Market Update - June 24

The market started this holiday shortened week with losses. Broad based selling was driven by a sense that the market was due for a pullback after a big run of late. The major indices were able to close off their session lows thanks to some mega caps recovering from early weakness.

The Vanguard Mega Cap Growth ETF (MGK) had been down as much as 0.9%, but closed with a 0.1% decline. The Invesco S&P 500 Equal Weight ETF (RSP), meanwhile, fell 0.9% and the market-cap weighted S&P 500, which was stuck below 4,400 today, closed with a 0.5% loss.

The broad retreat saw 26 of the 30 Dow components register losses and ten of the 11 S&P 500 sectors decline. The energy sector (-2.3%) was the worst performer by a wide margin, falling alongside oil prices ($71.21/bbl, -0.71, -1.0%).

The iShares U.S. Home Construction ETF (ITB) rose 1.0% and the SPDR S&P Homebuilder ETF (XHB) rose 0.6%. D.R. Horton (DHI), Lennar (LEN), and PulteGroup (PHM) were some of the top winners from the space. These moves were in response to this morning's better than expected housing starts data for May.

Reviewing Tuesday's economic data:

• Total housing starts surged 21.7% month-over-month to a seasonally adjusted annual rate of 1.631 million (Briefing.com consensus 1.400 million) following a downwardly revised 1.340 million (from 1.401 million) in April. That is the strongest pace of starts since April 2022. Total building permits increased 5.2% month-over-month to a seasonally adjusted annual rate of 1.491 million (Briefing.com consensus 1.425 million) following a revision to 1.417 million (from 1.416 million) for April.
  • The key takeaway from the report is rooted in the monthly growth for single-unit permits (+4.8%) -- a leading indicator -- and single-unit starts (+18.5%), which is a good sign for a supply-challenged housing market overall and a seemingly good portent for homebuilders' sales and earnings prospects.

The stock market closed on a softer note on Wednesday. The price action in the mega caps drove a lot of the index level moves, as well as a sense the market is still due for some consolidation. Notwithstanding the losses seen in the mega cap stocks, the major indices held up fairly well. The market-cap weighted S&P 500 fell 0.5%, but the Invesco S&P 500 Equal Weight ETF (RSP) fell by a modest 0.1%. 

Market participants were also digesting Fed Chair Powell's semiannual monetary policy testimony before the House Financial Services Committee, but his comments didn't contain anything too surprising; therefore, they did not move the market much. Specifically, he reiterated that there is still a long way to go to get inflation back down to the 2.0% target and that nearly all Fed members anticipate the need for additional tightening before year end.

Following an early slide, there was a rebound effort in the afternoon trade as stocks pared their losses in response to falling Treasury yields, which reacted to a strong $12 billion 20-year bond reopening at 13:00 ET. The 2-yr note yield, which flirted with 4.76% earlier, fell to 4.67% before settling the session up one basis point at 4.71%. The 10-yr note yield, which hit 3.79% earlier, fell to 3.71% and settled down one basis point at 3.72%. 

Selling in the stock market, however, picked up again in the final hour of trading on no news. Ultimately, the major indices all closed in negative territory.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index rose 0.5% with purchase applications rising 2.0% while refinancing applications fell 2.0%.

The stock market had a mixed showing. Index level performance was supported by strong mega cap stocks, which were benefitting from some flight to safety trading as concerns about global growth rose to the fore. The broader market, though, exhibited weakness due to continued consolidation efforts and the aforementioned growth concerns.

The Vanguard Mega Cap Growth ETF (MGK) rose 1.1%. The major indices all settled near their best levels of the session, leaving the S&P 500 and Nasdaq with gains while the Dow Jones Industrial Average closed flattish.

The Invesco S&P 500 Equal Weight ETF (RSP), however, declined 0.4%. Market breadth also reflected more negative action under the surface. Decliners lead advancers by a nearly 2-to-1 margin at the NYSE and a greater than 3-to-2 margin at the Nasdaq.

The underlying weakness was in response to a slate of rate hikes by the Bank of England (+50 bps to 5.00%), Norges Bank (+50 bps to 3.75%), Swiss National Bank (+25 bps to 1.75%), and Central Bank of Turkey (+650 bps to 15.0%). Those moves stoked concerns about global inflation and the lag effects of rate hikes potentially impacting global growth.

In addition, Fed Governor Michelle Bowman (FOMC voter) said in a speech that "additional policy rate increases will be necessary to bring inflation down." This followed Fed Chair Powell's commentary indicating that there could be two more rate hikes by the Fed before the end of the year if the economy performs as expected.

Fed Chair Powell continued his monetary policy testimony before the Senate Banking Committee. He didn't provide any new surprises in terms of monetary policy views, yet there was consternation among committee members regarding capital requirements for banks. That understanding, coupled with the growth concerns, undercut the bank stocks. The SPDR S&P Bank ETF (KBE) fell 3.2% and the SPDR S&P Regional Banking ETF (KRE) fell 2.7%.

Reviewing Thursday's economic data:

• Q1 Current Account Balance -$219.3 bln; Prior was revised to -$216.2 bln from -$206.8 bln
• Initial jobless claims for the week ending June 17 were unchanged at 264,000 and the four-week moving average of 255,750 was the highest since November 13, 2021. Continuing jobless claims for the week ending June 10 decreased by 13,000 to 1.759 million.
  • The key takeaway from the report is that initial jobless claims have remained elevated (third straight week above 260,000), suggesting that there is some loosening in the labor market, although the level of initial claims remains well below average levels north of 375,000 seen in all recessions since 1980.
• Existing home sales increased 0.2% month-over-month in May to a seasonally adjusted annual rate of 4.30 million (Briefing.com consensus 4.28 million) from an upwardly revised 4.29 million (from 4.28 million) in April. Sales were down 20.4% from the same period a year ago.
  • The key takeaway from the report is that the inventory of existing homes for sale remains tight, which is due in part to the strength of the labor market, the ability to work remotely, and the jump in mortgage rates that is deterring existing home owners' interest in moving.
• Leading Indicators fell 0.7% in May (Briefing.com consensus -0.8%) following a prior decline of 0.6%.
• The weekly EIA Natural Gas Inventories showed a build of 95 bcf versus a build of 84 bcf last week.
• The weekly EIA Crude Oil Inventories showed a draw of 3.83 million barrels after last week's build of 7.92 million barrels.

The stock market closed the week on a downbeat note. Ongoing consolidation efforts contributed to some of the weakness, although concerns about global growth prospects were another contributing factor. The major indices hit their best levels in the early afternoon trade as a few mega cap stocks recovered from opening losses, yet selling picked up again to interrupt that rebound effort.

Ultimately, the major indices all closed in negative territory with losses ranging from 0.7% to 1.4%.

The downside moves followed a slate of disappointing preliminary June manufacturing PMIs for Japan, Germany, the UK, the eurozone, and the U.S., all of which came in below 50 (i.e. the dividing line between expansion and contraction). Following Thursday's central bank rate hikes, those reports fueled worries that prior rate hikes may be adversely impacting economic activity, specifically in the manufacturing sector.

Reviewing Friday's economic data:

• June IHS Markit Manufacturing PMI - Prelim 46.3; Prior 48.4
• June IHS Markit Services PMI - Prelim 54.1; Prior 54.9