Market Update - December 2

It was tough watching the stock market on Monday, not because of how poorly it did, but because of how little it did until there was some seesaw action in the last hour of trading. The major indices had a mixed disposition throughout Monday's trade as neither buyers nor sellers showed much conviction. The Invesco S&P 500 Equal-Weight ETF (RSP) declined 0.2%.

The Nasdaq Composite had a small performance edge, drawing added support from select mega-cap names. Those gains also helped keep the S&P 500 in a fairly steady position relative to Friday's closing level. In fact, the S&P 500 traded in just a 14-point range between its high and low today.

The deliberate move was reflected in the modest changes for the S&P 500 sectors. 

Treasury yields took a lower turn to begin the week, aided by a weaker-than-expected October New Home Sales Report and a $55 billion 5-yr note auction that trumped some soft demand seen at the $54 billion 2-yr note auction.

Reviewing Monday's economic data:

• New home sales decreased 5.6% month-over-month in October to a seasonally adjusted annual rate of 679,000 units (Briefing.com consensus 720,000) from a downwardly revised 719,000 (from 759,000) in September. On a year-over-year basis, new home sales were up 17.7%
  • The key takeaway from the report is that new home sales activity slumped noticeably in October despite a big drop in median and average selling prices. The latter had to do with a large decline in sales in the high-priced West region, but in general, high mortgage rates and generally high prices combined to create affordability pressures for prospective buyers.

The major indices settled Tuesday's session little changed from where they began the session. That isn't a bad thing considering how far they have come since their late October lows. Little change is the equivalent of a victory for the bulls or, viewed in another light, a defeat for anyone hoping for a more meaningful pullback either because they are short the market or have an unmet desire to buy on weakness.

A staying factor was provided by Fed Governor Waller (FOMC voter) who, according to CNBC, acknowledged that the policy rate could be lowered if inflation continues to fall for several more months. He went on to add that, if inflation continues to decline, there is no reason for rates to remain really high.

Those remarks were made around mid-morning and they sent the indices to their best levels of the day. That rush of buying interest eventually faded, though, reflecting some of the buyer exhaustion that has set in after the big run from the late October lows.

Fed Governor Bowman, also an FOMC voter, provided an offset of sorts to the rate-cut excitement when she noted in a speech that she would support raising rates again if data show progress on inflation has stalled or is insufficient to bring inflation back down to 2 percent.

Her view notwithstanding, the fed funds futures market appeared to place more of a premium on Mr. Waller's remark than Ms. Bowman's comment.

The 2-yr note yield, which is more sensitive to changes in the fed funds rate, seemed to react in the same vein, all but ignoring a $39 billion 7-yr note auction that was met with weak demand.

The drop in rates was an otherwise supportive influence for stocks, which lacked concerted leadership.

Reviewing Tuesday's economic data:

• The Conference Board's Consumer Confidence Index checked in at 102.0 for November (Briefing.com consensus 100.0). That was up from a downwardly revised 99.1 (from 102.6) for October. Accordingly, it will be advertised as an uptick in confidence, but such an advertisement should carry the disclaimer that confidence increased in November from a downwardly revised number for the prior month.
  • The key takeaway from the report is that confidence in future business conditions, job availability, and incomes for the next six months improved -- a helpful attitude that should support the market's prevailing soft landing outlook.
• The September FHFA Housing Price Index was up 0.6% month-over-month following an upwardly revised 0.7% increase (from 0.6%) in August.
• The September S&P Case-Shiller Home Price Index was up 3.9% month-over-month (Briefing.com consensus 4.1%) following a downwardly revised 2.1% increase (from 2.2%) in August.

The S&P 500 and Nasdaq Composite closed near their lows of the day, registering slim declines due to relative weakness in the mega cap space. The Dow Jones Industrial Average, meanwhile, eked out a 0.04% gain while the Russell 2000 and S&P Mid Cap 400 rose 0.6% and 0.4%, respectively.

There was an underlying positive bias throughout the session, but buyer enthusiasm faded somewhat as the session progressed. The equal-weighted S&P 500 logged a 0.4% gain, but had been up as much as 1.1% at its high.

A drop in Treasury yields provided a measure of support for stocks in this seasonally strong period for the market.

Those moves were partially a reaction to some pleasing inflation data out of Germany, Spain, and Australia, and the notion that the Fed could cut rates in the first half of 2024.

Other factors that helped to drive the positive bias included an upward revision to Q3 real GDP to 5.2% from 4.9%, General Motors (GM) announcing an accelerated $10 billion share buyback program and 33% increase in its dividend, and the favorable response to earnings results from CrowdStrike (CRWD), NetApp (NTAP), Intuit (INTU), Workday (WDAY), and Foot Locker (FL).

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications Index 0.3%; Prior 3.0%
• Q3 GDP - Second Estimate 5.2% (Briefing.com consensus 4.9%); Prior 4.9%; Q3 GDP Deflator - Second Estimate 3.6% (Briefing.com consensus 3.8%); Prior 3.5%
  • The key takeaway from the report is that the U.S. economy was effectively booming in the third quarter despite higher interest rates, aided by a strong labor market and disinflation that fueled healthy consumer spending activity.
• October Adv. Intl. Trade in Goods -$89.8 bln; Prior was revised to -$86.8 bln from -$85.8 bln
• October Adv. Retail Inventories 0.0%; Prior was revised to 0.4% from 0.9%
• October Adv. Wholesale Inventories -0.2%; Prior was revised to 0.1% from 0.0%

Thursday's price action was somewhat mixed. The Dow Jones Industrial Average was a relative outperformer, climbing 1.5%, due in part to a big gain in Salesforce (CRM) after impressing with its earnings results and outlook after Wednesday's close.

The S&P 500 and Nasdaq Composite, meanwhile, spent most of the session pinned in negative territory due to lagging mega cap constituents. The Vanguard Mega Cap Growth ETF (MGK) closed with a 0.1% loss and the Nasdaq Composite fell 0.2%.

An uptick in buying activity in the last half hour of trading left the S&P 500 near its high of the day with a 0.4% gain.

The outperformance of the broader market comes in the wake some economic data that featured a moderation in income and spending, and disinflation in the PCE Price Indexes in October, a much stronger-than-expected Chicago PMI for November, and a relatively low level of initial jobless claims.

Treasury yields backed up some in response to the data, which kept some buyer enthusiasm in check in the stock market.

Reviewing Thursday's economic data:

• October Personal Income 0.2% (Briefing.com consensus 0.2%); Prior was revised to 0.4% from 0.3%; October Personal Spending 0.2% (Briefing.com consensus 0.2%); Prior 0.7%; October PCE Prices 0.0% (Briefing.com consensus 0.1%); Prior 0.4%; October PCE Price - Core 0.2% (Briefing.com consensus 0.2%); Prior 0.3%
  • The key takeaway from this report is the disinflation seen in the PCE Price Indexes, which is good; however, the 3.5% increase in core PCE, which is what the Fed focuses on, remains well above the 2.0% target. It's moving in the right direction fortunately, but that isn't the type of reading that will move the Fed to think about cutting rates soon.
• Weekly Initial Claims 218K (Briefing.com consensus 215K); Prior was revised to 211K from 209K; Weekly Continuing Claims 1.927 mln; Prior was revised to 1.841 mln from 1.840 mln
  • The key takeaway from the report is that layoff activity remains relatively subdued, which is a good thing. The bad thing, and what fits with a softening labor market, is that it is becoming more difficult to find a job after a layoff.
• November Chicago PMI 55.8 (Briefing.com consensus 45.0); Prior 44.0
• October Pending Home Sales -1.5% (Briefing.com consensus -2.3%); Prior was revised to 1.0% from 1.1%

The S&P 500 closed at its best level since March 2022. The index failed to cross 4,600, reaching 4,599 at its high, before closing just below that level. The Nasdaq Composite and Dow Jones Industrial Average registered gains of 0.6% and 0.8%, respectively, while the Russell 2000 jumped 3.0%.

The price action in the the early going was lackluster, though, with the three major trading near Thursday's closing levels. Buying activity picked up in the stock market around the same time that buying picked up in Treasuries.

The 2-yr note yield sank 14 basis points today to 4.56% and the 10-yr note yield settled 13 basis points lower at 4.23%. These moves were partially a reaction to this morning's economic releases.

Briefly, the S&P Global U.S. Manufacturing PMI was unchanged from the flash November reading, the Manufacturing PMI from the ISM Institute reflected contracting activity at a pace that was unchanged from October, and the Construction Spending report for October was stronger than expected.

Market participants were also reacting to Fed Chair Powell's speech on Friday, which did not contain anything surprising.

Just about everything came along for the upside ride, aided by a fear of missing out on further gains in a seasonally strong period for the market.

Reviewing Friday's economic data:

• November S&P Global US Manufacturing PMI - Final 49.4; Prior 49.4
• November ISM Manufacturing Index 46.7% (Briefing.com consensus 47.5)%; Prior 46.7%
  • The key takeaway from the report is that there was little overall change in the strength of the manufacturing sector in November, which was disappointing since the market had expected that the pace of contraction would decelerate. Furthermore, the Production Index fell into contraction (48.5%) after showing a slight expansion (50.4%) in October.
• October Construction Spending 0.6% (Briefing.com consensus 0.3%); Prior was revised to 0.2% from 0.4%
  • The key takeaway from the report is that construction spending continued growing in October, which is a positive for the economy at a time when analysts and investors are on guard for signs of potential sudden economic weakness. For instance, manufacturing spending was up a robust 71.2% year-over-year.