The week began with growing concerns on Wall Street about the potentially chaotic nature of the upcoming administration and its propensity to balloon the federal deficit by trillions of dollars and to reignite higher inflation based partly on increasingly bizarre online musings from Trump and Musk. These worries are being reflected by steadily rising interest rates, including that of the important 10-year Treasury note, from which mortgage rates pivot (as of this week, I will now be tracking market interest rates for you on a weekly basis in this report, see below).
Bond vigilantes are starting to flex in advance of the US inauguration and are currently using the UK, where interest rates are skyrocketing to levels not seen since the Great Financial Crisis of 2008, as a petrie dish. Meanwhile, the steady drumbeat of global political upheaval continued, last week specifically in Canada and Austria, with Musk spraying gasoline on fires all over the world, including openly plotting the overthrow of the democratically-elected UK Prime Minister, as reliably reported by the Financial Times and even encouraging the United States to “liberate” the British people.
Stock traders looked past all these worries at the open on Monday however, apparently unable to resist the enticement of recently-discounted equity prices ahead of a lot of crucial labor market data later in the week and early morning reports of a possible walk-back by Trump on the nature and scale of his proposed tariffs. A push to a new all-time high for Nvidia stock didn’t hurt either and the major indexes ended the session higher despite a late day backslide, with Big Tech and AI names very much taking the lead.
On Tuesday morning, we learned that there are still over 8 million job vacancies in the US, considerably more than expected. This dealt something of a blow to interest rate cut hopes since strong growth in economic activity combined with plenty of available jobs are a recipe for potentially higher inflation levels (before we even consider the obviously inflationary effects of tariffs) and therefore less action by the Fed in the foreseeable future. This all pushed interest rates higher and stocks significantly lower.
The pressure continued to build in the bond market on Wednesday as interest rates maintained their upward trajectory, partly driven by Trump appearing to up the ante on NATO defense spending to 5% of GDP (the US currently pays 3%). The release of the Fed minutes from its last meeting reinforced the idea of an upcoming halt in rate cuts. Stocks experienced a choppy session ahead of a day off to be followed by Friday’s pre-market labor market data, but ended up little changed.
The stock market was closed on Thursday for Carter’s state funeral but the bond market is where the real action is at the moment and it was operational until 2pm ET during which time interest rates drew a breath and eased back a bit following their recent spikes.
The Jobs Report on Friday was considered critical and here’s why .. it’s the first big economic data point of the year and recently strong economic readings have pressured stocks. Although the narrative is that there’s virtually no chance that the Fed will cut rates at its January 29th meeting, the contents of the Jobs Report could still impact the Fed’s language and whether or not they signal a longer-term pause in rate cuts in their announcement that day.
At 8:30am ET, the report came in much hotter than expected with a lower 4.1% unemployment rate and +256k new payrolls, crushing estimates of +165k. This confirmed the outstanding strength of the US economy and reinforced the idea of American exceptionalism within the global economy.
It put a fork in hopes of any imminent rate cuts from the Fed and Wall Street reacted accordingly with interest rates and the US Dollar roaring higher and stocks and bonds - very much in a “good news is bad news” mode right now - dropping like a stone and the indexes finished near the lows of a ghastly day to close out a very difficult week. Futures markets now imply a most-favored expectation of no Fed rate cuts before October at the earliest.
The interest rate-driven bond market is leading the stock market by the nose these days and it’s difficult to see how that changes any time soon. The upcoming market catalysts (inflation readings this week, the inauguration next week with accompanying executive orders, the Fed interest-rate setting meeting) are all going to have an outsized effect on the pace and trajectory of interest rates across the yield curve (and thereby bond prices) and it is what happens in this arena that will determine the behavior and direction of the stock market in the short term.
OTHER NEWS ..
Beep, Beep, Beep .. Musk backtracked massively on Thursday, admitting that trimming even $1 trillion from federal spending would be “an epic outcome” for his unofficial pet project, the Department of Government Efficiency. But no-one with an ounce of intelligence - and certainly no bond traders - had ever believed his laughable original claim of achieving $2 trillion in federal spending cuts, so the effect on interest rates of his colossal re-setting of expectations was negligible.
The same goes for Trump suddenly extending the timeline for him to single-handedly end the Ukraine war from 24 hours into his presidency to “several months”. Reality bites when it comes to freewheeling campaign soundbites versus real world considerations but, to financial markets, these reversals don’t matter at all, since nobody on Wall Street ever took the preposterous original assertions seriously anyhow.
Better Behaved .. Americans seem to be learning their lesson when it comes to debt. Outstanding US consumer debt actually fell in November by the most in over a year as credit card balances plunged. Total credit dropped by $7.5 billion, according to Federal Reserve data released on Wednesday. Credit card and other revolving debt decreased by $13.7 billion, the biggest fall since early in the pandemic, having surged a month earlier. Non-revolving credit, such as car loans and college tuition, increased by $6.2 billion.
ARTICLE OF THE WEEK ..
Popular myth .. dividend-paying stocks are a really good idea.
No, they’re not. They are a sure way to underperform the stock market over time.
THIS WEEK’S UPCOMING CALENDAR ..
The latest inflation data and the start of Q4 2024 earnings season are the highlights this week.
On Wednesday, the latest Consumer Price Index (CPI) measure of retail inflation will come out. It is forecast to be up 2.9% from a year earlier. This comes a day after the publication of the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers.
We will also see the latest Retail Sales numbers on Thursday.
The earnings season kickoff starts with reports from JPMorgan Chase, Wells Fargo, Citigroup, Goldman Sachs, Bank of America, Morgan Stanley, BlackRock, UnitedHealth Group and Taiwan Semiconductor.
LAST WEEK BY THE NUMBERS:
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) for the second week in a row - up 1.9% for the week.
Last week’s worst performing U.S. sector: Real Estate (two biggest holdings: Prologis, Equinix) - down 3.0% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from a universe of the largest U.S. companies. Its price fell 2.0% last week, is down 0.9% so far this year and ended the week 4.5% below its all-time record closing high (12/06/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a universe of 3,000 of the largest U.S. stocks. Its price fell 3.7% last week, is down 1.9% so far this year and ended the week 10.6% below its all-time record closing high (11/08/2021).
MARKET INTEREST RATES:
FED FUNDS: ⬌4.38% (unchanged)
3 MONTH: ⬆︎4.36% (4.34% a week ago)
2 YEAR: ⬆︎4.40% (4.28% a week ago)
10 YEAR*: ⬆︎4.77% (4.60% a week ago)
20 YEAR: ⬆︎5.04% (4.88% a week ago)
30 YEAR: ⬆︎4.96% (4.82% a week ago)
Data courtesy of ustreasuryyieldcurve.com and refer to Treasury yields as of the market close on Friday.
* Used as a basis for determining mortgage rates
AVERAGE 30-YEAR FIXED MORTGAGE RATE:
⬆︎6.93%
One week ago: 6.91%, one month ago: 6.60%, one year ago: 6.66%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
FEDWATCH INTEREST RATE TOOL:
Where will interest rates be after the Fed’s next meeting on January 29th?
Unchanged from now .. ⬆︎97% probability (89% a week ago)
0.25% lower than now .. ⬇︎3% probability (11% a week ago)
What is the most commonly expected number of 0.25% interest rate cuts in 2025?
⬌1 (unchanged from a week ago)
All data based on the Fed Funds interest rate (currently 4.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
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.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE:
⬇︎16% (80 of the S&P 500 stocks ended last week above their 50D MA and 420 were below)
One week ago: 23%, one month ago: 52%, one year ago: 84%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE:
⬇︎49% (244 of the S&P 500 stocks ended last week above their 200D MA and 256 were below)
One week ago: 55%, one month ago: 67%, one year ago: 75%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks 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.
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