Market Update – February 20th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

February 20th, 2024

Financial Markets

Markets slipped last week as a hotter than expected CPI print sparked a heavy selloff on Tuesday. As of close on Friday, February 16th, the Dow Jones fell -0.07%, the S&P 500 fell -0.34%, the Nasdaq Composite fell -1.25%, and the Barclays Aggregate Bond Index fell -0.55% for the week.

Market News

January CPI. January’s Consumer Price Index revealed an annual headline inflation rate of 3.1%, accompanied by a core inflation rate of 3.9%. This marked a slight decrease from December’s headline rate of 3.4% and no change from December’s core CPI figure of 3.9%. Despite the decrease in headline inflation, both metrics came in hotter than market expectations, triggering a selloff in the stock market, with the S&P 500 declining by -1.37% on Tuesday following the announcement.

Behind the higher-than-expected January’s CPI, were notable inflationary and deflationary pressures across various categories. Transportation services as a category experienced the greatest uptick, rising by +9.5% annually, largely driven by a substantial increase in car insurance costs observed in December. Additionally, shelter costs increased by 6.0% from a year ago and the cost of food away from home (restaurants) rose by 5.1% from a year ago. On the other hand, these upward trends were counterbalanced by certain categories experiencing declines in prices. Energy costs, for instance, decreased by -4.6% annually, while the prices of used vehicles dropped by -3.5% annually.

This hotter than expected CPI print for January concerned investors, as the average expectation for the first Federal Reserve rate cut bumped back from May to June now. Ultimately, the Fed is laser focused on preventing another upward spout of inflation, and these hot inflationary data points limit the proximity of rate cuts.

Source: BLS

January PPI. A lesser watched, but still important data point, the Producer Price Index, or PPI rose +0.3% month over month, while the core PPI rate rose +0.6% month over month, both hotter than expected. This amounted to an annual headline PPI inflation rate of 0.9% and an annual core PPI rate of 2.6%. Leading the PPI higher were higher service costs, rising +0.6% from a month ago, while goods costs fell -0.2% in the same period. This hotter than expected PPI print, especially alongside a hot CPI print, does not bode well for those expecting near term rate cuts from the Federal Reserve.

Source: BLS

Retail Sales. Alongside worse than expected inflation readings, retail sales came in much lower than expected for the month of January. Economists had projected a -0.4% monthly drop in retail sales, coming out of the holiday season, but the figure came in twice as low as what was expected, down -0.8% instead. From a year ago, retail sales were up +0.6%, with nonstore retail (which includes online shopping) up +6.4% and food and beverage sales up +6.3%. On the other hand, furniture sales were down -9.8%, building materials were down -8.3%, and department store sales were down -6.7% from a year ago.

Retail sales continue to paint a dynamic picture of the changing demand of the average consumer, shifting away from in person shopping for goods and more into services and more convenient methods of purchasing goods (online shopping).

Consumer Sentiment. January’s consumer sentiment posted in line with expectations, showcasing notable improvements compared to previous months. Rising by +13.3% from December and up +21.7% increase from January 2023, consumer sentiment is currently at its highest level since July 2021. Despite this positive trend, consumers provided mixed responses in the survey, regarding the future trajectory of the economy. 41% of consumers expressed optimism about future business conditions, while 48% held pessimistic views, however, this sentiment represents a significant improvement compared to the last year or two. Overall, it appears that more consumers are anticipating a soft-landing scenario despite ongoing uncertainties and a dynamic macroeconomic landscape. 

Source: University of Michigan

Summary

Markets fell last week after a higher-than-expected January Consumer Price Index (CPI) report, showing a 3.1% annual inflation rate, triggering a selloff with the S&P 500 declining by -1.37%. The increase was fueled by rising transportation, shelter, and food away from home costs, though energy and used vehicle prices dropped. This unexpected inflationary pressure pushed back expectations for a Federal Reserve rate cut and was compounded by a hotter-than-expected Producer Price Index (PPI). Retail sales for January also disappointed, signaling a shift towards online shopping and services. Despite improving consumer sentiment, concerns about future economic conditions persist as we approach our first rate cuts, hopefully by the start of summer.

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.