Economic Indicators in Tug of War: Leading vs Coincident
Photo Credit: Michael G, Unsplash
Weekly Market Recap for November 24, 2023
Earlier this week, the U.S. Department of Labor announced that initial jobless claims tallied a modest 209,000 for the week ending November 18th, versus economists’ consensus estimate of 227,000 and the revised prior-week total of 233,000. Higher interest rates are having an impact on consumer and business spending. With pricing power beginning to weaken, companies are looking to trim costs and potentially reduce staff. Jobless claims may trend upward in the coming quarters.
In addition, the U.S. Census Bureau reported, on a preliminary basis, that durable goods orders fell 5.4% last month, following a 4.6% gain in September. Adjusting for transportation goods (including automobiles), orders were flat, compared to the revised previous month's reading of 0.2%. The University of Michigan will shortly provide its final reading on November consumer sentiment. It is expected to fall to 60.6 from the October level of 63.8. Elevated prices of goods and services and higher borrowing rates are weighing on people's views of their financial situations.
Next week, the Bureau of Economic Analysis will update October's Personal Consumption Expenditures price index. Wall Street is hoping for no, or very slow, inflation. That could support higher share prices year-over-year. Also, stocks could benefit if the Federal Reserve decides at its December 12–13 meeting to hold short-term interest rates steady at 5.25-5.50%.
S&P 500 Index (Last 12 Months)
Homebuilder Sentiment Drops to 12-Month Low
The NAHB homebuilder sentiment index fell to 34 in November, the lowest level since December 2022, and a sharp drop from 56 in July. The decline occurred as the average 30-year fixed-rate mortgage rose from 6.80% in July to 7.80% in October, which increased borrowing costs and weighed on builder confidence. The decline in homebuilder sentiment and the falling ISM Mfg PMI suggest the US economy will struggle to remain in the expansion phase of the business cycle.
Homebuilder Sentiment Drops to a 12-Month Low
Existing Home Sales Fall to 2010 Levels
Higher Interest Rates Slow Economy in Q3
The big Q3 story was the sharp rise in Treasury yields, with the 30Y yield climbing from 4.25% in August to over 5% in October. The recent dip in homebuilder sentiment adds to the growing list of evidence that indicates the rise in yields slowed the economy's momentum. The ISM Mfg PMI declined to 46.7 in October from a 12-month high of 49 in September, indicating that the recent manufacturing rebound stalled. Labor market growth slowed in the third quarter, and the unemployment rate rose to 3.9%, the highest level since January 2022. Inflationary pressures eased as the price of oil dropped from over $90 to $75 per barrel due to demand concerns. The collective data suggests the Fed's tightening actions started to gain traction in Q3 as rates on the long end of the yield curve spiked. However, the recent yield reversal risks undoing a portion of the tightening.
Will the Recent Rate Reversal Stimulate Demand?
In the last month, interest rates have retraced nearly half of their Q3 surge, with the 30Y yield sliding from 5.1% to under 4.6%. This yield decline eases financial conditions, which could unleash a new wave of demand in addition to falling oil prices. If it does, we could see a rebound in activity in the coming months, such as improved homebuilder sentiment, a rise in ISM Mfg PMI, and a return of inflationary pressures. The new wave of demand could reshape the economic and monetary landscape by pushing out the timeline for a recession. This would give the Fed less reason to cut rates in the near term, but it would also put more pressure on the Fed to keep raising interest rates rather than adopting a patient approach. Together, these trends favor "higher for longer" and suggest there is room for interest rates to reverse higher. If the economy can function at current interest rate levels, then rates may not be restrictive enough in the Fed's eyes.
Leading Economic Index Declines
The Leading Economic Index (LEI) declined for the 19th consecutive month in October, the longest streak since the 2008 financial crisis. It was also the LEI's lowest reading since May 2020. While the LEI indicates the growth rate is slowing, the Coincident Economic Index (CEI) continues to trend higher and sits at an all-time high. It's a notable divergence, with the LEI's 19 monthly declines signaling a recession but the CEI not confirming. We attribute the gap between LEI and CEI to multiple macro themes, including an extended period of 0% interest rates, a $4 trillion expansion of the Fed's balance sheet, and a surge in fiscal deficits as government spending outpaces income. The looming question is how much longer the U.S. economy can continue to outrun the impact of higher rates.
Leading Economic Index Signals Recession
Nasdaq 100 Within 5% of All-Time High
The Nasdaq 100 has gained nearly 50% in 2023 after plunging -33% in 2022. This year’s rally brings it within 5% of the all-time closing high on November 19, 2021. Investors are optimistic that the Fed is finished raising interest rates, and there is excitement about the emerging AI industry. Moreover, there is growing optimism that the Fed can engineer a soft landing and that corporate earnings will increase in 2024. To sum it up, a lot of optimism is priced into the Nasdaq 100. Investor optimism powered the Nasdaq 100 and S&P 500 this year, but if the above forecasts are incorrect, today’s optimism could be a 2024 headwind. Given this risk, we favor an underweight to Mega Cap Growth. The ETF models currently express this Mega Cap Growth underweight via JQUA and USMV, and we intend to hold those positions throughout 1H 2024.
Nasdaq 100 Approaches All-Time Closing High
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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