Market Update – April 29th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, April 29th, 2024

Financial Markets

Last week markets witnessed a rebound in stocks driven by the impressive earnings of large-cap technology companies, which largely exceeded expectations, overshadowing less optimistic economic data. As of Friday, April 26th, the Nasdaq Composite rose +4.23%, the S&P 500 rose +2.67%, the Dow Jones Industrial Average rose +0.67%, and the Barclays Aggregate Bond Index fell a slight -0.05%.

Market News

PCE Inflation. March’s Personal Consumption Expenditures inflation data revealed a hotter than anticipated picture of the Fed’s preferred inflation metric, echoing warnings from CPI data earlier in the month regarding sticky inflationary pressures. Annual PCE inflation rose to 2.7%, marking its highest level since November 2023, while Core PCE, which excludes volatile food and energy prices, remained unchanged from February at 2.8%.

Both headline and core PCE saw a monthly increase of +0.3% in March, underscoring the sustained momentum of inflation. Services remained the primary driver, with service inflation rising by 4% from a year ago, while goods experienced a slimmer inflation rate of 0.1% from a year ago. With continually stubborn inflation data, the likelihood of a Federal Reserve rate cut is gradually being pushed further and further into the second half of 2024.

Personal Income, Spending, & Saving.

Alongside PCE inflation data, the BLS reported important data on consumers’ income, spending, and saving in the month of March. Personal income saw a healthy uptick of +0.5%, paralleled by a similar increase of +0.5% in disposable income, which factors in taxes. This growth trend is positive for consumers, as it outpaced March’s +0.3% monthly PCE inflation rate. However, despite this boost in income, consumers are opting to allocate more towards spending and less towards savings.

In fact, personal spending surged by +0.8%, reflecting a notable increase in consumer activity. As a consequence, the personal savings rate fell to 3.2%, the lowest since October 2022. This trend raises questions about the motivations behind increased spending. Are consumers compelled to spend as they please based on confidence in the economy, or are rising costs forcing them to spend more, with inflation potentially understating the true impact of rising costs on households? It’s likely a blend of scenarios, where certain households experiencing wage increases are opting into lifestyle inflation, while others grapple with financial strain as rising essential costs eat into incomes that have not been rising as much.

Q1 GDP Disappoints:

Thursday’s release of first-quarter estimates for real GDP showed 1.4% growth in the US economy compared to a year ago, missing expectations. Real GDP expansion was fueled by increased consumer spending, residential and nonresidential fixed investments, and state and local government spending, though partially offset by a decrease in private inventory investment and a decrease in net exports, as imports also saw an uptick during this period.

Consumer spending surged, particularly in services like healthcare and financial services, while residential fixed investment was boosted by brokers’ commissions and new housing construction. Nonresidential fixed investment also rose, mainly due to increased spending on intellectual property products. State and local government spending increased, largely driven by higher compensation for government employees. Finally, the decrease in inventory investment was primarily attributed to declines in wholesale trade and manufacturing.

This GDP report sparked market concerns over the current state of the economy, sending the S&P 500 down nearly -1.5% by market open on Thursday morning following the news. Signs like a pullback in the manufacturing sector hint at a potential slowdown ahead, suggesting a possible plateauing of the US economy, however only the test of time will ultimately tell how market conditions play out.

New Home Sales:

March brought unexpected strength in new home sales volumes, with 693,000 homes sold, marking an impressive 8.3% increase from a year ago. Similarly, the median sales price jumped to $430,700, reaching its highest level since August 2023. This robust activity occurs against the backdrop of persistently high mortgage rates, which have remained above 6% since September 2022. The market is witnessing a unique confluence of factors: pent-up, unserved demand colliding with limited supply and the dampening effect of higher borrowing costs on overall activity.

Durable Goods Orders:

March durable goods orders posted slightly below economists’ estimates but still showed a solid monthly increase of +2.6%. The transportation sector led this growth, surging by +7.7% during the month, placing durable goods excluding transportation equipment at a slimmer rise of +0.2%. Within the transportation category, nondefense aircraft orders experienced a significant jump of +30.6% from the previous month, driven by growing backlogs faced by aircraft manufacturers like Boeing and Airbus. Overall, despite the uptick in orders this month, the manufacturing sector remains a relatively sluggish component of the economy, trailing behind the service sectors in terms of growth.

Earnings Season:

So far this earnings season, over 40% of S&P 500 companies have reported first-quarter results, revealing an average annual earnings growth rate of 1% as of Friday, April 26th. Last week, notable earnings reports came from four mega-cap names, including Tesla, Meta, Google, and Microsoft. Tesla saw its shares surge after the electric vehicle maker pledged to accelerate the launch of more affordable models, despite falling short of quarterly earnings and revenue expectations. Meta’s CEO, Mark Zuckerberg, unsettled investors, sending the stock lower, by emphasizing long-term investments in AI and the metaverse during the company’s earnings call, despite strong quarterly earnings.

On the other hand, Google’s parent company, Alphabet, saw its market capitalization surpass $2 trillion following stellar quarterly results, which exceeded revenue and earnings estimates. Additionally, Alphabet announced its first cash dividend and a substantial stock buyback program. Finally, Microsoft exceeded estimates in its fiscal third-quarter results, but weaker-than-expected revenue guidance tempered market enthusiasm. Overall, this earnings season appears to be more muted for now, with results varying largely by company and industry.

Summary

Last week, stocks rebounded, fueled by the impressive earnings of large-cap technology companies, overshadowing less optimistic economic data. Meanwhile, March’s PCE inflation data revealed a higher-than-expected inflation rate, contributing to concerns about sustained inflationary pressures. Despite a healthy increase in personal income, spending rose more sharply in March, leading the personal savings rate to drop to its lowest level since October 2022. Additionally, the release of first-quarter real GDP estimates showed a disappointing 1.4% growth rate from a year ago. New home sales were up in March, and durable goods orders posted a solid increase, albeit slightly below economists’ estimates and led primarily by the transportation category. Earnings season has been in full swing as well, with notable reports from mega-cap companies such as Tesla, Meta, Google, and Microsoft last week.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.