Wentz Weekly Insights
Another Positive Week for Stocks with NADSAQ Reaching New Highs

Another positive week for stocks. Three of the four major stock indexes were higher last week, with the exception of the Dow which fell only slightly, and led by small caps with a 3% increase in the Russell 2000 which outperformed the S&P 500 by about 2%. The S&P saw its 16th gain in the past 18 weeks, the best stretch in over 50 years, and closed out February with its fourth consecutive month gain, rising 21% over that period.
It was also another week led by AI and semiconductor stocks, driven by memory chip maker Micron saying it began production of memory chips used in Nvidia’s latest AI chip and Dell saying it saw high demand in its AI servers.
While those were micro headlines that drove gains in specific sectors, the market as a whole was more focused on the latest batch of inflation and consumer data. This came Thursday morning with the personal income and outlays report that included the PCE price index, the Fed’s preferred inflation reading. Incomes rose a much more than expected 1% in January, but it may have been due to one-time beginning of the year cost-of-living adjustments, while consumer spending rose 0.3%. Spending was mixed but confirmed the retail sales data which was weak. Spending on goods dropped over 1% (up 1.7% over the past year) while spending on services was strong with a 1.0% increase in the month (up 7.3% over the past year) as people continue to do things rather than buy things.
Numbers on the PCE price indexes, one of the more important inflation readings, came in exactly as expected – the index rose 0.3% in January, and was up 2.4% from a year ago. The core index which excludes food and energy, rose 0.4% in the month and up 2.8% from a year ago. In addition, the “super core” index which is a measure that excludes goods, food, energy, and housing, rose 0.6% in the month and still almost double the Fed’s 2% target with a 3.5% annual increase. Both annual figures reflect a slowdown from the past several months, despite the larger monthly increase in January.
The other side of the story is the personal savings rate (the amount saved after taxes and spending) at 3.8% remains near the lowest since the pre-Financial Crisis years (excluding during the pandemic when people weren’t doing anything or spending money), which may suggest consumers are becoming more strapped that they are stretching budgets. For reference, the 10-year average savings rate prior to the pandemic was 7.5%.
The other big macro focus was Fed speak but nothing that revealed new details of thinking at the Fed. The ‘higher interest rates for longer’ narrative continued and futures pricing has adjusted and become more in line with the Fed thinking of only three rate cuts this year, but markets have not adjusted like they did in 2023 with stocks unfazed as they continue to move higher and Treasury yields remaining steady.
Meanwhile, oil moved over $80/barrel for the first time since November with gasoline prices the highest since then, averaging $3.33 per gallon last week. Mid East tensions have continued to put steady upward pressure on oil due to uncertainty. Over the weekend, OPEC said it agreed to extend its oil production cuts through the second quarter. The group has agreed to voluntarily cut production 2.2 million barrels per day, continuing an agreement that has been in place for months. For reference, global oil demand is about 102 million barrels per day.
The focus this week will shift to the labor market with the next batch of data and politics. The latest on job openings, ADP’s payroll numbers, weekly jobless claims, and the Department of Labor’s employment number will provide the latest picture on the labor market. Economists are expecting around 190,000 new jobs for February in Friday’s employment report.
On the political side, voters in 15 states head to the polls in the next round of primaries for Super Tuesday, President Biden will give the annual State of the Union address on Thursday, and Congress will remain busy on finding a resolution to a budget for this fiscal year before the next deadline March 8.
Week in Review:
The week started off uneventful, with focus on Warren Buffet’s quarterly meeting over the weekend and comments that there are a lack of deal/investment opportunities. Tuesday was more of the same with small caps seeing a strong outperformance, while Wednesday saw a small decline due to weakness in mega cap names.
The main event for the week was Thursday morning’s inflation data that was exactly in line with expectations across the board, showing a pickup in inflation in January but an annual rate that decelerated. As it was not as bad as feared, market moved higher after the report with the NASDAQ reaching the first new high since November 2021. On the political front, Congress struck a deal to keep the government funded before Friday’s shutdown deadline. The week ended with weakness in regional banks after an update from New York Community Bank that it had found material weakness in its financials.
It was another strong week for stocks with an outperformance by growth again, but the S&P 500 rose for 16 of the past 18 weeks, the best stretch of weekly gains in over five decades, according to FactSet. Treasury yields moved higher for most the week but fell Friday with the 10-year yield ending the week 6 basis points lower to 4.19%. Gold rose 2.3%, the dollar index was flat, Bitcoin had a big week with a 22% increase, and crude oil rose 4.5% as Mid East tensions remain high. The US stock indices finished as follows: Russell 2000 +2.96%, NASDAQ +1.74%, S&P 500 +0.95%, and Dow -0.11%.

Recent Economic Data

  • Personal Income & Outlays: The inflation part of the personal income and outlays report was exactly as expected, while incomes grew much more than expected and consumer spending slowing from recent months:
  • Personal incomes rose 1.0% in the month, well ahead of the 0.4% increase expected, driven mostly by transfer payments (possibly from higher cost of living adjustments for the first month of the year). Wages and salaries increased 0.4% and are up 5.5% over the past year, much higher than the historical average. Disposable income (income after taxes) rose 0.3% and up 5.9% from a year ago.
  • Consumer spending rose 0.3% in the month, as expected, driven all by services where spending grew 1.0% and offset by a 1.2% decline in spending on goods (confirming the weak retail sales data). Over the past year spending on services is up 7.3% and spending on goods is up 1.7%.
  • With income and spending levels, the savings rate held relatively steady, but at a historically low level of 3.8%, versus the 25-year average of around 7.5%. As has been the case for the past two years, consumers continue to spend through their savings, evident by other data releases and the low savings rate.
  • The PCE price index rose 0.3% as expected and is higher by 2.4% compared to a year ago, down from the annual rate of 2.6% in December and closer to the Fed’s target. However core prices rose 0.4% and are up 2.8% over the past year, coming in as expected but still higher than the Fed’s target.
  • New Home Sales: The level of new home sales in January was relatively unchanged compared to December. New home sales were at a seasonally adjusted annualized rate of 661,000 in the month, 2% above the level from a year ago. The median price of a new home sold was $420,700, down 2.6% from a year ago. Inventory of new homes have steadily improved over the past year with 456,000 units for sale in January, up from 438,000 a year ago. Evidence of the housing market cooling substantially is in the number of new homes sold, where construction hasn’t been started yet – this number has fallen substantially over the past couple years, while the supply of those homes has seen a sharp increase.
  • Case Shiller Home Price Index: The Case Shiller home price index shows home prices increased 0.2% in December (decreased 0.4% if not seasonally adjusted), with 17 of the 20 metro areas tracked seeing an increase, and reaching record highs for the seventh consecutive month. Home prices over the past 12 months have increased 5.5%, accelerating from the 5.0% annual increase in November. For the first time all year, home prices in all 20 regions saw annual gains, with the greatest price increases in San Diego (+8.8%), LA and Detroit (+8.3%), and the smallest increase in Portland (+0.3%), Dallas (+2.1%) and Denver (+2.3%). Cleveland near the top with 7.4% annual increase.
  • Gross Domestic Product (GDP): Fourth quarter GDP rose at a 3.2% quarter-over-quarter annualized pace, according to the second estimate, based on more complete source data. This is down slightly from the 3.3% rate in the first estimate released a month ago, based on a downward revision to inventory growth, offset by upward revisions to consumer spending and government spending.
  • Durable Goods Orders: Durable goods orders fell 6.1% in January, a sharp drop due mostly to transportation (aircraft orders). Excluding the transportation category, durable goods orders fell 0.3%, still a disappointment compared to the 0.2% increase expected. Core capital goods orders rose 0.1% as expected however. The most important data in this report, as it is an input to GDP, shipments of nondefense capital goods excluding aircraft, rose a very solid 0.8% in the month.
  • Construction Spending: Construction spending fell slightly in January with a monthly 0.2% decline driven by nonresidential spending. Over the past 12 months construction spending it up 11.7% with residential construction spending up 5.4% and nonresidential spending up 17.1%.
  • Manufacturing Indexes: The PMI manufacturing index showed improvements in February with the best manufacturing activity since mid-2022 with a reading of 52.2 (50 is breakeven), driven by better a small increase in new orders and production. Meanwhile, the ISM index suggested conditions were weaker with its index still in contraction territory at 47.8.
  • Jobless Claims: The number of unemployment claims the week ended February 24 was 215,000, an increase of 13k from the prior week which was the third lowest level of the past year. The four-week average was 212,500. The number of continuing claims was 1.905 million, up another 45k from the prior week with the four-week average at 1.880 million. The number of continuing claims has steadily increased after a brief decline the past two months, and is at the second highest level since the pandemic recession.
  • Consumer Confidence Index: The consumer confidence index fell about 4 points in February to 106.7, the first drop in four months, and has been in a range of 95 to about 115 over the past two years. The present situations index fell to 147.2 from 154.9 in January, while the expectations index fell to 79.8 from 81.5. An index level below 80 for expectations has historically signaled a recession ahead.
  • Money Supply: Money supply, which includes cash, deposits at banks, money market balances, etc, fell $45.1 billion in January, a 0.2% monthly decline, and is down 2.0% from a year ago. Recall, one economic thinking is money supply is what drives inflation, and with a 41% increase in money supply from pre-pandemic to post-pandemic highs, many think this is the reason we are seeing high levels of inflation and that it may continue. After the historic increase, money supply is down 4.2%, or about $914 billion, from its highs July 2022, but still up 34.5% from pre-pandemic levels. This size of a decline from recent highs has historically led to recessions.

Company News

  • Macy’s Store Closures: Along with its quarterly earnings release, Macy’s announced it will close 50 stores by the end of 2024 and 150 stores over the next three years. At the same time, it will continue with its plan to expand its small-format stores, planning to open 15 more stores. These smaller format stores are to be located away from malls and expected to be more profitable than the larger department stores.
  • Microsoft New AI Partnership: Microsoft is partnering with another AI focused firm, this time French company Mistral and will take a minor stake in the company, as it looks to expand its efforts beyond OpenAI. Mistral said it will bring its open and commercial models to Microsoft’s Azure cloud platform. One of its biggest large language models is used for multilingual reasoning tasks and is available now.
  • Kroger and Albertsons Merger: The Federal Trade Commission has filed a lawsuit to block Kroger’s planned acquisition of Albertsons, claiming the deal would lead to higher prices for consumers. Kroger’s announced earlier it would buy the grocer for nearly $25 billion.
  • Apple’s EV Project: A Bloomberg report said Apple has cancelled its electric vehicle project, known as Project Titan, and shifted its employees that were assigned to that project, about 2,000, to work on generative AI.
  • Warner Bros: CNBC reported Warner Bros Discovery has halted its merger talks with Paramount Global amid its falling stock price.
  • NY Community Bank Issues: After a 54% year-to-date decline through Thursday, New York Community Bancorp fell another 26% on Friday after it disclosed “material weakness” in its internal accounting protocols and is pushing back the timing of its quarterly report. Along with the news, it announced executive changes. Recall, NYCB acquired assets from Signature Bank, one of the banks that failed March 2023.
  • Boeing Potential Purchase: According to a report by Reuters, Boeing has explored and is in talks to buy Spirit AeroSystems, the maker of the fuselage for Boeing’s 737 planes and Boeing’s largest supplier. Boeing said it is exploring the purchase to strengthen the quality of planes and aviation. Spirit was a part of Boeing prior to 2005, before Boeing spun off several divisions into the new company. At the same time, the article noted Airbus has explored purchasing a plant where Sprit makes wings.

Other News

  • OPEC Production Cuts: Reuters reported OPEC will consider extending voluntary production cuts into the second quarter or even through the remainder of 2024, although the issue has not been formally discussed among OPEC members. In November, OPEC agreed to voluntary cuts of 2.2 million barrels/day for the first quarter 2024.
  • Congress Kicks the Can Down the Road, Again: The Senate passed a short term stopgap spending bill that would keep the government funded and prevent a shutdown by the March 1 deadline, but only pushing the partial shutdown deadline to March 8, after numerous other times of passing short term funding. The issue is having each side come to an agreement on funding for the full fiscal year that ends the end of September. Certain issues at hand are funding for Ukraine and border support.

WFG News

The Week Ahead

This week will be busy with economic data, earnings, and Fed and political events. We will see the next round of labor market data with job openings and ADP’s payroll data on Wednesday, jobless claims on Thursday, and the DOL labor report on Friday where economists expect about 190,000 job gains in February. Other data releases include February vehicle sales on Monday, factory orders and the ISM services index Tuesday, and trade data Thursday. Earnings this week include Target, Nordstrom, CrowdStrike on Tuesday, Foot Locker, Campbells, Victoria Secret Wednesday, and Kroger, Costco, GAP, Broadcom, and DocuSign on Thursday. On the Fed side, Chairman Powell will give his semiannual testimony before the House Financial Services Committee on Wednesday, and the Senate Banking Committee on Thursday. Super Tuesday takes place this week where voters from 15 states, which make up about one-third of all delegates for presidential candidate, will vote. Also, President Biden will deliver the annual Sate of the Union message on Thursday evening where he is expected to talk about tax hikes and lowering prescription drug pricing.