It was a sensational week for stocks, the best of the year, with prices rising each and every day. In the end, the S&P 500 Large Caps and Russell 2000 Small Caps both rose about 6% for the week and the NASDAQ soared 6.6%. What started life as something of a short term over-sold bounce following a largely gruesome three-month slide gained traction as the week went on, on the back of the fact that there was no interest rate hike from the Fed and earnings reports continued to impress for the most part - but mostly because everywhere you looked, there was Goldilocks economic data pointing to a soft landing.
Despite a continued ratcheting up of death and misery in Gaza over the weekend and zero apparent progress towards any kind of resolution of a looming possible U.S. government shutdown in less than two weeks’ time, an oversold condition resulting from the previous week’s carnage gave stocks hope on Monday and all the indexes moved solidly higher, helped also by falling oil prices and some strong earnings reports, including from McDonalds (MCD).
The warm and fuzzy feeling for stocks spilled into Tuesday as they drifted higher again to end the month of October on an upbeat note ahead of the Fed interest rate decision the following day, but not by enough to save us from a three consecutive calendar month decline in stock prices for the first time since those dark days of early 2020.
Heading into the Fed announcement of its interest rate decision and chair Jerome Powell’s press conference on Wednesday afternoon, stocks remained stable, bolstered by spectacular forward guidance from Advanced Micro Devices (AMD) and the release of largely unchanged and kinda Goldilocks Job Openings and Labor Turnover Survey (JOLTS) data.
The Fed duly followed the script and left interest rates unchanged for the second meeting in a row, as everyone knew that they would. Powell indulged in a rather large amount of hedging when speaking at the ensuing presser with often vague responses to journalists’ questions. He left the door open for further hikes in the future but gave no sign of imminently walking through it.
The market took this as the closest thing that we are going to get right now to a pledge that rates will not be raised any further by the Fed and Treasury yields fell hard, which boosted stocks nicely back into that long-standing recent 4200-4500 range for the S&P 500 index.
Wednesday afternoon had all the feeling of a party starting. But there were still a few poopers out there pointing out that the cops might show and break things up as early as the next day if earnings from Apple (AAPL) were to disappoint or Friday if the latest Jobs Report didn’t cooperate.
The Bank of England kicked off Thursday by following the Fed’s example and left interest rates unchanged. The conviction that the Fed is now finished raising rates over here grew even stronger as Thursday went on and stocks continued the week’s impressive rally leading into those AAPL earnings and then the Jobs Report pre-market the next morning, finishing at the highs of the day.
When it came out after-hours, the AAPL earnings report was underwhelming. The largest holding in the S&P 500 index saw its worldwide sales drop for a fourth straight quarter, marking its longest slide since U2 noticed that it was a beautiful day in 2001. The company is struggling with increasingly sluggish demand in the US and around the world. The results also suggested that Apple is facing an even bigger slowdown in China than originally feared.
On Friday morning before markets opened, the Jobs Report announced that 150k jobs were added last month, a considerable drop from the downwardly-revised 297k from a month earlier and way below what had been expected. The jobless rate rose to 3.9% from 3.8%. This was deemed to be yet another Goldilocks scenario for stocks as it doesn’t make the Fed any more likely to raise interest rates but nor does it undermine the soft landing thesis.
Stocks recently fell to multi-month lows not because of any meaningful deterioration in fundamentals, but instead because an overly optimistic outlook (in part brought about by media puffery over artificial intelligence earlier in the year) has been rattled by unpleasant geopolitical surprises, heightened U.S. political dysfunction and mega-cap tech earnings that failed to meet excessively-elevated expectations, but which weren’t bad in an absolute sense.
As long as those factors (along with higher yields) were driving the market narrative, stocks had a hard time rallying. But underlying fundamentals haven’t changed nearly as much as the decline in stocks in the last three months or so would imply.
The ingredients for a solid rebound were within grasp, and last week the market finally reached out and grabbed them after a few reminders that, broadly, the macroeconomic environment hasn’t materially changed and a soft landing is still the most likely option, although far from certain. For last week’s rally to continue, these reminders need to eventually drown out the dominant noise caused by increasingly distressing geopolitical and domestic congressional issues and the dawning recognition that the A.I. mania in the spring was rather giddy and out of control relative to reality.
At the beginning of the year, traders and investors worried extensively about a U.S. recession as the Fed raised rates by the most in decades. Not any more. Some economic “experts” are not only discarding their fears of a punishing downturn, but seeing a bigger risk that the U.S. economy will be so strong that inflation will pick back up again, forcing the Fed to keep its interest rate options open, as Powell tried to do on Wednesday.
The stock market is confidently reading things differently, however. Referring to the possibility of any further rate increases from the Fed, one senior trader summed up the view of most of Wall Street; “Put a fork in it,“ he said on Bloomberg TV, “they’re done.”
OTHER NEWS ..
Trick-or-treat inflation .. Revelers and generous householders were hit with steep prices for Halloween candy this year after poor weather from West Africa to India spurred a global shortfall of sugar and cocoa. Get your candy hit now though - it’s set to get even worse by Christmas.
Happy Anniversary Elon? .. Elon Musk spent the week in London fronting an A.I. summit (whose government organizers were publicly branded as being “mad and idiotic” to have invited him to do so) including a grotesquely cringe-worthy “fireside chat” with UK Prime Minister Sunak, while marking the one year anniversary of his purchase of X, the social media platform formerly known as Twitter.
Just one year on from Musk’s purchase, the entity is now worth less than half of what the supposed business genius paid for it. Restricted stock units awarded to employees value the company at $19 billion compared with the $44 billion Musk bought it for. Since the takeover was completed, a majority of Twitter staff have been gotten rid of or have quit, the platform has lost millions of users, it has seen the number of technical glitches and service interruptions grow at an alarming rate, changes in content rules decided on by Musk himself have resulted in a proliferation of toxic hate-speech, dangerous misinformation and dumb-ass conspiracy nonsense and it has seen its advertising revenue tank over 50%.
It’s Finally Over .. WeWork is filing for bankruptcy according to the Wall Street Journal in a stunning reversal for the flexible-office-space venture that once valued itself at $47 billion (if you haven’t yet, do make sure to watch the excellent Apple TV drama about the rise and fall of WeWork and founder Adam Neumann). The firm missed interest payments owed to its bondholders on October 2nd, forcing it into a default timeline. The extent of the domino effect on vendors and landlords of a huge long term tenant of enormous amounts of office space around the world going out of business remains to be seen, but will likely not be pretty.
On a personal note, as a pre-pandemic former client of WeWork, I am not sure my firm would even exist today without the benefits of my WeWork membership in Manhattan from 2016-2020. Basket case of a company as it clearly was at the C-Suite level, I was lucky enough to interact with some super-professional, kind and amazingly hard-working employees in some of its New York locations and I wish all of them nothing but the very best.
UNDER THE HOOD ..
The technical narrative recently switched from hopefully bullish to realistically cautious. The S&P 500’s 200-day moving average has been viewed as technical support or resistance in the near-term depending whether the index is above or below it.
But buyers are finally stirring after having been pretty much on strike for weeks. But investors should not overvalue the meaning of the sharp snap-back rally seen last week. It seems very unlikely that the market will continue to move higher without first establishing solid ground to support an intermediate-term advance.
It may still take a further exhaustion of Supply, followed by the quick return of enthusiastic, broad-based, indiscriminate Demand, to suggest an end to the recent market decline. Stocks must have perceived value to buyers in order for them to enthusiastically swarm in and, in most cases, that means lower prices. I’m not sure that level of lower prices has been reached yet.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Q3 earnings will be this week's focus once again with the S&P 500 seemingly on track to return to overall earnings growth. This week we will see numbers from Disney, AstraZeneca, MGM Resorts, eBay, Uber, BioNTech, UBS, Occidental Petroleum, Warner Bros, Roblox, KKR, Devon Energy, DR Horton and Constellation Energy.
The economics calendar is light, but we will see the Consumer Sentiment index for November.
ARTICLE OF THE WEEK ..
Mint, the popular free spending and budgeting app, is being shut down at the end of the year.
I have personally test-driven a number of alternatives to Mint and my conclusion is that I like Monarch Money, a paid app, as the best alternative. That’s just an opinion, I have absolutely no connection to or promotional arrangement with the platform.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Real Estate (two biggest holdings: Prologis, American Tower Corp.) - up 8.2% for the week.
Last week’s worst performing US sector: Consumer Defensive (two biggest holdings: Proctor & Gamble, Costco) - up 1.7% for the week.
The proprietary Lowry's measure for US stock market Buying Power rose by 24 points last week to 133 and that of US stock market Selling Pressure fell by 20 points to 146 over the course of the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest US companies. It is just above its 50-day moving average but below its 90-day and is now back above its long term trend line, with a RSI of 58***. SPY ended the week 9.0% below its all-time high (01/03/2022).
IWM, the Russell 2000 Small Cap ETF, is made up of the bottom two-thirds in terms of company size of the group of the 3,000 largest US stocks. It is below its 50-day and 90-day moving averages and is also below its long term trend line, with a RSI of 57***. IWM ended the week 28.0% below its all-time high (11/05/2021).
*** RSI (Relative Strength Index) above 70: technically overbought, RSI below 30: technically oversold
The VIX, the commonly-accepted measure of expected upcoming stock market risk and volatility (often referred to as the “fear index”) implied by S&P 500 index option trading, ended the week 6.4 points (30%) lower at 14.9. It is now back below its 50-day and 90-day moving averages and is also back below its long term trend line.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
7.76%
One week ago: 7.79%, one month ago: 7.49%, one year ago: 6.95%
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven different indicators that measure some aspect of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with a sense of “FOMO” and investors chasing rallies in an excessively risk-on environment, possibly leaving the market vulnerable to a sharp downward correction at some point.
Data courtesy of CNN Business.
PERCENT OF S&P 500 STOCKS TRADING ABOVE THEIR LONG TERM MOVING AVERAGE (LTMA) ..
41% (out of the largest 500 stocks in the U.S., 209 ended the week above their LTMA and 291 were below)
One week ago: 24%, one month ago: 37%, one year ago: 38%
A closely-watched measure of market breadth and participation, providing a real-time look at how many stocks within the S&P 500 index of the largest U.S. stocks are trending higher or lower, as defined by whether the stock price is above or below the 200-day moving average which is among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market.
US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 24% (29% a week ago)
⬌ Neutral: 26% (28% a week ago)
↓Bearish: 50% (43% a week ago)
Net Bull-Bear spread:↓Bearish by 26 (Bearish by 14 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are typically polled on Tuesdays and/or Wednesdays.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE PREDICTION TOOL ..
Where will interest rates be at the end of 2023?
⬌ Unchanged from now .. 95% probability
One week ago: 79%, one month ago: 53%
↑ Higher than now .. 5% probability
One week ago: 21%, one month ago: 47%
Data courtesy of CME FedWatch Tool. Based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of Friday.
US TREASURY INTEREST RATE YIELD CURVE ..
The interest rate yield curve remains “inverted” (i.e. shorter term interest rates are generally higher than longer term ones) with the highest rate (5.56%) being paid currently for the 2-month duration and the lowest rate (4.49%) for the 5-year.
The closely-watched and most commonly-used comparative measure of the spread between the 2-year and the 10-year rose from 0.15% to 0.26%, indicating a steepening in the inversion of the curve during the last week.
Historically, an inverted yield curve has been regarded as a leading indicator of an impending recession, with shorter term risk deemed to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
The curve has been inverted since July 2022 based on the 2-year vs. 10-year spread.
Data courtesy of ustreasuryyieldcurve.com as of Friday. Light shaded area shows the current Federal Funds rate range.
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