Market Update - December 9

After some up and down price action in the early going, the major indices stuck to relatively narrow trading ranges throughout most of the session.

Mega caps and semiconductor stocks were weighing heavily on index performance. NVIDIA (NVDA) was one of the most influential stocks in that respect. The Vanguard Mega Cap Growth ETF (MGK) declined 1.1% and the PHLX Semiconductor Index fell 1.2%.

The market-cap weighted S&P 500 closed with a 0.5% loss while the equal-weighted S&P 500 eked out a 0.1% gain.

Money was rotating into other stocks, which provided some offsetting support to the broader market. Airlines were winning standouts in that respect after news that Alaska Air (ALK) plans to acquire Hawaiian Holdings (HA) for $18.00 per share. The US Global Jets ETF (JETS) climbed 4.2%.

Banks, retailers, and homebuilders were also relatively strong on Monday. The SPDR S&P Bank ETF (KBE) jumped 1.2%; the SPDR S&P Retailer ETF (XRT) rose 1.1%; and the SPDR S&P Homebuilder ETF (XHB) climbed 0.7%.

Reviewing Monday's economic data:

• October Factory Orders -3.6% (Briefing.com consensus -2.6%); Prior was revised to 2.3% from 2.8%
  • The key takeaway from the report is that the October decrease was the largest month-over-month contraction since April 2020, when factory orders plunged 13.5% as coronavirus-related lockdowns spread. The October report also featured a downward revision to September figures, including orders for nondefense capital goods excluding aircraft, indicating that business spending in September was weaker than originally estimated.

Tuesday's trade had a negative bias. The A-D line favored decliners by a 7-to-3 margin at the NYSE and the equal weighted S&P 500 closed down 0.9%. Mega cap stocks, which benefitted from some safe-haven buying activity, acted as support for the three major indices.

Buyers were presumably drawn to mega caps on renewed concerns about global growth prospects, which also sent Treasury yields lower on Tuesday.

A Moody's downgrade of China's credit outlook to Negative from Stable that was tied in part to concerns about structurally weaker growth prospects and an October JOLTS - Job Openings Report that featured the lowest number of job openings (8.733 million) since March 2021 were the primary factors that stoked worries about an economic slowdown.

The latter news overshadowed a slight uptick in the ISM Non-Manufacturing Index for November to 52.7% from 51.8%.

Just about everything, aside from mega caps, participated in Tuesday's retreat.

Reviewing Tuesday's economic data:

• November S&P Global US Services PMI - Final 50.8; Prior 50.6
• November ISM Non-Manufacturing PMI 52.7% (Briefing.com consensus 52.4%); Prior 51.8%
  • The key takeaway from the report is that the largest sector of the U.S. economy saw a pickup in activity in November that is supportive of the soft landing view.
    October JOLTS -Job Openings 8.773 mln; Prior was revised to 9.350 mln from 9.553 mln

Wednesday's session started on a mostly positive note. Relative weakness in the mega cap space limited index performance throughout the session, but buying activity was more robust under the surface in the early going. The market-cap weighted S&P 500 was up 0.5% at its high, but closed with a 0.4% loss. The Invesco S&P 500 Equal Weight ETF (RSP) was up 0.9% at its best level of the day, but closed the session nearly unchanged from Tuesday.

Many stocks rolled over in the afternoon trade with no specific catalyst to account for the price action. Still, the market held up okay when considering how far stocks climbed in a relatively short period of time.

Shortly after the open, advancers had a better than 3-to-1 lead over decliners at the NYSE. By the close, decliners had an 11-to-10 lead over advancers at the NYSE.

The early upside moves were the result of an inclination to buy on weakness after Tuesday's losses, which was supported by another drop in the 10-yr yield in response to Wednesday morning's economic data.

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications Index 2.8%; Prior 0.3%
• November ADP Employment Change 103K (Briefing.com consensus 127K); Prior was revised to 106K from 113K
• Q3 Productivity-Rev. 5.2% (Briefing.com consensus 4.8%); Prior 4.7%; Q3 Unit Labor Costs-Rev. -1.2% (Briefing.com consensus -0.8%); Prior -0.8%
  • The key takeaway from the report is the connection between rising productivity and falling unit labor costs. Each is headed in the right direction for the Fed's purposes, which means interest rates should continue to move in the right direction for the market's purposes.
• October Trade Balance -$64.3 bln (Briefing.com consensus -$64.4 bln); Prior was revised to -$61.2 bln from -$61.5 bln
  • The key takeaway from the report is the different paths taken by exports and imports, as that fits with a narrative that underscores weaker activity abroad versus what has been seen in the U.S.

Stocks rebounded on Thursday following Wednesday's modest declines. The major indices all closed near their best levels of the day with gains ranging from 0.2% to 1.4%. The S&P 500 was approaching the 4,600 level, reaching 4,590 at Thursday's high.

Mega cap stocks had an outsized influence on index gains, but there was some buying activity under the surface, too. Alphabet (GOOG), which jumped more than 5% after introducing its Gemini AI model, Apple (AAPL), and Amazon.com (AMZN) were some of the top performers.

Semiconductor stocks also outperformed the broader market. The PHLX Semiconductor Index climbed 2.8%.

Relatively modest buying activity in the broader market led to a 0.5% gain in the equal-weighted S&P 500 closed. Advancers had a 2-to-1 lead over decliners at the NYSE and a 3-to-2 lead at the Nasdaq.

Thursday's positive bias was also stemming from relatively pleasing economic data that fit with the soft landing narrative. Specifically, weekly initial jobless claims were little changed at 220,000 and continuing jobless claims fell by 64,000 to 1.861 million.

Reviewing Thursday's economic data:

• Initial jobless claims for the week ending December 2 increased by 1,000 to 220,000 (Briefing.com consensus 223,000) and continuing jobless claims for the week ending November 25 decreased by 64,000 to 1.861 million.
  • The key takeaway from the report is that it isn't producing any major shockwaves as it relates to the labor market. It fits the narrative of the labor market loosening a bit, but not coming undone amid a stream of layoff announcements. Therefore, the market is viewing it through a soft-landing lens.
• October Wholesale Inventories -0.4% vs. -0.2% Briefing.com consensus; prior revised to 0.0% from 0.2%.
• EIA Natural Gas Inventories showed a draw of 117 bcf vs a build of 10 bcf last week
• Consumer credit increased by $5.2 bln in October (Briefing.com consensus $9.0 bln) following an upwardly revised $12.2 bln (from $9.0 bln) in September.
  • The key takeaway from the report is that tighter lending standards and reduced borrowing demand in the face of higher interest rates have slowed the pace of credit expansion.

The major indices closed Friday's session near their highs of the day. The S&P 500 (+0.4%) closed above the 4,600 for the first time since March 2022. The Dow Jones Industrial Average, Nasdaq Composite, and Russell 2000 registered gains of 0.4%, 0.5%, and 0.7%, respectively.

The price action was more mixed in the early going, though, as the market digested this morning's economic data.

Stocks did not have an outsized reaction to the aforementioned reports due in part to a growing sense that the market is due for consolidation. Another factor that kept buyer enthusiasm in check was the implication that strong data won't put the Fed in a rate-cut frame of mind.

As a result, the fed funds futures market is no longer pricing in a cut in March, but it still sees a strong likelihood of a cut in May (78.5% vs. 89.0% on Thursday), according to the CME FedWatch Tool.

The 2-yr note yield climbed 17 basis points today, and 18 basis points this week, to 4.74%. The 10-yr note yield rose 12 basis points today, and two basis points this week, to 4.25%.

Reviewing Friday's economic data:

• Nonfarm payrolls increased by 199,000 in November (Briefing.com consensus 175,000) after an increase of 150,000 in October.
• Nonfarm private payrolls increased by 150,000 in November (Briefing.com consensus 155,000) after a revised increase of 85,000 in October (from 99,000).
• Average hourly earnings increased by 0.4% in November (Briefing.com consensus 0.2%) following a 0.2% increase in October.The average workweek rose to 34.4 hours in November (Briefing.com consensus 34.3) from 34.3 hours in October.
• The unemployment rate fell to 3.7% in November (Briefing.com consensus 3.9%) from 3.9% in October.
  • The key takeaway from the report is the recognition that the unemployment rate dropped as the participation rate increased, which suggests hiring activity in November was -- word of the day -- solid. In fact, the number of employed civilians increased by 747,000 while the number of unemployed civilians decreased by 215,000.
• The preliminary reading for the University of Michigan Consumer Sentiment Index for December came in at 69.4 (Briefing.com consensus 62.6) versus the final reading of 61.3 in November. In the same period a year ago, the index stood at 59.8. Prior to this report, consumer sentiment had declined for four straight months.
  • The key takeaway from the report is the linkage between the increase in sentiment and the decrease in inflation expectations. The latter set the tone for improved attitudes across age, income, education, geography, and political identification.