Markets Blog
Index Performance
U.S. and International Equities
Markets Mostly Higher
The major market averages finished higher, reversing last week’s losses. Equities have done well despite fourth quarter earnings coming in lighter-than-expected. In addition, stocks have shrugged off economic slowdown conditions as the Federal Reserve (Fed) has pushed through rate increases to stymie inflation.
Investors believe that cooling inflation and a slowing economy should allow for the Fed to pivot on monetary policy. This is also helping the market averages. Emerging markets continue to perform well as Hong Kong and Chinese stocks outperformed given positive reopening/policy support dynamics.
Fixed Income Higher as Yields Decline
The Bloomberg Aggregate Bond Index finished the week marginally higher as yields declined amid next week’s FOMC meeting. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished the week higher.
High-yield bonds and bank loans are off to their strongest start in a calendar year since 2019. We believe spreads will settle into a range near-term supported by receding recession risks, earnings, a strong technical, and improving capital market access. Within the spread sector categories (high yield, bank loan, emerging market debt and non-U.S. developed), we still prefer to own high yield bonds, although valuations are fair to rich.
Commodities Mixed
Oil and natural gas prices finished the week mixed. Natural gas prices have been trending lower as warmer-than-anticipated weather and storage facility inventories remain at record seasonal highs. OPEC+ plans to meet next week to review crude production levels with the group expecting no change to current output policy. The major metals, including gold, silver, and copper finished the week mixed.
Economic Weekly Roundup
U.S. Housing Affordability
The rate of existing home sales in December fell to the slowest pace since 2010 as higher borrowing costs squelch demand. Median prices declined for the sixth consecutive month, but the overall shortage of homes available for sale is keeping median prices elevated. All cash deals were 28% of sales in December as households with home equity continue to relocate to lower cost of living areas and not needing to tap mortgage markets.
The housing market is reeling from years of under-building, economic uncertainty, and high interest rates. As demand cools and households settle, the available supply of homes for sale will likely shrink for the first part of this year. If supply of available homes for sale falls from here, we should expect median prices to stay elevated, especially hurting first-time buyers. Given the confluence of these factors, housing affordability is the lowest since the mid-1980s and will hamper demand for single-family homes in the first part of this year.
U.S. Leading Indicators
The index of leading economic indicators (LEI) fell 1% month-over-month in December from higher unemployment claims, weaker new orders and shorter average workweeks. The six-month percent change in the December LEI fell over 4%, the deepest decline since the onset of the global pandemic. Bottom Line for Investors: The declining index of leading economic indicators signals imminent recession.
Eurozone PMI
January Eurozone composite Purchasing Manager’s Index (PMI) rose above 50 for the first time since June. Values above 50 indicate expansion. Sentiment is improving in much of Europe from a mild winter, thereby limiting energy demand. China’s reopening is also adding confidence to the outlook for Europe. Decelerating inflation rates add to the attractiveness of the region as investors look to increase exposure.
Weekly Employment Report
Initial claims for the latest week came in below economists’ expectations while continuing claims increased higher. Labor market conditions are showing some signs of slowing job growth, increasing layoffs, and higher unemployment.
Week Ahead
The following economic data and potentially market-moving events are slated for the week ahead:
Tuesday: Federal Housing Finance Agency Home Price Index (Nov), S&P/Case-Shiller Home Price Index (Nov), Consumer Confidence (Jan)
Wednesday: ADP Employment Survey (Jan), S&P Global PMI Manufacturing (Jan), JOLTS Job Openings (Dec), ISM Manufacturing (Jan), Construction Spending (Dec), FOMC Meeting
Thursday: Weekly initial and continuing unemployment claims, unit labor costs (Q4), productivity (Q4), factory orders (Dec)
Friday: Hourly earnings (Jan), average workweek (Jan), unemployment report (Jan), PMI composite, S&P Global PMI services (Jan), ISM PMI services (Jan)
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