 54.3 on Friday. Although the growth rate is at a three-month low, U.S. businesses continued to expand in June. Manufacturers reported a renewed contraction in production, while service providers saw a slower, but still solid, increase in output. The U.S. Manufacturing PMI fell to 46.3 in June from 48.4 in May. U.S. businesses recorded the fastest rate of contraction in new orders since December 2022. Input prices fell, resulting in only a fractional increase in selling price inflation. The U.S. Service PMI slowed from May’s 54.9 but is still holding at 54.1, indicating a solid expansion in output at services firms. Demand conditions at service providers remained robust, as new orders increased strongly in June⁶.    

In testimony before the Senate and House Committees, the Fed Chairman stated, “Nearly all [policymakers] expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” Indeed, the Fed’s latest Summary of Economic Predictions revealed that most of those on the policy committee expect at least two more quarter-point rate hikes in the coming year—although futures markets continued to predict that was unlikely⁷. Market sentiment will continue to seesaw between optimism and pessimism in the coming months. Many are calling for a correction and further rate increases, bringing the economy to its knees and a recession, while others are expecting no further rate increases, a mild or soft landing and a broadening of market breadth. Time will tell who will win the debate.   

Sources:

¹https://www.census.gov/construction/nrc/pdf/newresconst.pdf

²https://www.redfin.com/news/high-mortgage-rates-lock-in-homeowners-2023/?mod=article_inline

³https://www.dol.gov/ui/data.pdf

⁴https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales

⁵https://www.conference-board.org/topics/us-leading-indicators?mod=article_inline

⁶https://www.pmi.spglobal.com/Public/Home/PressRelease/6e8efbfbddde43f29eb12c5193939625

⁷https://www.federalreserve.gov/newsevents/testimony/powell20230621a.htm

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

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