Stocks eventually ended a little higher for the week but it was a tough slog getting there with interest rates continuing to push ever higher (see AVERAGE 30-YEAR FIXED RATE MORTGAGE below) and a bizarre Jobs Report on Friday.
Monday started out quietly. There was some relief at no government shutdown but an awareness that the can is now lying just a little further down the road and nothing had really changed. Markets quickly resumed their recent short-term path of least resistance by moving lower, with Small Caps once again leading the way downwards.
Tuesday proved to be a very busy, consequential day. Employers reported having 9.6 million job openings at the end of August, according to a seemingly white-hot Job Openings and Labor Turnover Survey (JOLTS) report, up a mind-bending 690,000 from July, driven by a particularly large surge in professional and business services openings.
Taken at face value, that would seem to suggest that corporate America is ramping up hiring plans once again. On the surface, that is deemed to be highly inflationary. Markets ran with the negativity and Tuesday ended up as a horrible day for both stocks and bonds, with market interest rates surging even higher.
And the chaos in the asylum that is Congress reached new highs (lows?) with the historic constitutional assassination of House Speaker McCarthy driven by a few extremists in his own party. The legislative branch of the U.S. government is now in utter disarray and the chances of avoiding the next shutdown when the current government funding deal ends on November 17th (and potentially many more after that) are rapidly shrinking. An extended shutdown absolutely has the chance to help sabotage a soft landing for the economy.
Wednesday saw some welcome relief as weekly jobless data painted a less inflationary picture than the JOLTS numbers in advance of the big release of the Jobs Report on Friday and oil prices plunged 5% in the session. Interest rates eased somewhat and stock market buyers cautiously dipped their toes back in. Markets drew a breath ahead of the jobs data on a largely unchanged Thursday.
After the blowout Jobs Report came out before the market opened on Friday (see below), stocks’ initial knee-jerk reaction was to crap out on heightened fears that the Fed may now pull the trigger on another interest rate hike before year-end as a result and a strengthening of the “higher for longer” interest rate narrative. A more sober reading of the data as outlined below, however, saw stock prices recover sharply and end the day higher, locking in small gains for the week.
This Jobs Report was widely described as just plain “weird”. It showed a blockbuster headline figure of 336k new payrolls in September, more than double the expectation. The prior two months were also revised up by a combined 119k jobs.
Yet found behind the headline were plenty of details to support the idea that inflation is most definitely on the way down, particularly in an area on which the Fed has been most focused: wages. Average hourly earnings rose only 0.2%, the mildest monthly gain in nearly a year and a half. Also, the unemployment rate remained unchanged at 3.8% in September, despite the enormous increase in jobs created. It was this data that turned stocks around after the initial nosedive on Friday.
Things are just batshit crazy right now in the usually rather boring world of US government bonds with interest rates crashing around like a bird trapped in an small attic. Markets seem to be acting like a precocious toddler, testing the boundaries at which things break. Is it 5% interest rates on your bonds? No? How about 5.25%? Are 7.0% mortgage rates high enough? No? How about 7.50%?
It’s one thing to see extreme volatility in stocks or even junk bonds, we all signed up for that. It’s quite another to observe it in U.S. Treasury full-faith-in-credit instruments whose traditional role has been as buffers to the risk in the stock portion of everyone’s portfolios from most individual investors to banks and pension funds.
The sense is growing that if rates continue to rise the way they’ve been rising, there will eventually be a financial accident somewhere. More bank failures? Commercial real estate finally falling off a cliff? YUC collapses? A housing market crash? Take your pick.
Any of these things could trigger a recession and much lower stock prices and the Fed may well then have to react by beginning to cut interest rates sooner than they plan to and risk looking foolish at best and incompetent and destructive at worst. The problem of course is that by then it will be too late for Fed rate cuts to have any meaningful effect.
In the past few weeks the U.S. stock market has erased all of its gains of the past few months. The summer of 2023 came and went and we have nothing to show for it. As of right now, only 25 out of 500 companies are responsible for the 12% year-to-date gain in the S&P 500 and while that is up from just seven that represented the entire rally back in May, it still shows a concerning lack of breadth and is further evidence of how just looking at index performance does not necessarily give you the full picture of what is happening to the average stock.
OTHER NEWS ..
TGI Thursday lunchtime? .. JP Morgan CEO Jamie Dimon said artificial intelligence is already being used by thousands of employees at his bank and is likely to make dramatic improvements in workers’ quality of life, even if it eliminates some jobs. The bank advertised for more than 3,500 related roles between February and April.
“Your children are going to live to 100 and not have cancer because of technology,” Dimon said in an interview on Bloomberg TV. “And literally they’ll probably be working three-and-a-half days a week.”
Elon gives the regulator the finger .. The US Securities and Exchange Commission (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) is seeking to force Elon Musk to testify as it investigates the billionaire’s purchases of Twitter Inc. shares ahead of his takeover of the social media platform. The Wall Street regulator said on Thursday that Musk failed to appear to testify last month as requested, and has now asked a judge to force him to. The agency is reviewing Musk’s statements and disclosures about the stock transactions.
Before acquiring all of Twitter, Musk first purchased a 9.2% stake in the social media firm in March 2022. He did not disclose the stake to the SEC until a month later. The agency’s rules require that people who buy more than 5% of a public company disclose it within ten days.
The SEC began its probe in April 2022 and has requested thousands of documents from Musk and other parties, the agency said. He has apparently only sent a few hundred documents in response, withholding the rest. He originally agreed to sit down for an interview with the SEC last month, but two days before the meeting, Musk suddenly raised several objections, including one that he didn’t want to meet in San Francisco. Investigators even agreed to move the questioning to Fort Worth, Texas, near where Musk now lives to accommodate him - but then he decided that he wouldn’t attend the interview at all.
It’s possible, of course, that he was too busy designing more and more convoluted pricing models to try and make his comically overpriced purchase of the Twitter platform ever so slightly less disastrous.
UNDER THE HOOD ..
The S&P 500 index SPX closed on Friday at 4308, up a little for the week. The next upside resistance points are to be found at 4370, 4425 and 4460. Downside support levels are at 4305, 4273 and 4185.
We are almost at the one year anniversary of the 2022 stock market lows on October 12th. Since then, the S&P 500 Large Cap index is up 20%, the tech-heavy NASDAQ-100 up 38% and the Russell 2000 Small Cap Index up only 3%. Clearly size does matter.
Technical crosscurrents within the market are strong, drawing battle lines between an oversold short-term condition implying higher prices and tentative breakdowns in longer-term indicators suggesting lower ones.
The spread between dominant Selling Pressure and Buying Power continues to widen, although the main driver of this still appears to be more the withdrawal of Demand rather than an alarming intensification of Supply. But until the market is driven low enough to attract robust, broad-based Demand, sellers appear to remain in control.
It may well take a complete exhaustion of Supply, not currently observable, followed by the quick return of enthusiastic broad-based Demand, to suggest an end to the current corrective period that has gripped the market in recent weeks.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
The stock market will be open on Monday, but U.S. bond markets will be closed for the federal holiday.
The Q3 earning season starts on Friday, with results from several big banks. Citigroup, JPMorgan Chase and Wells Fargo will all report, as will BlackRock, PepsiCo, Delta Air Lines, Walgreens, UnitedHealth Group and Domino’s Pizza.
On Thursday, all eyes will be on the release of the latest Consumer Price Index (CPI) measure of retail inflation for September. Estimates are for month-to-month increases of 0.3% in both the headline CPI and the Core CPI, that would bring down the annualized rates of inflation to 3.6% and 4.1%.
The Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers will follow on Wednesday with the headline rate expected to be up 1.6% annualized and Core PPI seen rising 2.3%.
Federal Reserve watchers will closely examine Wednesday's release of minutes from the central bank's most recent policy meeting for extra clues about committee members’ thinking.
We will also see the latest Consumer Sentiment Index.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Technology (two biggest holdings: Apple, Microsoft.) - up 1.5% for the week.
Last week’s worst performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 3.2% for the week.
The proprietary Lowry's measure for US stock market Buying Power fell by 8 points last week to 119 and that of US stock market Selling Pressure rose by 11 points to 157 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 below its 50-day and 90-day moving averages but above its long term trend line, with a RSI of 43***. SPY ended the week 10.0% 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 also below its long term trend line, with a RSI of 34***. IWM ended the week 28.7% 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 0.3 points lower at 17.5. It is now above its 50-day and 90-day moving averages but just below its long term trend line.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
7.49%
One week ago: 7.31%, one month ago: 7.12%, one year ago: 6.66%
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
GROWTH ESTIMATE FOR THE CURRENT QUARTER GDP ..
Q3: +4.9%
Previous quarters .. Q2: +2.1% .. Q1: +2.0%
This data comes from the Atlanta Fed’s GDPNow model “now-cast”, which is a running algorithmic estimate of real seasonally-adjusted GDP growth for the current measured quarter based on multiple data points as they are released.
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.
US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 30% (28% a week ago)
⬌ Neutral: 28% (31% a week ago)
↓Bearish: 42% (41% a week ago)
Net Bull-Bear spread: ↓Bearish by 12 (Bearish by 13 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 ..
What will the Fed announce re: any interest rate change on November 1st after its next meeting?
⬌ No change .. 89% probability
One week ago: 82%, one month ago: 53%
↑ 0.25% increase .. 11% probability
One week ago: 18%, one month ago: 47%
Where will interest rates be at the end of 2023?
⬌ Unchanged from now .. 57% probability
One week ago: 65%, one month ago: 53%
↑ Higher than now .. 43% probability
One week ago: 35%, one month ago: 45%
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 (5.64%) being paid currently for the 4-month duration and the lowest rate (4.65%) for the 5-year.
The closely-watched and most commonly-used comparative measure of the spread between the 2-year and the 10-year rates fell from 0.44% to 0.30%, indicating a another significant flattening 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.
ARTICLE OF THE WEEK ..
There are plenty of good reasons to not own a home. A Morningstar analyst dives in.
EXPLAINER: FINANCIAL TERM OF THE WEEK ..
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity).
SECURITIES AND EXCHANGE COMMISSION (SEC)
The Securities and Exchange Commission (SEC) is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors.
The SEC was established by the passage of the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934, largely in response to the stock market crash of 1929 that led to the Great Depression.
The SEC can itself bring civil actions against lawbreakers, and also works with the Justice Department on criminal cases.
The U.S. Securities and Exchange Commission (SEC) is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. It also approves registration statements for bookrunners among underwriting firms.
Generally, issues of securities offered in interstate commerce, through the mail or on the Internet, must be registered with the SEC before they can be sold to investors. Financial services firms—such as broker-dealers, advisory firms and asset managers, as well as their professional representatives—must also register with the SEC to conduct business. An example: they would be responsible for approving any formal bitcoin exchange.
The SEC's primary function is to oversee organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors, and investment funds. Through established securities rules and regulations, the SEC promotes disclosure and sharing of market-related information, fair dealing, and protection against fraud. It provides investors with access to registration statements, periodic financial reports, and other securities forms through its electronic data-gathering, analysis, and retrieval database, known as EDGAR.
The SEC is headed by five commissioners who are appointed by the president, one of whom is designated as chair. Each commissioner's term lasts five years, but they may serve for an additional 18 months until a replacement is found. The current SEC chair is Gary Gensler, who took office on April 17, 2021. To promote nonpartisanship, the law requires that no more than three of the five commissioners come from the same political party.
Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government. The five divisions and their respective roles are:
Division of Corporate Finance: Ensures investors are provided with material information (that is, information relevant to a company's financial prospects or stock price) in order to make informed investment decisions.
Division of Enforcement: In charge of enforcing SEC regulations by investigating cases and prosecuting civil suits and administrative proceedings.
Division of Investment Management: Regulates investment companies, variable insurance products, and federally registered investment advisors.
Division of Economic and Risk Analysis: Integrates economics and data analytics into the core mission of the SEC.
Division of Trading and Markets: Establishes and maintains standards for fair, orderly, and efficient markets.
The SEC is allowed to bring only civil actions, either in federal court or before an administrative judge. Criminal cases fall under the jurisdiction of law enforcement agencies within the Department of Justice; however, the SEC often works closely with such agencies to provide evidence and assist with court proceedings.
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