Economic Update 4-08-2024

• Economic data for the week included ISM manufacturing improving into expansion, while ISM services/non-manufacturing slowed a bit, but remained in expansion as well. Nonfarm payrolls came in stronger than expected again, while job openings data has steadily flattened.
• Equities fell back in the U.S. and most of the developed world, while emerging markets saw small gains. Bonds generally fell back as yields rose. Commodities fared well across the board, with strong gains in both energy and metals.

U.S. stocks fell back last week, seeing more volatility than in the recent few months. By sector, energy stocks rose 4%, followed by communications up over a percent. The majority of other sectors lost ground, oddly led by normally defensive health care and consumer staples, down up to -3% each, with the former reacting to Medicare rates unchanged from the initial estimate. Real estate also fell -3%, hampered by higher long-term interest rates.

There was no shortage of catalysts for greater volatility, including an ISM manufacturing report improving, which pushed U.S. Treasury yields higher. Chair Powell’s recent remarks at a mid-week speech were a bit dovish, which elevated hopes that interest rate cuts won’t be too far down the pike. Then again, Minneapolis Fed President Kashkari opined that no cuts could be in order if inflation remains sticky. This rate uncertainty was joined by the release of a recent conversation between President Biden and Israel’s Prime Minister Netanyahu, alluding to a greater probability of strikes against Iran—which was felt immediately in oil markets. This was not taken well in equities, either, causing a market reversal of nearly -2%. This just reiterates the market’s current sensitivity to anything that could take the market off-track from the current ‘soft landing’ narrative. This included a growing concern that economic strength and sticky inflation numbers might keep interest rates indeed ‘higher for longer.’ The interest rate situation has continued to be perhaps the key driver of market sentiment so far this year, with one fear being that the current higher short-term rate (leading to higher cost of capital) will ultimately wear away at current corporate strength. It hasn’t appeared to have happened yet, although ‘lag’ effects are well-known, and unpredictable. Earnings season for Q1 begins next week, which may take over investor interest for the time being.

Foreign stocks followed the U.S. lead, with declines in developed regions—Japan seeing the greatest declines. Forces were similar to those driving U.S. stocks in terms of timing of rate cuts, the Middle East, as well as improving economic data—which had been lagging to a greater degree in Europe. Emerging markets bucked the trend, with small gains in a variety of nations, including China, India, Brazil, and Mexico. In China, manufacturing PMI also ticked back above the expansionary 50 level, in addition to further expansion in services. Both of these boosted sentiment, as did hints that the Bank of China may provide additional stimulus measures to help achieve broader growth targets. In Turkey, unexpected wins from opposition party candidates in local elections boosted sentiment, resulting in market gains.

Bonds fell back last week along with rates ticking higher, particularly in the 2-year and longer segment of the yield curve. This appeared primarily due to the ISM manufacturing report improving, providing a general tailwind to U.S. economic growth. Due to the duration effects, U.S. Treasuries lagged by the greatest degree, while a credit spread buffer helped investment-grade, high yield, and floating rate bank loans to perform slightly better. Foreign bonds performed similarly on net, with little change in the value of the U.S. dollar during the week.

Commodities rose across the board last week, with sharp gains in energy, industrial metals and precious metals. Crude oil prices rose over 4% last week to $87/barrel, due to the Biden-Netanyahu conversation alluding to potential Middle East escalation, in addition to already-tight supplies, and an improving global demand picture. Strength in the gold market has continued, with the price continuing to rise this year to a record $2,300/oz. Gold is a unique commodity, as one of the assets with near-zero long-term correlations to most all other conventional assets and features unpredictable behavior. Recently, it has thrived from several ongoing geopolitical concerns (Ukraine, Gaza, Red Sea), global central bank restocking, Chinese retail buying, and likely even more so due to hopes for Fed rate cuts this year. Lower real rates improve the comparative of gold versus U.S. Treasury debt, as does the potential for falling rates to lower the value of the U.S. dollar (which has been especially strong for years).

Period ending 4/5/2024	1 Week %	YTD %
DJIA	-2.23	3.77
S&P 500	-0.93	9.53
NASDAQ	-0.79	8.45
Russell 2000	-2.86	2.17
MSCI-EAFE	-1.35	4.36
MSCI-EM	0.28	2.65
Bloomberg U.S. Aggregate	-1.06	-1.83

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2023	5.40	4.23	3.84	3.88	4.03
3/29/2024	5.46	4.59	4.21	4.20	4.34
4/5/2024	5.43	4.73	4.38	4.39	4.54

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.