Equity Markets End Quarter on a High Note

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Last week marked the close of yet another volatile quarter. All in all, the week itself was light on the economic data front. Thankfully, there were no additional negative headlines regarding the regional banking sector. In terms of the data, what new information was released happened to be mostly sanguine as the housing market showed signs of slightly cooling, the labor market may be softening, and some all-important inflation data showed a less than anticipated increase.

Together, these factors helped lift the equity markets higher, bringing a positive end to both the week and the first quarter. Now, let’s take look at the data from last week and find out what’s in store for the week ahead.

Wall Street Wrap

Home prices continue to cool: The latest S&P CoreLogic Case-Shiller Index recorded a seventh straight month of price declines in January as home prices fell 0.25 percent from the previous month.

Meanwhile, the often-cited subset of the broader index, the Case-Shiller 20-city composite of the largest metro housing markets in the country, also fell for the seventh consecutive month and is now significantly lower than last April’s pace, which was a 21.3 percent year-over-year increase. In fact, since last April, prices are up just 2.5 percent on a year-over-year basis. As we have been noting for some time, the decline in the pace of home price appreciation is important because shelter is weighted heavily in Consumer Price Index (CPI) calculations. And price movements take 12 months or more to impact CPI readings. With shelter costs having peaked a year ago, we anticipate this portion of CPI to begin declining soon.

Inflation rises slightly less than expected: The Fed’s key inflation gauge, the Personal Consumption Expenditure (PCE) index, rose slightly less than expected in February, giving hope that interest rate hikes are indeed helping ease price pressure. Last week’s headline inflation reading showed an increase of 0.3 percent in February compared to the prior month and is up 5 percent on a year-over-year basis compared to a year-over-year rise of 5.3 percent in January. Core inflation, which excludes the volatile food and energy categories, also rose 0.3 percent from the previous month and is now up 4.6 percent from February 2022.

The same report shows personal spending rose 0.2 percent in February, down from January’s strong 2.0 percent. Adjusted for inflation, spending actually declined by 0.1 percent and is up a “historically normal” 2.5 percent year over year versus last February’s blistering 6.7 percent year-over-year pace. Importantly amid the shaky economic backdrop, consumers increase their saving rate for the fifth straight month to 4.6 percent, the highest level since January 2022.

Consumer confidence rises despite turmoil in banking sector: The Conference Board Consumer Confidence Index increased slightly in March. The Index now stands at 104.2, up from February’s 103.4 but below last March’s reading of 107.6. Consumers’ assessment of their present situation pulled back a bit but remains relatively elevated. While the expectations index ticked up to 73.0 from the prior month’s level of 69.7, it remains subdued. The authors of the report highlight that 12 of the last 13 months’ readings have been below 80, which are levels that have historically been followed by recession. Consistent with the increased saving rate in the PCE report, the Conference Board asked a special question in March about consumers’ spending plans over the next six months. The survey noted, “Consumers plan to spend less on highly discretionary categories, such as playing the lottery, visiting amusement parks, going to the movies, personal lodging, and dining.”

This focus on less discretionary spending comes as consumers’ views of their likely income change in the next six months remains muted. The income differential (those who expect higher wages minus those expecting lower wages over the next six months) fell to 1.3 percent from February’s reading of 2.8 percent — well off the recent high of 11.6 percent registered in June 2021. The subdued wage expectations come despite consumers remaining relatively optimistic about their job prospects. While the labor differential (those who say jobs are plentiful less those who respond they are hard to get) ticked down to 38.8 versus 40.7, it remains elevated by historical standards.  

Labor market shows signs of softening: Weekly initial jobless claims climbed slightly higher to 198,000 last week, up 7,000 from the prior week. Meanwhile, continuing claims (or those remaining on unemployment benefits) are now at 1.689 million, up 4,000 from the prior period and well above the level of 1.3 million recorded in May 2022. We believe the rise in continuing claims is an early sign of softening in the labor market as it becomes increasingly challenging for job seekers to find new roles.

The week ahead:

Monday: The Institute of Supply Management (ISM) will release its latest Purchasing Managers Manufacturing Index for March. Recent readings have shown the manufacturing sector in contraction as demand subsides and supply normalizes. The ISM services report will be released on Wednesday, and we’ll look at these reports together to help determine overall economic strength.

Tuesday: The Bureau of Labor Statistics releases its Job Openings and Labor Turnover Survey report for February. The report helps paint a picture of the health of the labor market, looking at both job openings and turnover data. This report continues to be of interest considering the Fed’s attention on the labor market as it fights inflation. We’ll again be watching for any indications that the gap between job openings and job seekers is narrowing, which may help ease wage pressure for businesses.

Thursday: Before the opening bell we’ll receive initial and continuing jobless claims reports. Filings rose last week, and we’ll continue to keep an eye out for signs that the labor market is softening.

Friday: On Friday, the Bureau of Labor Statistics will release the March Jobs report. In prior editions we’ve noted that a significant gap has emerged between the Nonfarm Payrolls report and the Household report. We’ll continue to watch for signs that this gap is narrowing as well as any changes in hourly earnings for workers to help gauge whether wage growth has continued to recede.

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