Market Update - February 17

It was a strong day for the stock market. Many stocks finished higher as evidenced by the positive bias in market breadth. Advancers led decliners by a 7-to-2 margin at the NYSE and by a 2-to-1 margin at the Nasdaq. The Dow Jones Industrial Average saw a 0.3% gain, marking another record closing high, while the Russell 2000 jumped 1.8%, continuing its recent outperformance.

Meanwhile, some mega cap stocks succumbed to profit-taking activity, weighing down the S&P 500 (-0.1%) and Nasdaq Composite (-0.3%).

Amazon.com (AMZN) and Microsoft (MSFT) were among the influential losers from the mega cap space.

Semiconductor stocks also rolled over from early strength, adding downside pressure to the major indices.

The rollover action seen was related to the market's growing sense that things are due for a pullback. Still, the "rest" of the market, aside from semiconductor and mega cap stocks, continued to show nice resilience to selling efforts.

The energy sector was a top performer, gaining 1.1%, due to a huge gain in Diamondback Energy (FANG) following news that it plans to merge with Endeavor Energy Resources in a $26 billion cash-and-stock deal that is inclusive of Endeavor's debt.

Reviewing Monday's economic data:

• The January Treasury Budget showed a deficit of $22.0 billion compared to a deficit of $38.8 bln in the same period a year ago. The deficit in January resulted from outlays ($499.3 billion) exceeding receipts ($477.3 billion). The Treasury Budget data is not seasonally adjusted so the January 2024 deficit cannot be compared to the December 2023 deficit of $129.4 billion.
  • The key takeaway from the report is that the outlay for net interest in January exceeded the outlay for National Defense, reflecting the onerous impact of higher interest rates and the increased issuance to fund the government's chronic budget deficit.

The stock market experienced a broad retreat on Tuesday as participants reacted to the latest inflation data. A hotter than expected CPI (actual 0.3%; Briefing.com consensus 0.2%) and core CPI (actual 0.4%; Briefing.com consensus 0.3%) for January fueled selling interest in both the stock and bond markets.

Ultimately, the S&P 500 fell 1.4% and the Nasdaq Composite registered a 1.8% loss while the Dow Jones Industrial Average sank 500 points.

The Russell 2000 lagged relative to other major indices, dropping 4.0%, due to weakness in regional bank shares that fell under renewed selling pressure after recent rebound action. This weakness also left the SPDR S&P Regional Banking ETF (KRE) with a 4.2% loss.

Small cap underperformance was also related to worries about growth in a high interest rate environment.

Tuesday's robust selling activity left ten of the 11 S&P 500 sectors down at least 1.0%.

Reviewing Tuesday's economic data:

• January NFIB Small Business Optimism 89.9; Prior 91.9
• January CPI 0.3% (Briefing.com consensus 0.2%); Prior 0.2%; January Core CPI 0.4% (Briefing.com consensus 0.3%); Prior 0.3%
  • The key takeaway from the report is that it gives Fed officials an argument to maintain their hawkish rhetoric and delay the discussion about the initial rate cut.

The stock market had a solid showing following Tuesday's post-CPI retreat. The Russell 2000 outperformed its peers, ultimately closing with a 2.4% gain following Tuesday's 4.0% slide.

A late afternoon surge in buying left the S&P 500 at 5,000 with a 1.0% gain. At its session low, the S&P 500 was testing Tuesday's closing level, but the index failed to slip below its flat line, inviting increased buying activity.

In addition to the market's ongoing resilience to selling efforts, a noticeable pullback in interest rates and ongoing optimism about rate cuts stoked buying in the stock market.

Wednesday's broad and orderly advance left nine of the 11 S&P 500 sectors higher.

Lyft (LYFT) jumped 35% after reporting pleasing earnings and an expectation for its FY24 adjusted EBITDA margin to increase approximately 50 basis points. Lyft mistakenly noted in the earnings press release, which it subsequently corrected, an expectation for an approximately 500 basis points increase.

There was no economic data of note on Wednesday. 

The stock market saw ongoing rebound action, which began late Tuesday following the CPI-induced sell-off. Some of the heaviest stocks were left out, though, falling under some profit-taking activity and limiting index level moves for the S&P 500 and Nasdaq Composite. Still, Thursday's upside moves left the S&P 500 higher than Monday's close (5021.84) ahead of the CPI report.

The Russell 2000, which jumped 2.4%, also recovered all the ground it lost after sliding 4% on Tuesday in response to the CPI report.

Losses in some of the heavily-weighted names left the S&P 500 information technology sector alone in negative territory at the close with a 0.4% decline. Cisco (CSCO) was another notable loser from the sector after reporting fiscal Q2 results and issuing a disappointing outlook that featured a plan to reduce its workforce by approximately 5%.

A slight moderation in interest rates provided a measure of support to the stock market Thursday, but Treasuries settled off their highs, which were reached following a slate of economic releases.

Reviewing Thursday's economic data:

• Retail sales declined 0.8% month-over-month in January (Briefing.com consensus -0.2%) following a downwardly revised 0.4% increase (from 0.6%) in December. Excluding autos, retail sales declined 0.6% month-over-month (Briefing.com consensus 0.1%) following an unrevised 0.4% increase in December.
  • The key takeaway from the report is that it reflects a slowdown in spending on goods in January. Some brutally cold weather during the month will get some blame for the slowdown, but that excuse falls short as the primary driver knowing that sales at nonstore retailers (the bulk of which are online retailers) declined 0.8% month-over-month.
• Initial jobless claims for the week ending February 10 decreased 8,000 to 212,000 (Briefing.com consensus 221,000). Continuing jobless claims for the week ending February 3 increased 30,000 to 1.895 million.
  • The key takeaway from the report is that the low level of initial claims support an economy operating in growth mode; however, the rising level of continuing jobless claims underscores a rising level of challenge in finding a new job after a layoff.
• January import prices increased 0.8% month-over-month. Excluding fuel, import prices were up 0.7%. Export prices also increased 0.8% month-over-month. Excluding agricultural products, export prices were up 0.9%.
  • The key takeaway from the report was the deflation seen in year-over-year readings. Import prices were down 1.3% (and down 0.3% excluding fuel) while export prices were down 2.4% (and down 1.6% excluding agricultural products).
• The February New York Empire State Manufacturing Index checked in at -2.4 (Briefing.com consensus -9.0) following a -43.7 reading for January. The dividing line between expansion and contraction for this series is 0.0, so the February reading connotes an ongoing contraction, albeit at a much slower pace than what was seen in January.
• The February Philadelphia Fed Index checked in at 5.2 (Briefing.com consensus -9.0) versus -10.6 in January. The dividing line between expansion and contraction for this series is 0.0, so the February reading reflects an expansion in manufacturing activity in February.
• Total industrial production decreased 0.1% month-over-month in January (Briefing.com consensus 0.4%) after a revised unchanged reading (from 0.1%) in December. The capacity utilization rate was 78.5% (Briefing.com consensus 78.9%), versus an upwardly revised 78.7% (from 78.6%) for December. Total industrial production was flat yr/yr while the capacity utilization rate was 1.1 percentage points below its long-run average.
  • The key takeaway from the report is that the drop in industrial production in January was unduly influenced by weather-related issues, so the decline isn't necessarily as bad as the headline suggests.
• Business inventories increased 0.4% in December (Briefing.com consensus 0.4%) following a revised 0.1% decline in November.
• The NAHB Housing Market Index jumped to 48 in February (Briefing.com consensus 46) from 44 in January.
• Weekly EIA Natural Gas Inventories showed a draw of 49 versus a draw of 75 bcf last week

The stock market spent most of Friday's session little changed from Thursday's closing levels. Stocks didn't have much of a reaction to another hot inflation reading in the form of January PPI and another jump in Treasury yields.

The major indices took a sharp turn lower in the late afternoon trade, however, ultimately closing near session lows. There was no specific catalyst to account for the afternoon deterioration, which was relatively modest compared to Tuesday's post CPI-slide.

Regardless of the late-session slide, market participants were not spooked by Friday morning's economic data, holding onto to hope that inflation will continue to go the market's way, that the macroenvironment will remain strong, and that the Fed will cut rates sooner rather than later.

Reviewing Friday's economic data:

• January Housing Starts 1.331 mln (Briefing.com consensus 1.470 mln); Prior was revised to 1.562 mln from 1.460 mln; January Building Permits 1.470 mln (Briefing.com consensus 1.510 mln); Prior was revised to 1.493 mln from 1.495 mln
  • The key takeaway from the report is that the weakness was concentrated in multi-family starts and permits, although single-family starts were down 4.7% in a disappointing development for an inventory-constrained housing market.
• January PPI 0.3% (Briefing.com consensus 0.1%); Prior was revised to -0.1% from -0.2%; January Core PPI 0.5% (Briefing.com consensus 0.1%); Prior was revised to -0.1% from 0.0%
  • The key takeaway from the report is a lot like the key takeaway from the hotter-than-expected January CPI report: whether the market chooses to dismiss this report as a function of seasonal adjustment factors, the fact of the matter is that the Fed isn't going to dismiss it, and will see it as a reason to remain patient with respect to cutting rates.
• February Univ. of Michigan Consumer Sentiment - Prelim 79.6 (Briefing.com consensus 79.3); Prior 79.0
  • The key takeaway from the report is that consumers are feeling better about the economy with inflation pressures easing and the labor market showing continued strength.