Weekly Market Performance — December 22, 2023

LPL Research provides its Weekly Market Performance for the week of December 18, 2023. Highlights include the eighth straight week of gains for the S&P 500 and Nasdaq Composite, a decline in used car prices, a strong November housing report, and the November Personal Consumption Expenditures (PCE) report.

Stock Index Performance

S&P 500 Index Sectors

Fixed Income and Commodities

U.S. and International Equities

Markets Higher: Both the S&P 500 Index and the Nasdaq Composite witnessed their eighth consecutive weekly rise. The Russell 2000 Index continued its strong advance as financial conditions ease and the soft-landing increasingly becomes consensus. U.S. equities witnessed $10.5 billion in net outflows this past week as part of a global net outflow of $21.3 billion, the largest outflow since December 2021, according to EPFR data. This breaks nine straight weeks of inflows for U.S. equities.

According to the most recent American Association of Individual Investors (AAII) Sentiment Survey, sentiment remains solidly bullish as bearish sentiment wanes. The percentage of bullish investors increased to just under 53%, well above the historical long-term average of 37.5%. Bearish investors dropped to just under 21%, well below the historical average of 31.0%, while neutral investors fell to around 26%.

Given the market’s solid gains this quarter, concerns about stretched valuations have become more widespread as year-end approaches. Some believe equities are looking increasingly overbought, with just under half of the S&P 500 now trading at a 14-day Relative Strength Index of 0.70, the most in 30 years.  

More Gains for Fixed Income: The Bloomberg Aggregate Bond Index continued higher this week as markets continued to price in aggressive rate cuts by the Federal Reserve (Fed) in 2024 and inflation continued its steady march lower. Moreover, high yield bonds also gained ground this week amid generally favorable corporate credit conditions.    

The Fed's pivot and subsequent drop in interest rates likely keeps the high yield corporate credit default rate lower than it would have been under a real “higher for longer” environment. Markets seem to have largely priced that in, though, with high yield spreads sitting at their 17th percentile for the index, and 11th and 17th for B- and BB-rated companies, respectively. LPL Research believes high yield is quite expensive and priced to perfection, but it may remain a beneficiary of the resilient economic environment in early 2024.   

Commodities Mostly Higher: Oil prices rebounded after the Iran-aligned Yemeni Houthi militant group targeted the Red Sea, disrupting maritime trade and supply costs. Robust production and benign weather have caused natural gas prices to drop this fall, but prices rose this week as traders took advantage of lower prices and colder weather arrived in the Northeast.   

Corn importers in Europe and North Africa expect a consistent stream of Ukrainian exports in 2024, which could potentially weigh on agriculture prices next year. But given persistent logistical difficulties and Russian attacks on infrastructure, some market-watchers believe there is little chance of a large increase in supply. How this debate is resolved could have a meaningful impact on crop prices next year.   

Economic Weekly Roundup

December Consumer Confidence: A resilient labor market is supporting consumer confidence, which will likely support consumer spending as we head into 2024. Consumers who want to work are generally able to find employment. The decline in used car prices brought prospective buyers back into the market. We witnessed an uptick in future buying plans for both new and used vehicles.  

An improvement in buying plans for large-ticket items is a sign consumers feel confident about their financial well-being. The consumer is feeling pretty well as rates move lower, employers add to their payroll, and income expectations improve. Moreover, the Fed is getting its wish of suppressing inflation without much economic pain, giving the bulls more confidence as New Year’s approaches. 

November Housing: Housing starts in November were much higher than in 2019 as high borrowing costs have not materially dampened new construction activity. We are seeing strength in both single-family and multi-family activity as homebuilders are taking advantage of the low supply of existing homes on the market. Most of the housing starts were in the South as hybrid work continues to be a boon for households seeking a lower cost of living.  

Permitting was up for single-family homes, but the monthly decline in multi-family permitting dragged the headline number down. Investors have rewarded homebuilders in the stock market as low inventory of existing available homes has created an opportunity for new construction. Falling mortgage rates also helped ignite demand. Mortgage rates are the lowest since July. 

U.K. November Inflation Improving: U.K. inflation fell more than expected to 3.9% in November, its lowest annual reading since September 2021. Economists polled by FactSet expected a modest decline in the headline consumer price index (CPI) to 4.4%, after the 4.6% annual reading in October surprised to the downside, falling to a two-year low. Core CPI, which excludes food, energy, alcohol, and tobacco prices, came in at 5.1%, well below the 5.5% forecast. 

Weekly Employment Report: Continuing claims came in above analysts’ expectations but below the prior week’s reading. Initial claims came in below analysts’ expectations but above the prior week’s reading. LPL Research believes the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the lagged effects of tighter monetary policy.  

Core PCE Report: The Fed’s preferred inflation measure, the core PCE deflator, rose 0.1% month over month and 3.2% year over year in November, both below expectations. The core PCE has increased just 1.9% over the past six months, impressively below the Fed’s goal. Overall PCE prices fell 0.1% during the month, the first decline since April 2020, and rose 2.6% year over year, the smallest gain since February 2021. Consumer spending increased 0.2% month over month, trailing personal income’s 0.4% increase and lifting the savings rate slightly. 

The Week Ahead

The following economic data is slated for the week ahead: 

• Tuesday: FHFA Home Price Index (Oct), S&P/Case-Shiller Home Price Index (Oct)  
• Thursday: Weekly initial and continuing unemployment claims, wholesale inventories (Nov), pending home sales (Nov)