Markets Blog
David Matzko, LPL Research
Weekly Market Performance for the week of May 27, 2024. Tepid demand for Treasury securities this week pushed the Bloomberg Aggregate Bond Index slightly lower. While yields varied, intermediate and longer maturities saw a small move higher. The lackluster performance in Treasury auctions, totaling over $180 billion, suggests higher yields may be necessary to entice buyers and absorb the increased supply. U.S. equities fell as higher yields and mixed earnings reports dampened investor sentiment. The S&P 500 lost well over 1% for the week, ending its five-week run higher. Tech stocks, especially those in the artificial intelligence (AI) space, were hit hard by profit-taking and earnings disappointments, while the energy sector was the top outperformer.
Index Performance
U.S. and International Equities
Markets: U.S. equities struggled with higher yields and mixed results at the tail end of earnings season, leaving the S&P 500 Index down about 1.3% for the holiday-shortened week and ending five-week win streaks for the S&P 500 and Nasdaq Composite. Former President Trump’s convictions did not seem to impact markets much initially, but political uncertainly may have contributed to the lackluster finish to the week. Based on recent market correlations, a slight shift toward Biden would likely correspond to some, but not much equity market weakness.
Earnings disappointments, along with some profit taking was evident in technology, which finished at the bottom of this week’s sector rankings after leading the previous week. A sharp earnings-driven drop of about 15% in Salesforce (CRM) shares triggered concerns about artificial intelligence (AI) crowding out investment in enterprise software. Meanwhile, that didn’t stop shares of NVIDIA (NVDA) from rising for the week.
Weakness in technology alongside gains in the energy, real estate, and utilities sectors enabled the Russell 1000 Value Index to hold up relatively well. The value index fell but outperformed the growth side by about 1.7 percentage points. Energy benefited from higher natural gas prices; utilities continued to garner support from power needs for AI data centers; and real estate got a boost from gains in wireless cell tower stocks and the slight cooling of inflation. Small caps held up relatively well as the Russell 2000 Index suffered only a modest decline of about 0.5%.
International developed market equities fell less than U.S. equities, with gains in Japan and Switzerland helping to mitigate losses in the Netherlands, France, and the U.K. Declines in China and technology-oriented markets in South Korea and Taiwan dragged the emerging markets (EM) index down about 3% for the week. Markets are balancing attractive valuations and some encouraging technical analysis indicators with heightened trade tensions and choppy recent economic data.
Fixed Income: The Bloomberg Aggregate Bond Index was slightly lower on the week following tepid demand for Treasury securities this week. Treasury yields were mixed across the yield curve, with the intermediate to longer-maturity yields higher by a few basis points.
The Treasury Department auctioned off over $180 billion (total) of 2-year, 5-year, and 7-year notes this week, and each one was met with very tepid demand. This week’s lousy Treasury auctions may signal that Treasury yields must stay elevated to attract the price-sensitive buyers needed to take down elevated levels of Treasury supply.
A holiday-shortened week and the unofficial summer kick-off probably explained some of the disinterest, but recent trends suggest that bearish Treasury positioning is re-emerging. Recent commitments of traders' data show that speculators have started to add to short positions, particularly in the front end and belly of the curve. Additionally, the J.P. Morgan Treasury sentiment survey data showed both active clients and all clients pulled back in net-long positioning.
Auction amounts are going to continue to climb as the Treasury Department needs to fund large budget deficits, so the ongoing success (or lack of) is going to influence Treasury prices (at least on the margin). Until/unless budget deficits fall, elevated levels of Treasury volatility are likely. However, it’s important to remember that buying bonds and holding to maturity help mitigate the day-to-day volatility in markets.
Commodities: The benchmark Bloomberg Commodities Index reversed sharply to fall more than 3% on the week as base metals and softs (grown commodities such as orange juice, soybean meal, and corn, etc.) led the complex lower. Energy was also on the backfoot as front-month West Texas Intermediate (WTI) futures didn't hold onto gains above the 200-day moving average and are once again testing the May range lows ahead of the OPEC+ meeting this weekend. Consensus expects the organization to announce a continuation of production cuts, but the market clearly remains on edge. On the positive side in commodities, Cocoa continued its sharp reversal higher and rallied over 12% on the week and is now up more than 37% since May 20, as renewed supply concerns fuel the advance.
Economic Weekly Roundup
Consumers had fewer job opportunities this month, reminiscent of early 2021.
The number of consumers saying jobs are not so plentiful is the highest since early 2021. Consumers find the job market is softening.
Buying plans are also slowing down as fewer consumers plan to buy a home and other big-ticket items.
Bottom Line: The job market is likely cooling off and that should translate into improving inflation dynamics, giving the markets some reprieve as investors struggle with uncertain interest rate expectations.
Real final sales to domestic purchasers in Q1 were revised down, illustrating weaker momentum in the beginning of 2024. But we have good news on business investment in capital.
Consumer spending was not as strong as originally reported, pulling headline growth down to 1.3% annualized from the initial estimate of 1.6%.
On the positive side, business fixed investment was revised up as businesses invested in artificial intelligence and other technologies.
Inflation was better than originally reported as both the headline and core measures were revised downward.
Bottom Line: Momentum is slowing as consumers struggle with lingering inflation pressures. A bright spot in the macro landscape is business investment, as firms continue to invest in new technologies. We should expect inventory investment to have a small rebound in the current quarter and investors should expect slower momentum in consumer spending to continue throughout the balance of 2024.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Manufacturing Purchasing Managers' Index (PMI) (May final), Construction Spending (Apr), Institute for Supply Management (ISM) Manufacturing (May)
Tuesday: Job Openings and Labor Turnover Survey (JOLTS) Job Openings (Apr), Factory Orders (Apr), Durable Goods Orders (Apr final),
Wednesday: MBA Mortgage Applications (May 31), ADP Employment Change (May), Services PMI (May final), ISM Services (May)
Thursday: Challenger Job Cuts (May), Nonfarm Productivity (Q1 final), Trade Balance (Apr), Initial Claims (June 1)
Friday: Nonfarm Payrolls (May), Unemployment Rate (May), Wholesale Inventories (Apr Final), Consumer Credit (Apr)
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