Market Update - November 18
by Justin J. Long CFP® on Nov 18, 2023 7:24:08 AM
With the Thanksgiving holiday coming this week, I wanted to take a moment and express my thanks for all our clients, partners, and our community.
We had the pleasure of being the event sponsor for the Serving Our Kids charity golf tournament last weekend to help raise funds for food delivery to food insecure children here in the valley.
Here in the Long home we plan on eating way too much food this week and watching our 49ers battle the Seahawks of Seattle on Thursday! What plans do you have for the Thanksgiving Holiday?
Happy Thanksgiiving from your Diazo Wealth Team!
And now onto the weekly recap:
It was another winning week for the stock market. The S&P 500, which flirted with 4,100 in late October, closed above the 4,500 level on Friday. The positive bias was partially driven by a recognition that there wasn't a lot of selling activity after the big run, along with a fear of missing out on further gains during a seasonally strong time of year for the market.
Mega cap stocks contributed to index performance, but the broader market experienced more robust buying interest. The market-cap weighted S&P 500 rose 2.2% this week while the Invesco S&P 500 Equal Weight ETF (RSP) jumped 3.4%. Also, the Vanguard Mega Cap Growth ETF (MGK) logged a 2.1% gain.
The bulk of this week gains followed the October Consumer Price Index on Tuesday, which corroborated the notion that the Fed is done raising rates. That report, along with the October Producer Price Index, the October Retail Sales, the weekly initial jobless claims, and the October Housing Starts data, all seemed consistent with a soft landing scenario for the economy.
The fed funds futures market priced out the probability of any additional rate hikes by the Fed, and now sees a 61.7% probability of the first rate cut in May 2024, according to the CME FedWatch Tool.
Treasury yields took a sharp turn lower in response to the data and the idea that the Fed is done raising rates. The 2-yr note yield fell 15 basis points this week to 4.90%. The 10-yr note yield declined 19 basis points to 4.44%.
The rate-sensitive S&P 500 sectors registered some of the largest gains, but all 11 sectors traded higher this week. The real estate (+4.5%), financials (+3.3%), and utilities (+3.0%) sectors were standouts in that respect. The consumer staples (+0.6%) and energy (+0.9%) sectors were the only ones to gain less than 1.0%.
Market participants were digesting another batch of earnings news. Walmart (WMT) and Target (TGT) headlined the calendar, both making mention of a more cautious-minded consumer. Still, Target registered a big gain after reporting results. Gap (GPS), Ross Stores (ROST), and Macy's (M) were also standout winners after reporting earnings.
Leading chip equipment maker Applied Materials (AMAT) also reported earnings and logged a decline following aReutersreport that it is the subject of a DOJ criminal probe over shipments to China's top chipmaker, SMIC.
In other news, Congress passed a continuing resolution to avoid a government shutdown, and President Biden and President Xi agreed to resume high-level, direct military talks, and bilateral cooperation in combating global illicit drug manufacturing and trafficking.
Looking ahead, markets will be closed on Thursday and close at 1:00 p.m. ET on Friday in observance of Thanksgiving.
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The major indices settled the session little changed on the heels of Friday's rally. Early selling pressure, driven in part by a sense that the market is due for some consolidation, had stocks modestly lower right out of the gate. The major indices climbed off their worst levels, though, after the S&P 500 found support on a test of the 4,400 level, hitting 4,393 at its low.
There was a general lack of conviction from both buyers and sellers ahead of Tuesday's release of the October Consumer Price Index. Boeing (BA) was a standout winner in the DJIA after news that it received multiple orders at the Dubai Airshow and a Bloomberg report that China is considering ending its freeze of Boeing with a new 737 Max deal.
The move higher in the stock market also coincided with Treasuries pulling back from intraday high yields.
Monday's economic data was limited to the October Treasury Budget, which showed a deficit of $66.6 billion compared to a deficit of $87.9 billion in the same period a year ago. The deficit in October resulted from outlays ($470.0 billion) exceeding receipts ($403.4 billion). The Treasury Budget data is not seasonally adjusted so the October 2023 deficit cannot be compared to the September deficit of $170.7 billion.
The major indices all closed with sizable gains, ending near their highs of the day on heavier than average volume. The S&P 500, which flirted with the 4,100 level on October 27, was trading above 4,500 at its high before settling the session just below that level. The Russell 2000 surged 5.4%, which left the index positive for the year.
Equities reacted to a sharp drop in rates on the heels of the better-than-expected October Consumer Price Index (CPI), which corroborated the market's thinking that the Fed is done raising rates.
The fed funds futures market priced out the probability of any additional rate hikes by the Fed, and now sees a 65.4% probability of the first rate cut in May 2024, according to the CME FedWatch Tool.
Buying activity was broad based with just about everything coming along for the rally. Home Depot (HD) was an individual standout after reporting pleasing Q3 results.
Reviewing Tuesday's economic data:
- October CPI 0.0% (Briefing.com consensus 0.1%); Prior 0.4%; October Core CPI 0.2% (Briefing.com consensus 0.3%); Prior 0.3%
- The key takeaway from the report is that inflation is moving in the right direction, and because it is, the market will continue to believe that the Fed won't be moving the target range for the fed funds rate any higher.
The stock market had a decent showing on Wednesday. The major indices added modest gains, continuing a rally that began after Tuesday's CPI data. The S&P 500 closed just above the 4,500 level with a 0.2% gain, which was still impressive considering the S&P 500 is up 9.4% since October 27.
The thinking that the Fed is done raising rates contributed to the positive bias following another batch of economic data that seemed consistent with a soft landing scenario for the economy.
The positive bias was also supported by a huge gain in Target (TGT) following its better-than-expected earnings results and a lingering fear of missing out on further gains during a seasonally strong time of year for the market.
In spite of today's pleasing economic data, Treasuries experienced some selling after yesterday's big gains.
Reviewing Wednesday's economic data:
- Weekly MBA Mortgage Applications Index 2.8%; Prior 2.5%
- October Retail Sales -0.1% (Briefing.com consensus -0.3%); Prior was revised to 0.9% from 0.7%; October Retail Sales ex-auto 0.1% (Briefing.com consensus -0.2%); Prior was revised to 0.8% from 0.6%
- The key takeaway from the report is that it isn't adjusted for inflation, so it is clear to see that consumer demand for goods in October fell off noticeably from September.
- October PPI -0.5% (Briefing.com consensus 0.1%); Prior was revised to 0.4% from 0.5%; October Core PPI 0.0% (Briefing.com consensus 0.3%); Prior was revised to 0.2% from 0.3%
- The key takeaway from the report is that it reflects a sharp moderation in prices at the wholesale level, which should remain relatively subdued barring a future jump in energy prices, as the index for unprocessed goods for intermediate demand was down 1.4%.
- November Empire State Manufacturing 9.1 (Briefing.com consensus -5.0); Prior -4.6
- September Business Inventories 0.4% (Briefing.com consensus 0.4%); Prior 0.4%
The S&P 500, which closed above 4,500, and the Nasdaq Composite eked out slim gains thanks to support from mega cap stocks. The broader market, meanwhile, experienced some normal consolidation, but losses were modest compared to the size of recent gains.
Big negative reactions to disappointing earnings and/or guidance from Walmart (WMT), Cisco (CSCO), and Palo Alto Networks (PANW) helped create an excuse for market participants to take profits.
Oil prices slid ($72.92/bbl, -3.64, -4.8%) in response to slowdown worries and technical selling after closing yesterday below their 200-day moving average.
Reviewing Thursday's economic data:
- Weekly Initial Claims 231K (Briefing.com consensus 220K); Prior was revised to 218K from 217K; Weekly Continuing Claims 1.865 mln; Prior was revised to 1.833 mln from 1.834 mln
- The key takeaway from the report is that it fits the Fed's preferred script of seeing some softening in the labor market. Initial claims are at their highest level since August and continuing jobless claims are their highest level since November 2021.
- October Export Price Index -1.1%; Prior was revised to 0.5% from 0.7%
- October Export Prices ex-ag. -1.0%; Prior was revised to 0.7% from 1.0%
- October Import Price Index -0.8%; Prior was revised to 0.4% from 0.1%
- October Import Prices ex-oil -0.2%; Prior -0.2%
- November Philadelphia Fed Index -5.9 (Briefing.com consensus -7.5); Prior -9.0
- October Industrial Production -0.6% (Briefing.com consensus -0.4%); Prior was revised to 0.1% from 0.3%; October Capacity Utilization 78.9% (Briefing.com consensus 79.4%); Prior was revised to 79.5% from 79.7%
- The key takeaway from the report is that it was adversely affected by the UAW strike, which has since ended. Motor vehicle and parts production, therefore, should turn into a tailwind for November industrial production, which is a thought that takes some of the sting out of the disappointing headline number for October.
- November NAHB Housing Market Index 34 (Briefing.com consensus 40); Prior 40
Friday's trade had the major indices confined to relatively narrow ranges. Stocks closed the session off their highs, which had the S&P 500 above the 4,500 level. The Russell 2000 paced index level gains, jumping 1.4%, thanks to strength in its energy components as oil prices rebounded.
Relative weakness in some mega cap stocks kept the other major indices in check. The market-cap weighted S&P 500 rose 0.1% while the Invesco S&P 500 Equal Weight ETF (RSP) closed with a 0.5% gain.
Big gains in Ross Stores (ROST) and Gap (GPS) after they reported earnings helped support the broader market.
Applied Materials (AMAT) was a losing standout after reporting earnings, sinking with a Reuters report that it is the subject of a DOJ criminal probe over shipments to China's top chipmaker, SMIC, weighing heavily on sentiment.
Reviewing Friday's economic data:
- Total housing starts increased 1.9% month-over-month, but were down 4.9% year-over-year, to a seasonally adjusted annual rate of 1.372 million (Briefing.com consensus 1.365 million). Building permits -- a leading indicator -- were up 1.1% month-over-month, and down 4.4% year-over-year, to a seasonally adjusted annual rate of 1.487 million (Briefing.com consensus 1.445 million).
- The key takeaway from the report is that building activity, particularly for the much needed single-family unit, remains subdued in the face of higher costs and financing rates. Single-unit starts were up just 0.2% month-over-month while single-unit permits rose 0.5% month-over-month. The number of single-family units under construction at the end of the period was down 0.6% month-over-month and the number of single-family units completed was down 0.9% month-over-month.
The data provided is for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. The information contained here is not guaranteed as to accuracy or completeness. All economic and performance information is historical and does not guarantee future results.
The Dow Jones Industrial Average is a price-weighted index comprising 30 widely traded blue chip U.S. common stocks. The NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on the NASDAQ stock exchange. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. The Cboe Volatility Index (VIX) shows the market’s expectation of 30-day volatility and is constructed using the implied volatilities of a wide range of S&P 500 Index options. Weekly and year-to-date figures for the VIX show percentage changes, not investment returns. The Russell 2000 Index tracks the performance of approximately 2,000 publicly traded small-cap companies in the United States. It is not possible to invest directly in an index.
The Treasury yield curve is derived from available U.S. Treasury securities trading in the market and is provided directly by the U.S. Federal Reserve. The spread measures the difference in yield between two government securities. A normal (positive) yield curve occurs when longer-term rates are higher than shorter-term rates. The opposite holds true for an inverted yield curve. Year-to-date changes in U.S. Treasury bond yields are shown in basis points (bps). One hundred basis points equals one percent.
Oil prices are represented by West Texas Intermediate (WTI) crude oil.
The G20 countries comprise a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85% of global gross domestic product, and over 75% of global trade.
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