What We Are Watching This Week
- S&P U.S. Services PMI
- ADP Employment Report
- U.S. Employment Report
- Factory Orders
Highlights From Last Week
- Consumer Confidence
- Personal Consumption Expenditures (PCE) and Core PCE
- ISM Manufacturing
- S&P Case-Shiller Home Price Index
In November, Canadian stocks jumped over 8%, contributing to the TSX’s return to positive territory for the year. U.S. stocks surged, posting their best monthly performance in nearly 1.5 years, with gains exceeding 9%. This was the seventh-best monthly return in the past 30 years and marked the second-best November performance. The S&P 500 has risen nearly 12% since its low on October 27.
Several favorable factors supported the robust November rally. Inflation continued to decrease; the Federal Reserve indicated a pause in tightening monetary policy and the economy remained resilient. Despite high interest rates, corporate earnings surpassed expectations. This strong November performance suggests a solid foundation for the market, though occasional fluctuations may occur as we approach 2024. With stocks near their year-high levels, there’s optimism for a positive posture in the market in the upcoming year.
Most major North American stock indexes had a positive week. Falling Treasury yields continued to boost market sentiment and the bond market recorded its best monthly performance since 1985. In Europe, the STOXX Europe 600 Index increased by 1.35% in local currency due to lower inflation and declining bond yields, which lifted investor confidence. Major European indexes also rose, including Germany’s DAX by 2.3%, Italy’s FTSE MIB by 1.69%, France’s CAC 40 Index by 0.73%, and the U.K.’s FTSE 100 Index by 0.55%.
On Monday, the S&P CoreLogic Case-Shiller 20-City Home Price Index revealed that home prices in the 20 major U.S. metropolitan areas hit a new record high for the seventh consecutive month, driven by an ongoing shortage of available homes. The 0.2% increase in September marked its highest level since its creation in the late 1980s. Over the past year, these cities saw a 3.9% rise in home prices, a significant increase compared to the 2.5% rise in August. Detroit recorded the largest year-over-year price increase at 6.7%, followed by San Diego at 6.5%. However, some cities like Portland, Phoenix, and Las Vegas experienced declines. High interest rates have deterred some buyers, but the demand remains strong due to a shortage of available properties and new housing construction. Unfortunately, these challenges are expected to persist.1
Consumer confidence rebounded in November, rising to a reading of 102 from the revised October figure of 99.1, according to the Conference Board’s closely watched index. While this exceeded the Wall Street Journal‘s forecast of 101, consumers’ concerns about a looming recession persisted. Despite a robust job market, Americans remain dissatisfied with the economy due to a severe bout of inflation, which has driven prices up by 18% over the past three years and eroded their standard of living. High interest rates have compounded the economic challenges and are expected to slow economic growth further. The current assessment of how consumers perceive the economy dipped slightly from 138.6 to 138.2, while the forward-looking confidence gauge for the next six months improved from 72.7 to 77.8. However, for the past three months, the future expectations index has stayed below the critical 80 mark, often indicating an impending recession. Approximately two-thirds of consumers surveyed expressed concerns about a recession in the coming year. Despite the sharpest increase in interest rates in decades, the U.S. economy has thus far avoided a recession. However, higher borrowing costs are beginning to be felt, with reduced hiring and investment by businesses and consumer cutbacks. It remains to be seen whether the U.S. can continue to defy historical patterns and avoid a recession typically associated with significant interest rate hikes. According to Dana Peterson, chief economist at the Conference Board, consumers’ top concerns continue to be rising prices, followed by global conflicts and higher interest rates.2
The U.S. economy experienced robust growth in the third quarter, with GDP expanding at a revised 5.2% annual rate, up from the initial 4.9% report, marking the strongest growth in a decade, excluding the pandemic years. However, this surge appears to be a one-time occurrence, as economic activity has cooled recently. Consumer spending, representing 70% of the economy, slowed to a 3.6% pace in Q3, with economists doubting its sustainability given current income levels. Business investment and government spending also contributed positively to GDP, while higher interest rates aimed at curbing inflation are expected to continue slowing economic growth in the coming year.3
On Thursday, the U.S. Labor Department reported that in the week ending November 25, initial jobless claims increased by 7,000 to 218,000, slightly below economists’ estimates of a rise to 220,000. The number of people already receiving jobless benefits from all programs in the week ending November 18 surged by 86,000 to 1.927 million, the highest level since November 2021. Jobless claims tend to be volatile during the holiday season, and experts caution against overinterpreting the data. The rise in continuing claims suggests that finding new jobs is becoming more challenging for laid-off workers, aligning with a softer labor market described in the Fed’s Beige Book survey.4
In October, U.S. consumer spending saw a modest 0.2% increase, in line with analysts’ expectations, potentially signaling a slowdown in the economy. While consumer spending is a primary driver of the U.S. economy, the 3.6% growth in the third quarter, though robust, was considered unsustainable. Notably, Americans spent more on essential items like healthcare, housing, and utilities but reduced their spending on new cars due to high prices and interest rates and spent less on gas as oil prices declined. Incomes rose by 0.2% in October and the U.S. savings rate increased to 3.8%, although it has decreased since the pandemic, suggesting reduced financial safety nets for Americans.
The PCE price index, the Federal Reserve’s favored inflation gauge, remained flat in October. The inflation rate for the past year dropped to 3.0% from 3.4%, the lowest since February 2021. The core PCE index, which excludes food and energy, increased by 0.2% in October, aligning with expectations. Over the past year, the core rate slowed to 3.5% from 3.7%, the lowest since spring 2021. While inflation remains above the Fed’s 2% target, some experts believe the current interest rates may be sufficient to reach the target in the coming years. Investors are increasingly betting that the Fed has concluded its interest rate hikes, as the central bank has raised its benchmark short-term rate from near zero to 5.5% in just 18 months, potentially slowing the economy. Despite signs of consumers becoming more selective and price-conscious, a significant pullback in consumer spending that would indicate an impending recession is not expected. The ongoing labor shortage, giving employees more leverage, is likely to persist and continue supporting consumer spending.5
In November, the Manufacturing PMI remained at 46.7%, indicating continued contraction in the overall economy. This marks the second consecutive month of contraction following one month of weak expansion and nine months of contraction prior. The New Orders Index also stayed in contraction territory at 48.3%, slightly improving from October. The Production Index declined to 48.5%, down from 50.4% in October. Prices rose, with the Prices Index reaching 49.9%, up from 45.1% in the previous month. The Backlog of Orders Index decreased to 39.3%, and the Employment Index fell to 45.8% from 46.8% in October, indicating challenging manufacturing conditions.6
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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