Good news for stocks erupted all over the place last week. We saw slowdowns in the Consumer Price Index (CPI) measure of retail inflation and the Producer Price Index (PPI) measure of wholesale inflation faced by manufacturers, we saw the (temporary) avoidance of a government shutdown, we saw continued mostly impressive earnings, particularly from Target (TGT) which soared 18% in a day and plummeting market interest rates. Everywhere you looked there were reasons to buy stocks.
Markets opened the week on Monday in a rather somber mood, following the previous Friday’s outlook downgrade for the United States from Moody’s Investor Services. But attention soon shifted to the week’s main event and next big narrative catalyst, the release of the CPI report the following day. There are still those who believe in the concept of Immaculate Disinflation and that Tuesday’s data might bolster that belief and it was this kind of optimism about the upcoming inflation data that stabilized things and stocks finished the day largely unchanged.
When it arrived pre-market on Tuesday morning, we got what was in every sense of the word a very cool CPI report. There was zero inflation in October as consumer prices remained unchanged from September. The increase in the headline rate over the year through October was 3.2%, markedly lower than the 3.7% pace from the previous month. The all-important (to the Federal Reserve) Core CPI reading, which excludes food and energy costs, rose by 0.2% in the last month for a slightly lower annualized rate of 4.0%.
Almost everything about the CPI report was better than expected and appeared to justify a reduction in concerns about a re-emergence of high inflation. It also reinforced to investors that the second of the Three Pillars of the Rally (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes) was still very much in place and it helped the Immaculate Disinflation believers cling to their faith.
As such, it likely eliminated the possibility of another interest rate hike from the Fed (see FEDWATCH INTEREST RATE PREDICTION TOOL below) and caused investors to now anticipate rate cuts sooner and larger than previously expected.
Unsurprisingly, financial markets fell madly in love with the report, especially when paired with the slowly but steadily rising jobless rate. Treasury yields plunged at the open and stocks exploded upwards out of the gate and kept flying all day.
The green-on-the-screen carried into Wednesday, by which time markets had digested the news from the previous evening that, despite some quite extraordinary in-fighting among Republicans (in a couple of cases, almost literally), the House had passed legislation to avert a government shutdown (later overwhelmingly confirmed by the Senate), even if once again it was just kicking the can down the road.
This time it was a “laddered” resolution out until February 2nd of next year - which ironically enough is Groundhog Day. There’s clearly no long term joined-up thinking going on here, this is just how things are likely to be with Congress and shutdowns going forward.
Do nothing for weeks or months → Last minute brinkmanship and grandstanding → Lots of yelling → Short term Band-Aid → More yelling → Rinse and repeat.
More economic data emerged and we saw that PPI is confirming the lower inflation narrative and Retail Sales fell slightly - both further pushing the idea that the Fed couldn’t possibly think about raising interest rates again. All these tailwinds meant that stocks finished Wednesday a touch higher, instead of suffering any whiplash from Tuesday’s monster rally as often happens after days like that.
Stocks took a breather on Thursday, particularly Small Caps which gave back a chunk of their impressive gains from Tuesday, while all the other indexes finished basically flat on the day. Friday was similar, with rudderless sideways trading for the entire session - the only difference this time was that Small Caps went and out-performed the other indexes this time. The relative dullness of the last two days of the week can actually be viewed as a positive as the massive gains of earlier in the week were maintained into the weekend.
This latest stock rally is an example of the stock market aggressively pricing in what it wants to believe, namely that the Fed will soon turn dovish and interest rates will fall both imminently and meaningfully. Wall Street once again totally disbelieves the Fed whenever it talks of higher-for-longer interest rates and last week’s CPI and PPI reports have only emboldened it’s stance.
Will under-invested institutions needing to jump on board the stock train by year-end chase this stock market higher into a solid or even spectacular Santa Claus rally? Very possibly. But the wide gulf that exists between what the Fed is saying and what the market believes it will do does makes stock prices highly vulnerable to any severe disappointment if it begins to look as if the Fed is winning that particular arm-wrestle.
In this regard, put a big X by December 13th on your calendar, because that’s when we get to see the next quarterly Fed “Dot Plot” of the Fed committee members’ interest rate change expectations for 2024 and beyond.
OTHER NEWS ..
X Marks The Troublespot .. Apple, Disney, IBM, Sony, Comcast, Warner Brothers, Paramount, Lions Gate and the European Union are among those rushing for the exits at X/Twitter as they all suspended their advertising on the platform after a Media Matters report confirmed that their ads were frequently running alongside pro-Nazi posts.
The list of runaway advertisers may well be longer by the time you read this. The report said that multiple other firms are also suffering the same fate and many of them appear to be considering joining the exodus of those abandoning the ailing social media channel.
Meanwhile, the situation has been compounded and the exit rate accelerated by the fallout from X/Twitter owner Elon Musk enthusiastically endorsing anti-semitic and white supremacist conspiracies while attacking and abusing the Anti-Defamation League on his own platform. A number of major Tesla shareholders came out to express that they are losing patience with South African-born Musk’s increasingly “bizarre and detrimental” behavior with some of them openly championing the idea of his removal as chairman.
Tesla stock has basically been on a wild ride to nowhere for the last three years, so their frustration is understandable. The price closed on Friday right around where it was on New Year’s Eve 2020. It swiftly lost over $40 billion in market value after Musk’s ill-advised comments first appeared on Wednesday.
Grim News in CRE .. Foreclosures are surging in riskiest corners of commercial real-estate financing, offering one of the strongest signs yet that the turmoil in the property market is worsening. Lenders this year have issued a record number of foreclosure notices for high-risk property loans, according to the Wall Street Journal. Many of these loans are similar to second mortgages and commonly known as “mezzanine loans”. The increase in mezzanine loan foreclosure announcements matters because it offers a more immediate measure of commercial real estate distress than mortgage foreclosure rates.
Oh no, Oreo! .. Suspicion over subtle changes to Oreo cookies has prompted some fans to protest what they believe is one of the biggest inflation scandals to date: “Double Stuf” Oreos with just a normal amount of creme and then less in the original-sized versions. Some Oreo enthusiasts are posting videos online of twisting the cookie open to reveal a more scarce filling. Snack giant Mondelez, the maker of the world’s best-selling cookie, promises it hasn’t tinkered with the creme ratio, but “always welcomes feedback from consumers”. Hmmm.
UNDER THE HOOD ..
Tuesday’s super-surge in stocks went a long way to resolving some of the negative divergences in technical key indicators that had developed since the beginning of November. But long-term technical analysis is not built for speed, we need to see sustained moves in one direction to generate true turnarounds.
A first step would be to observe Buying Power reclaim the dominant position above Selling Pressure (see LAST WEEK BY THE NUMBERS below) and we aren’t there yet.
A lot has changed for the better and the preponderance of the evidence is close to tipping back toward the bullish side. Notably, for the first time since mid-September, a majority of stocks in the S&P 500 are back above their long term averages (see PERCENT OF S&P 500 STOCKS TRADING ABOVE THEIR LONG TERM MOVING AVERAGE below).
However, we must still recognize that the current potential lows were not born from an exhaustion of Supply as is usually the case, so the return of Demand must be overwhelming and undeniable to be fully trusted.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Wall Street will get a midweek break for the Thanksgiving holiday. Equity and bond markets will both be closed in observance of Thanksgiving on Thursday. Stock trading will end at 1pm ET on Friday. The Bond market will close at 2pm ET.
We will get Q3 earnings from Lowe’s, Zoom, Best Buy, Hewlett Packard, Deere, Medtronic, Agilent Technologies and Autodesk - but the big one will be Nvidia on Tuesday.
The Fed will release the minutes from its early November meeting, when it again held interest rates steady.
Economic data will include the latest releases of the Leading Economic Index, Existing Home Sales and Durable Goods.
ARTICLE OF THE WEEK ..
Picking individual stocks is a loser’s game and you shouldn’t even try to do it. Why not? It’s simple math and probability.
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) - up 5.5% for the week.
Last week’s worst performing US sector: Consumer Defensive (two biggest holdings: Walmart, Procter & Gamble) - up 0.5% for the week.
The proprietary Lowry's measure for US stock market Buying Power rose by 14 points last week to 134 and that of US stock market Selling Pressure fell by 11 points to 147 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 above its 50-day and 90-day moving averages and is also above its long term trend line, with a RSI of 70***. SPY ended the week up 19.2% year-to-date and is 5.6% 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 above its 50-day moving average but below its 90-day and is also below its long term trend line, with a RSI of 60***. IWM ended the week up 3.4% year-to-date and is 26.5% 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 0.4 points (3%) lower at 13.8. It is below its 50-day and 90-day moving averages and is also below its long term trend line.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
7.44%
One week ago: 7.50%, one month ago: 7.57%, one year ago: 6.61%
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) ..
51% (of the 500 largest stocks in the U.S., 257 ended last week above their LTMA and 243 were below)
One week ago: 40%, one month ago: 38%, one year ago: 49%
A closely-watched measure of market breadth and participation, providing a real-time look at how many of the largest 500 publicly-traded stocks in the U.S. 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: 44% (43% a week ago)
⬌ Neutral: 28% (30% a week ago)
↓Bearish: 28% (27% a week ago)
Net Bull-Bear spread: ↑Bullish by 16 (Bullish by 16 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 (one more Fed decision, on December 13th)?
⬌ Unchanged from now .. 100% probability
One week ago: 86%, one month ago: 57%
↑ Higher than now .. 0% probability
One week ago: 14%, one month ago: 43%
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 (5.54%) being paid currently for the 2-month duration and the lowest rate (4.44%) for the 10-year.
The closely-watched and most commonly-used comparative measure of the spread between the 2-year and the 10-year rose from 0.42% to 0.44%, 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. Lightly shaded area shows the current Federal Funds rate range.
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