It was a very busy week with some huge earnings reports painting a somewhat mixed but on balance positive picture, a Fed interest rate meeting that pushed back hard against Wall Street interest rate cut expectations, a sudden resurrection of regional bank concerns and an astonishing Jobs Report that indicated that the economy is on fire right now. All this kept traders on their toes, but the final outcome was yet another positive week for U.S. stocks which ended Friday back at more new all-time highs.
Coming off a weekend of increased Middle East tension and the apparent final confirmation of the demise of China’s largest real estate firm, Evergrande Group, markets were quite subdued for most of Monday before a late flurry of optimism about falling Treasury yields and the Federal Reserve’s upcoming interest rate call pushed stocks higher and right back into all-time record closing high territory once again.
Monday’s late-day gains were broadly maintained on Tuesday, but things were generally very quiet and barely changed ahead of some mega-tech earnings after the closing bell and the Fed interest rate-setting meeting the following day.
When they were released, the big Q4 2023 earnings reports were kind of so-so. Microsoft posted its strongest revenue growth since 2022 with the help of AI products, but its cloud performance disappointed. Alphabet/Google beat estimates for sales and profits, but its ad revenue came in shy of the forecast.
The knee-jerk reaction to these earnings on Wednesday morning was a sharp selloff in tech and tech-adjacent stocks, and this accelerated when the Fed statement was released after interest rates were left predictably unchanged that included the killer line that Fed officials “do not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
A definition of what “greater confidence” meant was notably lacking, but the message was clear; yes, there will be likely be interest rate cuts at some point in 2024, but there’s definitely no rush. Fed Chairman Jerome Powell very much stuck to this script in his press conference, calling an interest rate cut at the Fed’s next meeting in March “not the most likely case”. You could almost hear the stock market groaning in disappointment as stocks continued to cascade lower all afternoon, with the tech-heavy NASDAQ having its worst day in over a year.
Thursday was a day of digestion as Wall Street re-litigated the previous day’s Fed decision and Powell’s words, eventually deciding that things weren’t so bad after all. It was also a massive day for earnings and we got another mixed bag. Apple shares fell after a deepening slump in China overshadowed sales from elsewhere beating estimates, but Amazon reported very strong sales and Meta/Facebook shares jumped in extended trading after its sales forecast beat estimates. The firm will also pay its first ever dividend in March. Stocks rebounded from Wednesday’s dismal showing, with all the indexes jumping more than 1% on the day.
Everything seemed to change on Friday morning when, pre-market, we got a stunning blowout Jobs Report. Payrolls increased by 353k in January, that’s double what had been expected. While the unemployment rate remained unchanged at 3.7%, wage growth exploded higher as well to 4.5% year-on-year, up from 4.1% in December. Numbers for prior payroll reports were even revised higher, suggesting that this is something more than just a one-off blip.
This kind of data is an interest-rate-cut-killer, as it points to the fact that a victory lap over the final conquest of inflation may possibly be premature. Going in to the Jobs Report, the market-derived probability of lower interest rates by the end of the March Fed meeting was 42% and by the May meeting was 94%. Within minutes of the report coming out these probabilities had plunged to 16% and 68% respectively (before recovering slightly later) and the number of expected 0.25% rate cuts for 2024 fell from six to five (see FEDWATCH INTEREST RATE TOOL below).
Stocks, which had been poised to roar higher when the market opened on the back of those solid earnings reports the previous evening from Meta/Facebook and Amazon, wobbled at first in the face of the jobs data and, for a while, it felt like a bad-tempered stock market was going to knock prices down as a result of the sense that the imminent and frequent rate cuts to which it feels so entitled were slipping away from its grasp.
However, disappointment about a diminishing imminent rate cut likelihood was ultimately overwhelmed by a sense of bullishness about the ripping economy and what it could mean for corporate earnings. Stocks took another leg higher led by the tech and communications services sectors (and Meta/Facebook in particular ,which soared 20%) and even deeper into all-time record high territory by Friday’s close.
It’s just plain hard be a seller of stocks at the moment in an economy that is experiencing massive expansion, collapsing inflation, vibrant labor markets, a consumer that seems incapable of not spending shitloads of money, mostly solid (and sometimes spectacular) earnings reports from the biggest companies and a very healthy technical setup.
March (and possibly even May) interest rate cuts may now be off the table after that staggering Jobs Report, but there is a developing sense that exactly when the interest rate cuts begin is becoming less important than the total extent of cuts by the end of the year, both in terms of how many cuts there’ll be and how much lower interest rates will be on New Year’s Eve than they are now.
I am now monitoring all these numbers for you in the FEDWATCH INTEREST RATE TOOL below and even after the shocks of last week, we are still looking at a market expectation of a total of five interest rate cuts in 2024. If we see nothing in May’s meeting, that would mean a 0.25% cut at each and every one of the remaining Fed meetings for the rest of the year.
It sounds like a tall order, but consider this. When you look at the inflation rate using more recent data with a six month look-back (then annualized) rather than the more traditional straight one-year look-back, the Fed’s measure of annual inflation is now down to 1.9%, already below its target of 2%.
That says to me that the Fed could already be in a position to cut interest rates and just needs to be sure that the recent inflation data is not some kind of short term head fake that could suddenly reverse. The startling Jobs Report demonstrated the wisdom of the Fed’s slow and cautious approach, which gives policymakers flexibility. But ultimately the cuts will come.
OTHER NEWS ..
70% Inflation .. Tickets to attend the Super Bowl in Las Vegas next weekend are the most expensive ever for the event, going for an average $9,815 each so far, according to reseller TickPick. The price is 70% more than last year’s game, which was held in Arizona. This year’s attractive location is being cited as the biggest factor driving demand. It’s the first NFL championship to be held in the city. The previous record average ticket price was $7,046 in 2021 in Tampa, Florida, when the game was played at a sharply reduced capacity due to the pandemic. Many rooms at Las Vegas hotels, including the Bellagio and the Fontainebleau, are priced at well over $1,000 a night for the weekend.
Global Growth Optimism .. The International Monetary Fund (IMF) raised its forecast for global growth this year on the strong economic expansion in the U.S. and fiscal stimulus in China. The world economy will grow 3.1% this year, up from the 2.9% seen in October, the institution said last week. Tighter central-bank policy to fight inflation and public-spending cuts in some countries are among the reasons why growth is expected to be slower than in the two decades before the pandemic, when it averaged 3.8%.
But, given the scale of the COVID price shocks and the flurry of significant interest-rate hikes that followed, the IMF suggested things could have gone much, much worse. “The global economy continues to display remarkable resilience, and we are now in the final descent toward a soft landing with inflation declining steadily and growth holding up” , the report said.
Bad Memories .. Markets were jolted on Wednesday when the share value of New York Community Bancorp (NYCB) plunged by almost 50% after shocking Wall Street with a “game-changing” Q4 2023 earnings miss and slashed its dividend from 17 cents to 5 cents. To blame were huge loan-loss provisions (many of them commercial real estate-related) after asset purchases resulting from its acquisition of Flagstar Bank which itself acquired failed Signature Bank last March and a frighteningly high delinquency rate on some of the bank’s loans.
These developments are a reminder that the regional bank problems that rocked financial markets last year may not yet have been fully resolved. Loans related to the increasingly troubled commercial real estate sector still account for more than 28% of assets at small banks. Traders looking around for a possible next shoe to drop were apparently starting to focus on Valley National Bank on Friday.
UNDER THE HOOD ..
It is apparent that while multi-month trends in the technicals are still favorable, short-term indicators continue to show more selective Demand than is ideal with mild lingering Supply. Last Wednesday’s precipitous fall illustrates the risk of what can suddenly happen during such a lengthy and pretty powerful rally. However, Buying Power remains dominant above Selling Pressure emphasizing the firm grip that buyers maintain on the market.
The number of S&P 500 stocks trading above their 50-day moving average (MA) fell below the number trading above their 200-day MA. This was primarily the result of a bad Wednesday in the market last week, but such a crossover is generally considered to be a sign of some short term pullback risk (see below).
Also of concern is the return last week to meaningful Large Cap outperformance of Small Cap, indicating a reduction in the breadth of the advance.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Another flood of Q4 2023 earnings reports will keep us busy next week. 100+ S&P 500 companies are scheduled to report including Eli Lilly, PepsiCo, McDonalds, CVS, Caterpillar, Uber, Disney, Spotify, Ford, Paypal, BP, Alibaba, Simon Property Group, ConocoPhilllips, Expedia, Tyson Foods, Chipotle and Take Two Interactive.
The main economic-data highlight of the week will be Friday's release of the annual revisions to the Consumer Price Index (CPI) measure of retail inflation from the Bureau of Labor Statistics. Those could affect the previous five years of inflation data, and may have implications for Federal Reserve policy on interest rates.
ARTICLE OF THE WEEK ..
Could you retire at 30 years old with $10 million? Nick Magiulli takes a deep dive.
LAST WEEK BY THE NUMBERS
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - up 3.3% for the week.
Last week’s worst performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 0.9% for the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest U.S. companies. Its price rose 1.4% last week, is up 4.0% so far this year and ended the week at a new all-time closing record high (02/02/2024)
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 U.S. stocks. Its price fell 0.8% last week, is down 3.1% so far this year and is 19.9% below its all-time closing record high (11/05/2021)
DXY, the U.S. Dollar index, is an index that measures the value of the U.S. Dollar against a weighted basket of six other major currencies (the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krone and the Swiss Franc). It rose 0.5% last week, is up 2.6% so far this year and is up 14.1% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE
6.63%
One week ago: 6.69%, one month ago: 6.62%, one year ago: 6.09%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
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 of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, 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 possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
The “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE
65% (324 of the 500 largest stocks in the U.S. ended last week above their 50D MA and 176 were below)
One week ago: 75%, one month ago: 75%, one year ago: 71%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE
70% (352 of the 500 largest stocks in the U.S. ended last week above their 200D MA and 148 were below)
One week ago: 71%, one month ago: 77%, one year ago: 71%
Closely-watched measures 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 their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
Crossovers between the 50-day and the 200-day are also considered to be significant: a technical uptrend is considered to be in place when the 50-day percentage is above that of the 200-day and a technical downtrend when it is below.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months)
↑Bullish: 49% (39% a week ago)
⬌ Neutral: 26% (35% a week ago)
↓Bearish: 25% (26% a week ago)
Net Bull-Bear spread: ↑Bullish by 24 (Bullish by 13 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE TOOL
Will interest rates be lower than they are now following the Fed’s next meeting on March 20th?
Yes .. 20% probability (48% a week ago)
No .. 80% probability (52% a week ago)
Will interest rates be lower than they are now following the Fed’s following meeting on May 1st?
Yes .. 71% probability (88% a week ago)
No .. 29% probability (12% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.125% (1.25% lower than where we are now, implying five rate cuts of 0.25% each in 2024)
One week ago: 3.875% (implying six rate cuts), one month ago: 3.625% (implying seven rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
US TREASURY INTEREST RATE YIELD CURVE
The highest rate on the yield curve (5.51%) is being paid for the 2-month duration and the lowest rate (3.99%) is for the 5-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year rose from 0.19% to 0.33%, indicating a steepening in the inversion of the curve.
The interest rate yield curve remains unusually “inverted” (i.e. shorter term interest rates are generally higher than longer term ones). Based on the 2-year vs. 10-year spread, the curve has been inverted since July 2022.
Historically, an inverted yield curve is not the norm and has been regarded by many as a leading indicator of an impending recession, with shorter term risk regarded to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
Data courtesy of ustreasuryyieldcurve.com as of Friday. Lightly shaded area on the chart shows the current Federal Funds rate range.
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