By Peter Hudlow, CFA, Advisor Directed Portfolio Analyst
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The S&P 500, Dow Jones Industrial Average and NASDAQ continued to grind higher last week by 0.62%, 0.57% and 0.79%, respectively, following broadly supportive gross domestic product (GDP), labor and spending data, and amid muted volatility following the previous week’s “triple-witching” (expiration of September futures, futures options and equity option contracts) event. While both the S&P 500 and Dow Jones Industrial Average hit fresh all-time highs last week of 5,767 and 42,628, respectively, the NASDAQ remains roughly 3% off its high set on July 11. The high set by the S&P 500 marks its 41st of 2024 and is up 20% year to date. Looking back since 1929, the 16 prior instances of 35+ all-time highs in a single year have yielded a median return of 23.1%.
In this week’s commentary, I will cover the recent underperformance of technology, the resurgent China stimulus trade, continued weakness in the energy sector, precious and industrial metal outperformance, and the continued net inflow into money market funds.
The Nasdaq 100 index has retraced approximately 75% of its -17% peak-to-trough drawdown as of September 27 ($20,500–$17,500), failing to achieve a new all-time high in over two months. Focusing on “Magnificent Seven” performance, only Meta Platforms has hit a new all-time high. Currently In the Nasdaq 100 and the S&P 500 indexes, the Magnificent Seven now make up 42.9% and 31.2%, respectively, of constituent holdings.
Notable earnings last week included Micron Technologies, which reported fiscal fourth-quarter 2024 (Q4) earnings (Q4 revenue of $7.75 billion, net income of $778 million) Wednesday after the close, broadly beating analyst expectations (normalized earnings per share of $1.18 versus $1.11 average estimate) and climbing 14.2% for the week.
China made headlines Tuesday by issuing a set of sweeping initiatives to bolster much-needed investment and liquidity into the economy. The People’s Bank of China cut its key reverse repurchase rate by 50 basis points, slashed currently held mortgage rates, and lowered the residential down payment guidelines to 15% in attempt to counter China’s flailing real estate market and high unemployment rate. Reception has been robust, with the CSI 300 and Shanghai Composite indexes posting weekly gains of 18.35% and 12%, respectively. While the short-term pop in risk assets has been a welcome development to investors, the China’s yearly goal of 5.0% real GDP growth is still in question.
Energy producers have lagged in the third quarter by -4.0%, as measured by the Energy Select Sector SPDR Fund (XLE), and currently are the worst performing sector year-to-date (+5.0%), as front-month crude futures dipped to below the $70-per-barrel support level twice in September. The pessimism around XLE has reached historical levels, with a -1.74 standard deviation relative to SPY being second only to the negative oil futures meltdown during the lockdown mandates of early 2020. Demand-side headwinds include current and projected consumption softness and accelerated electric vehicle (EV) adoption in China, where 50% of the world’s EV fleet is located. Supply-side headwinds include news that OPEC+ member Saudi Arabia will ramp up production in December, and Libya is reportedly increasing production following a new central bank governor appointment.
Bulls in the sector point to a mean-reversion trade from record bearishness, a September 20 U.S. reserve drawdown of -4.4-million barrels, escalating conflicts in the Middle East, multiple legacy automakers publicly dialing back EV ambitions and China’s economic stimulus plan. The former provided a jolt to producers Thursday, with Brent Crude futures defending the long-term $70-per-barrel level into the weekend.
Hard commodities copper and gold have broadly outperformed year-to-date, gaining 18.6% and 28.2%, respectively, as recession, war, inflation and artificial intelligence have added to their attractiveness. Gold (and silver, which is highly correlated to gold) has enjoyed a multi-year bid from central bank buying, reaching an aggregate 16% of global reserve assets last week and second only to the U.S. dollar’s 58% share. Russia’s central bank also announced on September 5 that it plans to increase gold purchases from $13.5 million to $93 million per day. Conversely, copper, an industrial metal, is benefitting from a different set of inputs. A combination of record capital expenditures in data center construction (artificial intelligence), extremely low levels of existing home sales (homebuilders) and the pressing need for modernizing our electric grid (infrastructure), have supported the commodity. Between monetary policy dovishness and fiscal “policy” foolishness, a weaker dollar is also poised to provide commodities a tailwind.
Money market mutual funds are also hitting all-time-highs, with inflows up $120.8 billion, or 1.92% week-over-week (week ending September 25), to over $6.4 trillion for the first time ever. The previous week-over-week reading (week ending September 18), which concluded on the day that the U.S. Federal Reserve cut rates by 50-basis-points, declined $20.0 billion, or -1.88%.
Instead of taking nominal figures as is, I wanted to examine this level historically compared to household total financial assets to derive the percentage of cash that individuals are holding versus their “risk” assets relative to history. Dating back to 1992, households held an average 4.6% of financial assets in money market mutual funds; today, that allocation is 5.6%. Historical peaks in cash alternatives have occurred during recessions, with the dot-com bubble (Q3 2001, 6.7%), the great recession (2Q 2009, 8.0%), and more recently, two peaks of 5.7% during the initial stages of Covid-19 (1Q 2020) and the current timeframe (3Q 2023 – present). *
This week’s notable events include multiple economic data releases, including the ISM and S&P Global manufacturing and services purchasing managers indexes (PMI), job openings less terminations (JOLTs), payrolls and unemployment rate for September. EV manufacturers will have their third-quarter deliveries numbers released October 2, which will provide insight into performance and greater adoption around the world. Politically, vice presidential hopefuls JD Vance and Tim Walz are set to debate Tuesday evening.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, Sep. 30 | ||||
| 12:55 p.m. | Jerome Powell Speech | – | – | – |
| TUESDAY, Oct. 1 | ||||
| 9:00 a.m. | ISM Manufacturing PMI | Sep. | 48.3 | 47.2 |
| 9:00 a.m. | JOLTs Job Openings | Aug. | 7.65M | 7.673M |
| WED., Oct. 2 | ||||
| THURSDAY, Oct. 3 | ||||
| 7:30 a.m. | Initial Jobless Claims | Sep. | 220K | 218K |
| 9:00 a.m. | ISM Services PMI | Sep. | 51.3 | 51.5 |
| FRIDAY, Oct. 4 | ||||
| 7:30 a.m. | Non-Farm Payrolls | Sep. | 130K | 142K |
| 7:30 a.m. | Unemployment Rate | Sep. | 4.3% | 4.2% |
Sources: Federal Reserve Bank of St. Louis, Investment Company Institute, Ned Davis Research, Reuters
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market