- The Conference Board Leading Economic Index contracted for the 19th consecutive month, extending the longest negative streak since 2007-2009. Financial indicators such as the negative spread between 10-year Treasury yields and the fed funds rate, manufacturing new order weakness and pessimistic consumer sentiment continue to maintain downward pressure on leading indicators. However, consumer expectations reflected in survey responses remain disconnected from consumer behavior indicated in retail sales data. This suggests employment confidence, wage gains and moderating inflation continue to support spending despite consumers expressing dissatisfaction about gasoline, food and other essential goods prices.
- Existing home sales declined 4.1% in October to 3.79 million seasonally adjusted annualized units, below economists’ consensus forecasts and the slowest sales pace since October 2008. Both single- and multi-family segments drove October’s decline, with single-family sales falling 4.2% while multi-family unit sales fell 2.4%. Rising home prices and the highest mortgage rates in 20 years are challenging first-time and trade-up home buyers, with listed properties remaining near record lows.
- Eurozone preliminary November purchasing manager surveys improved slightly relative to October, but contractionary (below 50) readings for both manufacturing and service sectors reflect weak private sector conditions across the region. Manufacturing continues to exhibit significant weakness relative to service sector activity. Europe’s economy contracted by 0.2% in the third quarter and recent purchasing manager surveys suggest the region may experience continued contraction in the fourth quarter, constituting a technical recession.
Market News
Market analysis
November 27, 2023
Source: Global Economic Health Check, U.S. Bank Asset Management Group, November 24, 2023.
U.S. Bank Global Economic Health Check
The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.
Number of the week:
-4.1%
The difference in existing home sales in October compared to September. Sales declined 14.6% compared to a year ago.
Term of the week:
OPEC+
The Organization of the Petroleum Exporting Countries (OPEC) is a group consisting of 14 of the world’s major oil-exporting nations. OPEC+ also includes 10 OPEC allies, the largest of which are Russia, Mexico and Kazakhstan.
Quote of the week:
“Existing home sales declined 4.1% in October to 3.79 million seasonally adjusted, annualized units, below economists’ consensus forecasts and the slowest sales pace since October 2008. Both single- and multi-family segments drove October’s decline, with single-family sales falling 4.2% while multi-family unit sales fell 2.4%. Rising home prices and the highest mortgage rates in 20 years are challenging first-time and trade-up home buyers, with listed properties remaining near record lows.”
― Robert Haworth, CFA, Senior Vice President, Senior Investment Strategy Director, U.S. Bank
Global economy
Quick take: U.S. leading economic indicators reflect the ongoing divergence between consumer activity and expectations, while elevated home prices and decades-high mortgage rates crimp housing market activity. European purchasing manager surveys improved but highlight ongoing growth challenges across the region.
Our view: The global economy continues to shrug off elevated inflation and rising interest rates, though growth is likely to moderate into year-end. Despite higher interest rates the U.S. Bank Economic Team sees conditions consistent with a soft landing in the U.S.
Equity markets
Quick take: U.S. equities are posting superb performance in November. Broad market attention is shifting toward holiday spending.
Our view: Inflation, interest rates and the pace of earnings growth in 2023 and 2024 remain headwinds to advancing equity prices. Still to be determined is whether the pace of inflation is on a sustained downtrend, which would pave the way for the Federal Reserve (Fed) to take a more dovish stance toward interest rates.
- November month-to-date performance is superb and broad based. As of Friday’s close, the S&P 500 and technology-oriented NASDAQ Composite are advancing 8.7% and 10.9%, respectively, for the month, and 10 of 11 S&P 500 sectors are positive. Perhaps most noteworthy is the 8.7% month-to-date return of the small cap-oriented Russell 2000. The Russell 2000 has lagged in 2023, advancing 2.6% this year versus 18.7% for the S&P 500. Sustained performance of small- to mid-sized companies would be one indicator of broadening economic strength.
- As we near the end of third quarter earnings reporting, overall results are exceeding modest expectations. As of Friday’s close, 96% of S&P 500 companies have reported third quarter results, with sales advancing 1.8% year-over-year versus expectations of 1.5%; earnings are up 4.3% versus expectations 0.1%.
- Consensus earnings projections for 2023 and 2024 remain stable, at approximately $220 and $244 per share, respectively, according to Bloomberg, FactSet and S&P Cap IQ, reflecting roughly 10% year-over-year growth. At current price levels, the S&P 500 trades at respective 20.7 and 18.7 times projected 2023 and 2024 estimates, in line with recent 25-year historical averages.
- The holiday shopping season is in high gear. The National Retail Federation is projecting overall holiday spending to increase 3.0%-4.0% compared to last year, bolstered by falling gasoline prices, widespread discounting and real consumer income growth. Black Friday e-commerce in the U.S. increased 7.5% over last year to a record $9.8 billion, according to Adobe Analytics, with price-conscious consumers looking for online deals. With retailers reporting inventories in reasonably good shape, the amount of discounting this year versus prior years may be marginal. Persistent inflation, higher interest rates, resumption of student loan payments and fears of an economic downturn are among headwinds for shoppers.
Bond markets
Quick take: Mixed bond performance last week stemmed from Treasury yields rising slightly, which served as a headwind to higher-quality bond performance, paired with improving investor sentiment that drove prices higher for bonds with credit risk. As a result, corporate and municipal bonds outperformed Treasuries.
Our view: Most bond categories continue to offer yields near their highest in 15 years. Long-term fixed income allocation targets that are primarily comprised of high-quality bonds help bolster portfolio diversification, while taking modest exposures to esoteric bond categories like reinsurance (insurance-backed bonds) and mortgages not backed by the government can incrementally improve current investment portfolio income.
- The Fed’s data dependence remains a two-sided risk for bond yields. Fed communications emphasize a willingness to adjust the policy outlook each meeting, dependent on the evolution of economic data. The Fed’s November 1 meeting minutes, released last week, lacked urgency around the prospect of further rate hikes, but still highlighted officials’ wariness of prematurely concluding that inflation is settling at their 2% target. Market interest rates indicate about 50% odds that the Fed will begin cutting rates in May, but cuts could be postponed if the Fed lacks confidence that inflation is under control. Over the past month market-based measures of inflation expectations have made considerable progress toward levels consistent with the Fed’s target. The Fed could also choose to gradually reduce rates to keep the real (inflation-adjusted) policy rate stable if inflation slows according to economists’ expectations.
- Strong investor risk appetite remains a tailwind for riskier bonds. Corporate and municipal bond valuations, measured as their incremental yield compared to Treasuries, held steady last week after rallying earlier in November. Improving investor demand has been a strong tailwind for riskier high-yield corporate debt and bank loans. However, corporate default activity remains slightly elevated compared to the past. Higher refinancing costs brought on by the large increase in yields over the past two years present headwinds to corporate and municipal bond issuers alike.
Real assets
Quick take: Most real assets traded in line with the S&P 500 in light holiday trading last week. Commodities trailed despite a falling dollar, led lower by agricultural goods. Precious metals continue to show strength, potentially signaling future interest rate declines.
Our view: We continue to see value in real assets’ defensive sectors. We favor tangible assets with stable cash flows as the market moves through a period plagued by decelerating economic growth and corporate earnings. Commodities remain vulnerable if expectations for falling inflation and decelerating growth come to fruition.
- Real Estate traded in line with the S&P 500 last week. Industrial properties led performance, beating the broader market by 0.7%. Offices lagged, trailing the broader market by 2%. We believe public real estate offers compelling value at current levels, but acknowledge that near-term risk is elevated, and sentiment can change abruptly.
- Infrastructure trailed the S&P 500 by 0.3% last week. Railroads led performance, beating the broader market by 1.5%. Toll roads were the worst performers, trailing the S&P 500 by 2.5%.
- Crude oil prices fell 0.1% last week after it was announced the November 30 OPEC+ meeting would be switched to a virtual meeting. In the near term, the market appears oversupplied; Europe is contending with a glut and domestic supplies are increasing. Over a longer horizon, we see the crude market as undersupplied, which should be supportive for prices. However, we acknowledge downside exists if a solution to the crisis in Gaza is found or economic growth disappoints.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The NASDAQ Composite Index is a market-capitalization weighted average of roughly 5,000 stocks that are electronically traded in the NASDAQ market. The Conference Board Leading Economic Index is intended to provide an early indication of significant turning points in the business cycle and where the economy is heading in the near term.
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