The Market Update
The Markets - March 18, 2024
IN THE MARKETS
Stocks were mostly lower for the week, as investors weighed upside surprises in inflation data and signs of moderating consumer spending. The Dow Jones Industrial Average held up best among the major indexes and reached a record high on Wednesday before falling back to end the week. Energy shares outperformed on the back of higher oil prices, while technology shares lagged due to weakness in NVIDIA and other chipmakers.
Markets got off to a generally quiet start to the week, as investors awaited the release of consumer inflation data on Tuesday. The Labor Department's consumer price index (CPI) rose 0.4% in February, in line with consensus expectations, but core prices (less food and energy) rose a tick more than expected, also by 0.4%. Investors appeared to take the upside core surprise largely in stride, perhaps because it was due in part to a continued increase in shelter costs, generally considered a lagging indicator of overall inflation trends. Apparel costs jumped 0.6% but remained flat over the past 12 months.
U.S. MARKETS
The indexes saw consistent loss across the board. The below 5 indexes all lost some gains, with the S&P500 and Russell 2000 showing the largest losses of the group.
DOW & TECH
The Dow Jones Industrial Average lost 0.20% this week, not much by percentage loss, but signaling the second consecutive week of downward movement. It closed Mar 15 at 38,714.77 vs the prior week of 38,714.77. The tech-driven index, NASDAQ, also saw its second consecutive week in a downshift, losing 0.70% and closing at 15,973.17.
BY MARKET CAP
- The large-cap S&P 500 lost 1.30%, closing at 5,117.09 vs last week’s close of 5,123.69.
- S&P 400 mid cap lost 0.97%, closing at 2,923.76 vs its close last week of 2,952.39.
- After a slow decline last week, the Russell 2000 (small cap) sped up the downward momentum, losing 2.08%, closing at 2,039.32 over last week’s close of 2,082.71.
ON TO COMMODOTIES / FUTURES…
Futures were mostly up this week, with the exception of Gold. Silver, Copper, and Crude Oil all saw more than a 3% growth each.
- GOLD (GC00) ended the week at $2,159.40 per ounce vs the prior week of $2,186.20. While steady last week, Gold dropped 1.23% at market close this week.
- SILVER (SI00) gained again for the second week in a row, increasing to a close of $25.41 per ounce – a 50% gain over last weeks close of $24.55.
- COPPER (HG00), saw another week’s gains, this time boasting a 91% increase over the prior week. This commodity is sometimes viewed as a barometer of world economic health, ending the week up 5.91% at $4.12 per pound vs the prior week of $3.89.
- CRUDE OIL (CL-1) ended the week at $81.01 per barrel — an increase of 85% over last weeks close of $78.01.
LAST 52 WEEKS OF THE VOLITILIY INDEX (VIX)
- VIX closed at 14.41 this week, a 2.24% decrease over last week’s close of 14.74. This can be an be an indication that there may be less demand and options prices can start to decline.
HOW VIX WORKS
The Volatility Index or VIX is the annualized implied volatility of a hypothetical S&P 500 stock option with 30 days to expiration. It can help investors estimate how much the S&P 500 Index will fluctuate in the next 30 days. While the VIX only measures the volatility of the S&P 500 Index, it has become a benchmark for the U.S. stock market.
The VIX is often referred to as the market’s “fear index or fear gauge”. The performance of the VIX is inversely related to the S&P 500 – when the price of the VIX goes up, the price of the S&P 500 usually goes down. If the VIX is rising, demand for options is increasing, and therefore, becoming more expensive. If the VIX is falling, there's less demand, and options prices tend to fall. One thing to keep in mind is that current volatility cannot be known ahead of time. That's why it's a good idea to use the VIX in tandem with technical and fundamental analysis.
INTERNATIONAL MARKETS
The MSCI (Morgan Stanley Capital International) Emerging Markets Index lost 0.23% for the week closing at 1,034.74 vs the prior week of 1,037.09, with a YTD growth of 0.98%.
U.S. MARKET NEWS
PRODUCERS FACE HIGHER INPUT COSTS
Thursday’s upside producer inflation surprises appeared to cause greater consternation. The producer price index (PPI) rose 0.6% in February, roughly double consensus estimates and the most in six months. While core producer prices rose only 0.3%, this was also slightly more than expected. On a year-over-year basis, headline producer prices were up 1.6%, well above expectations and at the highest level since September. The data appeared to weigh on hopes that low inflation or even deflation in producer prices would eventually flow down to prices paid by consumers.
The stock market’s reaction to the inflation data may have been mitigated by surprising weakness in Thursday’s retail sales report. The Commerce Department reported that retail sales rose 0.6% in February, but the gain missed expectations and was largely due to an increase in gasoline prices (retail sales data are not adjusted for inflation). Notably, online sales also declined 0.1%, marking a sharp deceleration from the 6.4% increase over the past 12 months. Sales at restaurants and bars increased 0.4%, but also at a slower pace, suggesting some growing consumer caution. Indeed, the University of Michigan’s survey of consumer sentiment, released Friday, indicated a modest decline in consumer expectations, with American’s perceiving “few signals that the economy is currently improving or deteriorating,” according to its lead researcher.
YIELDS RISE ON INFLATION DATA
The bond market’s reaction to the inflation surprises was more pronounced, with the yield on the benchmark 10-year Treasury note touching its highest intraday level (4.32%) since February 27. (Bond prices and yields move in opposite directions.) Municipals outperformed Treasuries, even as primary issuance volume rose sharply. The largest deals appeared to do well as traders observed strong demand from retail investors.
Traders also noted that investment-grade issuance was heavy at the start of the week and was also largely oversubscribed. Likewise, high yield bond investors appeared to view the hotter-than-expected CPI number as manageable given the technical backdrop of high cash balances and limited new issuance. Investors seemed ready to use any weakness to add positions. However, the market turned lower along with equities amid broad macro headwinds following the release of PPI data.
INTERNATIONAL MARKET NEWS
In local currency terms, the pan-European STOXX Europe 600 Index added 0.31%, notching an eighth consecutive weekly gain. Encouraging corporate earnings and growing hopes that the European Central Bank (ECB) would lower borrowing costs in June stoked the advance. France’s CAC 40 Index rose 1.70%, Italy’s FTSE MIB gained 1.61%, and Germany’s DAX added 0.69%. The UK’s FTSE 100 Index put on 0.94%.
The yield spread between German and Italian benchmark 10-year sovereign bonds narrowed significantly due to growing confidence in Italy’s economic policy and increased demand for high yield debt ahead of a likely reduction in borrowing costs later this year.
The unemployment rate in the UK unexpectedly rose from 3.8% to 3.9% in the three months through January. Wage growth, excluding bonuses, fell to 6.1%, the lowest level since mid-2022. Meanwhile, the UK economy showed signs that it may be recovering from a recession in the second half of 2023. Gross domestic product (GDP) increased 0.2% sequentially in January, bolstered by expansion of retailing and wholesaling. However, GDP fell 0.1% over the three months through January.
JAPAN
Japan’s stock markets generated a negative return over the week, with the Nikkei 225 Index losing 2.5% and the broader TOPIX Index down 2.1%. The likelihood of the Bank of Japan (BoJ) ending its negative interest rate policy in the near term rose with the announcement of the highest average wage rises for members of Japan’s labor unions since the early 1990s. The BoJ is committed to the view that monetary policy tweaks will hinge on the meeting of its 2% inflation target, driven by inflation accompanied by wage growth. Economists’ consensus expectations are now converging around a March or an April interest rate hike.
The BoJ’s ultra-accommodative policy has weighed heavily on the yen, boosting many of the country’s large-cap exporters who derive their revenues from overseas. The yen weakened over the week, to the high end of the JPY 148 against the USD range, from around JPY 147 at the end of the previous week. The yield on the 10-year Japanese government bond rose to 0.79% from a prior 0.73%, hitting its highest level in about three months in anticipation of the BoJ adjusting its monetary policy settings.
BoJ Governor Kazuo Ueda gave a relatively downcast view of the country’s prospects, stating that while the economy is recovering moderately, weakness has been seen in some data. However, economic growth figures released early in the week showed that Japan had in fact averted a technical recession (marked by two successive quarters of negative growth) in the final quarter of last year. Gross domestic product in the fourth quarter of 2023 expanded 0.1% on the quarter compared with the earlier release suggesting the economy had contracted 0.1%. On an annualized basis, this equated to a 0.4% expansion versus a prior fall of 0.4%.
CHINA
Chinese stocks rose as the government’s recent market stabilization measures boosted investor confidence despite a weak economic outlook. The Shanghai Composite Index gained 0.28%, while the blue chip CSI 300 added 0.71%. In Hong Kong, the benchmark Hang Seng Index rallied 2.25%, according to FactSet.
China’s consumer price index rose an above-consensus 0.7% in February from the prior-year period, reversing January’s 0.8% decline and marking the first positive reading since August 2023 as food and services prices increased and consumption surged during the weeklong Lunar New Year holiday. However, the producer price index fell a bigger-than-expected 2.7% from a year ago, accelerating from January’s 2.5% drop and marking the 17th monthly decline, the longest streak of declines since 2016, according to Bloomberg. Investors remained cautious on calling a trough to deflation as China grapples with weak domestic demand.
The People’s Bank of China injected RMB 387 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.5%, as expected. With RMB 481 billion in loans set to expire this month, the operation resulted in a net withdrawal of RMB 94 billion from the banking system, the first cash extraction through the liquidity instrument since November 2022.
Best regards,
The PRS Investment Research Committee:
Dan Pinkerton, CFP®, CKA® -- Founder, CEO
Ron Glendening, CPM®, CFP®-- COO
Matt Weed, CPM® -- Chief Investment Strategist
Gary Pinkerton, MBA, AIF®, CFP® -- Institutional Portfolios Director
Paul Steenblik CFA, CFP® -- Active Research Specialist
Nick Helgeson CFP® -- Alternative Investments
Pinkerton Retirement Specialists, LLC
2000 John Loop
Coeur d’Alene, ID 83814
208-667-8998 or 1-800-634-2008
*S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal
* Sources: All index- and returns-data from Norgate Data and Commodity Systems Incorporated; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, visualcapitalist.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.