Wentz Weekly Insights
Growing Divergence At the Fed Leads to Best Month For Bonds Since 1980s While Stocks Hit New YTD Highs

Not only did stocks and bonds have a positive week, they finished November with one of the best months in a while. Stocks finished the week up 0.77%, but it was a week that saw broad participation with the equally weighted S&P 500 outperforming with a 2.5% gain. Stocks have risen for 19 out of the past 24 days and are now up for the fifth consecutive week. The streak has sent the S&P 500 to new highs of the year and back to the highest level since March 2022. While the index has performed well, the average stock is still 5%-10% from the levels March 2022.
As mentioned last week, we have been in a quiet period since the last inflation reading was released prior to Thanksgiving with a lack of market moving events. With volatility at pre-pandemic lows and sentiment improving from encouraging economic data, the path of least resistance has been to the upside. What has helped is investors have increasingly priced in rate cuts for 2024. As of Friday, future pricing indicates about 1.2% of rate cuts by the end of next year, with the first cut happening by May, a substantial pull forward of forecasts compared to just a month ago.
This has sent bond yields significantly lower – the yield on the 10-year Treasury note has fallen from a 16-year high of 5.00% in mid-October to Friday’s close of 4.20%. This has pushed bond prices higher (bond prices and interest rates have an inverse relationship). In fact, bonds saw their best month since 1985 with a 4.5% return in the Aggregate Bond index. Longer duration bonds fared better, 20+ year Treasury bonds saw a nearly 10% increase, however, many of these longer maturity bonds are still negative year-to-date. These yields and bond prices will face a key test next week when the Federal Reserve holds its last policy meeting of the year.
The recent rally has been driven by some of the riskier assets. A basket of the most shorted stocks was up over 20% in November, compared to the S&P 500’s 9% return. Meanwhile cryptocurrency has been on a tear – Bitcoin hit 40,000 for the first time since April 2022 and is up nearly 50% from the October market low.
What may have helped the move higher last week, and increase rate cut odds, was comments made by Fed Governor Christopher Waller who said he has become increasingly confident policy is in a good place to get inflation back to 2% and went further to say there is no reason for rates to remain this high if inflation continues its recent progress. Investors took those remarks and disregarded comments from other policymakers, included from Governor Bowman who was more hawkish and said her baseline outlook continues to expect additional rate hikes will be needed to keep policy “sufficiently restrictive.” One common theme among the “hawks” at the Fed is remembering the importance of historical lessons of prematurely declaring victory on inflation in that it can very easily reaccelerate and create more problems in the future.
These comments, among many others from other policymakers, show there is a growing divergence at the Fed, which will add to the uncertainty already in the markets. If we know anything about uncertainty, it is that the markets do not like it.
Looking ahead to this week, the headlines will come from data on the labor market – first, data on job openings Tuesday, ADP’s release of payroll data Wednesday, weekly jobless claims on Thursday, and the DOL’s employment report on Friday. Economists are estimating 180,000 jobs were added in November with 0.3% wage growth. October saw less jobs added than expected, likely due to the United Auto Workers strike with thousands being counted as unemployed, and we wouldn’t be surprised if November comes in to the upside as the jobs are added back into the numbers.
After this week, focus will shift to Fed’s projections from the crucial FOMC meeting next week. After December, strong seasonality will have passed, earnings season will restart, and 2024 estimates will show a very mixed picture, not to mention it is an election year which historically brings on more volatility, all building back uncertainty that seems to have diminished lately.
Week in Review:
After seeing its fourth consecutive week of gains, stocks opened last week modestly lower and traded in a tight range through the session. There was a lot of focus on spending data from the Thanksgiving weekend, which was mixed but mostly stronger than expected. Data included new home sales that fell in October but the bigger observation was the median price of a new home was down 17.6% from a year earlier, the largest 12-month drop on record. Oil finished down slightly despite the Saudis pushing OPEC members to reduce output further. The S&P 500 closed down 0.20% on the day while Treasury yields fell across the curve.
Tuesday saw data on home prices with a new record high after a 0.7% increase in September for the eighth consecutive increase while data on money supply saw a 0.1% decline for the 12th decline of the past 15 months. Meanwhile, Fed speak saw two different sides – Governor Waller said he believes rate hikes are done as inflation is on path to 2% while Governor Bowman said her baseline outlook sees additional rate hikes. Stocks were mostly higher but small caps declined with the S&P 500 up 0.10% while yields saw a large decline on the short-end of the curve (the 2-year Treasury yield fell 15 basis points).
On Wednesday, yields saw another move lower after further cooling in inflation data out of Europe. There were multiple Fed policymakers speaking during the day with comments mixed but all agreeing that further policy tightening will happen if inflation proves more persistent. The Beige Book released in the afternoon indicated economic activity was declining in half of the Fed districts and inflation was moderating but remains elevated. Crude oil rose as speculation increased that OPEC would cut production further after several reports, while stocks closed near the lows of the day with the S&P 500 down 0.09%.
Economic data on Thursday included personal income and consumer spending that both increased 0.2% as expected while the PCE price index, another inflation reading, matched the consumer price index two weeks ago with no change in price in October, while the 12-month change decelerated compared to September. However, continuing unemployment claims moved to the highest level since late-2021, which is worth following. OPEC agreed in its semi-annual meeting to voluntarily cut production by another 1 million barrels/day, initially sending oil higher, but it ultimately settled 2.4% lower. Stocks were mixed on the day with value seeing a large outperformance with a 1.47% increase in the Dow while the S&P 500 rose 0.38%.
Headlines on Friday involved public remarks from Fed Chairman Powell in which he reiterated it would be premature to say interest rates are “sufficiently restrictive,” the Fed is prepared to tighten policy further if necessary, while talking about the welcoming progress on inflation and that the full effects of tightening have still yet to be seen. Data in the morning included manufacturing indicators which continued to suggest recessionary conditions. Despite Powell’s comments, markets continued to push yields lower with another 14 basis point decline in the 10-year yield (to 4.21%), while stocks rose 0.59%.
It was another positive week for stocks and bonds, where there were no significant headlines and investors continued to price in higher probability of rate cuts in 2024. Oil fell for the sixth straight week with a 1.9% decline despite OPEC’s announcement to cut production an additional 1 million barrels per day, leaving investors unconvinced that it will have an impact on supply or that producers will follow through. Gold hit a new all-time high after a 4.3% increase, the dollar index was relatively unchanged, and Bitcoin hit the highest level in 20 months after a roughly 10% gain. Yields saw another significant drop, the 2-year yield down 41 basis points and the 10-year yield down 27 bps on the week to 4.20% for the lowest since August. The major US stock indexes finished as follows: Russell 2000 +3.05%, Dow +2.42%, S&P 500 +0.77%, and NASDAQ +0.38%.

Recent Economic Data

  • New home sales in October fell 5.6% to a seasonally adjusted annual rate of 679,000 homes. New home sales have trended around pre-pandemic levels for much of the year, after having bottomed in July 2022 from all sorts of shortages, and are up 17.7% from the pace in October a year earlier. The number of new homes on the market for sale seems to have found a bottom around the 430,000 range for much of the year, down from 2022, with October’s supply of 439,000. The median sales price of a new home was a big topic for this report, with a median sales price of $409,300 that is down 17.6% from a year ago, the largest 12-month decline in history. A contributing factor of this could be due to sales mix – we are seeing more home sales at the lower end of the market versus more expensive homes.
  • The pending home sales index fell 1.5% in October for the lowest level on record going back to when the data began in 2001. This index measures signed contracts of existing homes, so it measured contracts signed in October when the average rate shot over 8%. Sales were down 8.5% from last year with lenders saying its more due to the lack of supply than the rise in rates.
  • The S&P Case Shiller home price index shows home prices on average increased 0.7% in September for the eight consecutive monthly increase, coming after seven straight months of declines to end 2022. The index of home prices is now 6.6% higher than the lows reached in January and pushed new record highs, while up 6.1% from 12 months ago. While higher mortgage rates have suppressed the number of homes sold, prices have been supported by a substantial lack of inventory. Only five of the 20 major cities tracked saw a decline in prices in the month with only three seeing a decline compred to a year ago, led by Las Vegas, Phoenix, and Portland. Seeing the largest 12-month gains were Detroit (+6.7%), San Diego (+6.5%), and New York (+6.3%). Cleveland remains near the top at +5.0%.
  • The second estimate of third quarter GDP, based on more complete source data, shows growth was a little stronger than initially estimated. GDP grew at an annual rate of 5.2% in the quarter, up from 4.9% in the first estimate last month. The increase reflects an upward revision to business investments, government spending, and net exports, partially offset by a downward revision to consumer spending. The growth in consumer spending was revised down to 3.6% from 4.0%, government spending was revised to a 5.5% increase from 4.6%, business investment was revised to 1.3% growth from 0.8%.
  • The PMI manufacturing index was 49.4 for November, remaining below 50 for 12 of the past 13 months. The report noted a “renewed deterioration in operating conditions” in November, with lower new orders and a slower expansion in production while employment fell and input prices rose at a slower pace due to lower energy prices.
  • The ISM manufacturing index was 46.7 in November, unchanged from October, slightly below expectations, and remaining under 50 which is considered contracting conditions. The ISM indicates manufacturing conditions have contracted for 11 of the past 12 months. New orders declined in the month but at a slower pace than October while production decreased further, price pressures built slightly, and employment declined further.
  • Construction spending in October increased 0.6% for the tenth consecutive month of increases, and up a total of 10.7% from a year earlier. The increase was driven mainly by residential spending which includes new home builds, which was up 1.2% in the month and to a lesser degree nonresidential spending which was up 0.1% in the month. Spending is up 0.9% from a year ago in the residential space, but up a very strong 20% over the same period on nonresidential construction.
  • The number of unemployment claims file the week ended November 25 was 218,000, an increase of 7,000 from the prior week with the four-week average at 220,000, relatively unchanged. No surprises here, new claims have been trending in the low 200,000’s range. The number of continuing claims increased another 86,000 to 1.927 million, now at the highest level since November 2021. Something worth keeping an eye on – claims are one of the best leading indicators on the labor market.
  • The personal income and outlays data, which includes PCE inflation, confirmed what the consumer price index showed us two weeks earlier in that inflation cooled further in October. The data:
  • Personal income rose 0.2% in October, matching consensus estimates and slowing from the 0.4% increase seen in September. Incomes are up 4.3% from a year ago, a larger slowdown from the 5.0% 12-month increase a month prior. The important wages and salaries component rose 0.1% in the month (after a stronger 0.5% increase in September) and slowed to a 4.1% y/y rate.
  • After taxes, disposable income rose 0.3% in the month and is still up a strong 7.3% over the past 12 months, although lower than September’s increase.
  • Consumer spending rose 0.2% in October, matching estimates but a big slowdown from the 0.7% increase in September. Spending was driven by services which increased 0.4%, and offset by a 0.2% decline in spending on goods. Compared to a year ago spending was 7.0% higher, still a strong rate; driven by services up 7.5% and to a lesser degree goods up 3.2%.
  • Given this information, the personal savings rate remained below long-term average at 3.8%, the second lowest reading of the year and compared to the pre-pandemic 10-year average of 7.5%. This continues to suggest consumers are spending their way through savings accumulated through the pandemic.
  • The PCE price index, which is the Fed’s favorite inflation reading, was unchanged in October, the same as the consumer price index, and increased 3.0% over the past 12 months, a deceleration from the 3.4% y/y rate in September. Core prices, which exclude food and energy categories, rose 0.2% as expected and are still up 3.5% from a year ago, decelerating from 3.7% a month ago, and both matching estimates.
  • Money supply declined in October by 0.1% for the third consecutive monthly decline, and is now down 12 of the past 15 months. M2 money supply, a broad measure of the total amount of money circulating throughout the US economy, was $20.725.6 trillion which was down 0.1% in the month, down 3.3% from a year ago and down 4.5% from the record highs July 2022. It may not sound like much but that is a nearly $1 trillion decline in money supply. Also to note, M1 money supply, which measures just liquid money like cash on hand and cash in checking/savings accounts, is down 12.5%, or $2.6 trillion, from the highs March 2022. Money supply (M2) is still up 34.1% from pre-pandemic levels, which is why we are dealing with inflation, but a 4.5% decline is the largest on record and signals a slowdown in economic activity.

Company News

  • Twilio shares got a boost last week after asset manager Anson Funds had reportedly taken a stake in Twilio and subsequently sent a letter to the board pushing the company to explore a sale of the entire company or divest assets such as its data and application units.
  • CNBC reported US Steel has said final bids for the company were due Friday and the report says five separate parties are expected to submit proposals. The companies reportedly include Cleveland-Cliffs and Arcelor Mittal, who are both expected to submit bids for the whole company, while others like Nucor, Stelco, and Argentina based Techint have previously shown interest in pursuing some form of a transaction, possibly as a partner.
  • Disney CEO Bob Iger said to his staff that next year will be about building a more modern version of the company. Then, when speaking on the possibility of asset sales where it has been speculated that Disney may sell off its non-core media assets (basically everything except ESPN, ABC, Freeform), Iger said no decisions were made and he downplayed that possibility. He added the major priority for Disney right now is the launch of the direct-to-consumer ESPN service, expected to launch in 2025. In addition, CEO Bob Iger said “I’m definitely going to step down” in 2026 and that the company is “aggressively” pursuing a succession plan. In his latest comments he said the media networks are not for sales because they are running more efficiently than they were in July when he made the comments that the company was evaluation whether it made sense to divest some of its media networks.
  • Disney’s announced its board has approved reinstating its dividend and declared a $0.30 dividend per share (which will be a semi-annual dividend equaling a yield of 0.6%) for the second half of the year that will be payable on January 10. In comparison, prior to suspending its dividend during the pandemic was $0.88/share last issued in December 2019, which would be equivalent to a 1.9% yield as of last week’s price.
  • GM said it is updating its 2023 guidance, increasing its dividend, and announcing an accelerated share buyback program now that the UAW strike is over. GM reinstated its earnings guidance of $7.20-$7.70 EPS versus the $7.35 consensus, which was previously withdrawn due to the union strike, while lowering its capital spending plans slightly. It will increase its dividend to 33% (now about a 1.5% yield) and begin a new $10 billion accelerated share repurchase program that is expected to conclude Q4 2024.
  • One day after GM’s updated guidance and surprise share buyback program, Ford said it is updating its full year guidance for EBIT of $10B-$10.5B which includes a $1.7 billion impact from the auto workers union strike from lost production. The company added the new contract with the union will impact the cost per vehicle by about $900 by 2028 and Ford said it will work to offset this higher costs with higher productivity and lower expenses.
  • Pfizer said it will discontinue developing its twice-daily version of its weight loss drug for obese people after it saw high rates of adverse side effects in one of its trials. The results met its primary endpoints in its Phase 2 clinical trials, but the company said it will stop development as patients had trouble tolerating the drug. The pill was developed to be a more convenient alternative to the very popular weight loss injections where the market has exploded with growth.
  • Jack Ma, co-founder of Alibaba, sent an internal memo to executives of the company asking it to correct course and called for fundamental changes at the company. It seems the memo was triggered after Ma observed its competitor PDD (Pinduoduo – an e-commerce platform in China) has taken significant market share in recent quarters. In the memo, Ma praised the decisions PDD has made to grow over the past several years.
  • The WSJ reported health insurers Humana and Cigna were in talks to merge in a stock and cash deal that could be completed by the end of the year if talks don’t fall apart. Using today’s market values, the merger of the health insurers would make the combined company worth nearly $145 billion, second in size only to UnitedHealth. The merger would combine Cigna’s massive pharmacy benefit business with the second largest Medicare insurer in Humana. It is worth noting both companies were acquired previously but both were blocked by US regulators on antitrust concerns.
  • Over the weekend Alaska Air agreed to acquire Hawaiian Airlines in a $1.9 billion deal, including its debt. It will be an all-cash deal for $18/share, almost a 4x premium to where shares traded prior to the announcement. The deal is expected to result in significant synergies and would make it the fifth largest US airline.

Other News

  • In an effort to further support crude oil prices, Saudi Arabia has been seeking other OPEC members to reduce their oil output, however some members are resisting. Reports say Iraq, Russia, and Kazakhstan have recently been producing above their quotas while other African members have lost so much production capacity that they are unable to cut production further. On Thursday, in OPEC’s Ministerial meeting, in addition to the existing 1.3 million barrels per day production cut (led by Saudi Arabia), the group agreed to voluntarily cut oil production by an additional 1 million barrels/day, including UAE volunteering to cut 163k bbl/day. Despite the announcement for additional supply cuts, oil moved lower for the sixth consecutive week. There were some concerns and investors are unconvinced the voluntary cuts will be followed through, especially after seeing the incoordination between OPEC members and the way the supply cuts were announced.
  • It is becoming more apparent there seems to be growing differences in opinions among Fed members. That was more apparent last week after two Federal Reserve Governors spoke on Tuesday. Governor Waller said he is “increasing confident that policy is currently well positioned to slow the economy and get inflation back to 2%,” adding he is encouraged by what we have seen in the past few weeks because “something appears to be giving” and it’s the pace of the economy. On the other hand, Governor Bowman was more hawkish, saying her baseline outlook continues to expect additional rate hikes will be needed to keep policy “sufficiently restrictive” adding that it is important to remember “historical lessons and risks associated with prematurely declaring victory” on inflation.
  • The Investors Intelligence index, a level of sentiment between bulls/bears, showed that the bulls jumped to 55.7% in the latest survey, which was up another 3.5% from the previous week for the highest level since July, which coincides with when the market hit a high for the year. The spread between bulls and bears increased to +34.8%, up from 29.8% in the previous week, the largest one-week change since 2009, with a level of over 30% indicating cautious levels.

Did You Know…?

Air Travel Hits A New Record

Airlines saw the busiest travel day on record on November 26, the Sunday after Thanksgiving. According to TSA, 2,907,378 people were screened that day, up about 1% from the previous record on the same day in 2019. Not only was that weekend the busiest ever, but 2023 is shaping to be the busiest travel year on record – 8 of the 11 most traveled days have occurred this year so far, with most of those happening in June and July. Year-to-date, as of December 3, TSA throughput is 12.4% higher than the same period in 2022, and 1.4% higher than the same period in 2019, the previous record year. It is worth noting that while vacation travel is well above 2019 levels, business travel is still below those levels. Separately, AAA estimates that 55.4 million people traveled at least 50 miles over the Thanksgiving holiday period (Wednesday before Thanksgiving to the Sunday after Thanksgiving), an increase of about 2% from 2022.

WFG News

Toys for Tots Toy Drive

Wentz Financial Group is excited to have partnered with the United State Marine Corp on their Toy for Tots toy drive in 2023. We are collecting toys to be donated to the Marine’s efforts. We will be collecting toys until December 15th, feel free to stop by at any time during our office hours until then!

Career Development Day

Monday, December 18, 2023 – All Day
Do you know someone in high school or college looking to get real life work experience from the finance industry? Wentz Financial Group will be hosting its 3rd Career Development Day at our office on December 18. The day will not only be for those looking to get a first look into financial services field but is open to any student wanting to get their feet in the door of the professional world. Don’t forget to RSVP by responding to this email or calling the office at 330-650-2700.

The Week Ahead

The focus this week for market participants will likely be on the number of labor market indicators. The highlight will be the Department of Labor’s employment report on Friday where economists’ consensus estimates see 180,000 new jobs added with 0.3% wage growth in November. The other data releases include job openings on Tuesday, the ADP payroll report on Wednesday, and jobless claims on Thursday. Also on the economic calendar is data on November vehicle sales along with factory orders on Monday, the ISM services index on Tuesday, trade and productivity data on Wednesday, and the consumer sentiment index on Friday. The earnings calendar is lighter than usual, but notable companies reporting quarterly results include AutoZone, Toll Brother, MongoDB, JM Smucker on Tuesday, Campbell Soup, Chewy, GameStop, C3.ai, Veeva on Wednesday, and Broadcom, DocuSign, Lululemon, and Dollar General on Thursday. Several investor events from large companies will take place this week as well, including McDonald’s, Johnson & Johnson, CVS, Exxon Mobil, and Shopify, and appearances from Intel, AMD, Appian, Microsoft, among others, at the Barclays Tech and Media conference. It will be quiet week from the Federal Reserve perspective as policymakers head into a quiet period ahead of next week’s FOMC meeting.