By Pete Biebel, Senior Vice President, Senior Investment Strategist
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In the category of “Superlatives,” your Jeopardy clue is, “The stock market gains of the past 10 weeks have been BLANK.” The answer, in the form of a question, is, “What is spectacular?” The judges would have also accepted “Stunning,” “Amazing,” “Nutso” and “Cray-cray.” The consistency of those gains is what has been most impressive. Other than a week of weakness in early September, the major averages have trended steadily higher since their early August low. An apparently still healthy economy and the promise of additional rate cuts by the U.S. Federal Reserve (Fed) have been the name of the game.
Last week, the game played on. The S&P 500 Index (SPX) added 0.85%, its sixth consecutive weekly gain. The index hit several new intraday highs during the week and ended the week at its highest closing level ever. The NASDAQ Composite Index (COMP) gained 0.80%. It too has posted net gains for six straight weeks, though it still hasn’t quite climbed back to the level of its July high. It was fun and games for the Dow Jones Industrial Average (DJIA) as well. DJIA racked up its sixth consecutive weekly gain, adding just under 1% for the week. The Russell 2000 Index of small-cap stocks (RUT) gained about 2%.
Meanwhile, the chants of “Come on down!” continue as the market expects 25-basis-point reductions in the Fed’s overnight lending rate at each of its next two meetings. While very short-term rates are likely to come on down as the Fed rate cuts unfold, longer-term rates have been going in the opposite direction. The yield on 10-year Treasury notes stood at 3.66% on the day before the Fed’s September 50-basis point cut. It had climbed to near 3.8% at the end of September; it punched over 4.0% early this month and ended last week near 4.1%.
I still believe that the potential for higher long-term interest rates is a risk that the stock market has yet to realize. In my most recent article, “Upon Further Reflection,” I wrote, “The prevailing assumption is that lower short-term rates will automatically lead to lower long-term rates. But that’s not always a true reflection of reality… If economic growth remains solid and if fiscal debt and deficits force massive increases in the issuance of Treasury securities, then long-term rates could easily continue to trend higher.”
Only two of the 11 S&P industry sectors were off their game and had net losses for the week. The S&P Healthcare Sector Index slipped 0.58%. The energy sector, which had been the hottest game in town in early October, forfeited a big chunk of those winnings last week. The game changer was a steep slide in the price of West Texas Intermediate (WTI) crude oil. WTI was trading near $75 a barrel as the week began, but as fear of an Israeli strike on Iranian oil facilities decreased, so too did the price of WTI. By Tuesday, crude had dropped to below $70 a barrel and ended the week at $69.35. Net for the week, the S&P Energy Sector Index lost 2.65%. You are the weakest link. Goodbye.
Two of the strongest links last week were the utilities and real estate sectors. Both posted gains of more than 3% for the week. The historically dull, boring S&P 500 utilities sector has generated a total return of more than 43% over the past 12 months. True, this traditionally interest-rate-sensitive sector has had a tailwind from generally declining interest rates. But how can we account for the sector’s recent strength as the yield on 10-year Treasury notes has been climbing since the mid-September Fed rate cut? Can I phone a friend? The answer lies in a new spin on the expected surge in demand for electricity (to power the data centers that will run artificial intelligence applications) that propelled utility stocks higher earlier this year.
The survey says that answer is a resurgence of interest in nuclear power, and in small modular reactors in particular. Last week, Amazon.com and Alphabet Inc. both announced investments in new, smaller reactors. In addition to renewed strength in the stocks of large utilities with existing nuclear facilities, there has been a rush into stocks of companies that most of us had never heard of. Nano Nuclear Energy Inc. (NNE) rallied 16% last week and has climbed 92% over the past month. NuScale Power Corp. (SMR) has gained 30% and 89% over the past week and month respectively. Centrus Energy Corp. (LEU, as in “low-enriched uranium”) has more than doubled in the past month thanks largely to a 67% gain last week. And Oklo Inc. (OKLO) surged 81% last week, lifting its one-month gain to 175%.
It was deal or no deal for semiconductor stocks last week. There was a very high level of correlation among the stocks in the group as it led the market higher through the first half of the year. Last week…not so much. While many companies in the group had good weeks (NVDA +2%, CRUS +4.3%, MRVL +7.89%, MU up almost 4% and WOLF up almost 40%), one index for the sector, the VanEck Semiconductor index, was down about 2% for the week. The game-changer was revenue guidance from Dutch-based ASML, a manufacturer of semiconductor lithography machines used to etch transistors into the silicon chips. Last Tuesday, ASML surprised analysts by guiding down its estimate of 2025 revenue. The stock fell about 16% on that day and was down a net 14% for the week. The selling quickly spread to other stocks in the semiconductor field, leading to significant losses for the week in several of the other big names in the sector (AMD -7.1%, AMAT -9.1%, KLAC -15.6% and LRCX -12.1%).
SPX’s closing record on Friday was near 5865. With no resistance overhead, higher highs are certainly within reach. The index is now borderline overbought on both a short-term and a long-term basis. There’s no doubt that valuations are stretched. The index’s 50-day moving average (near 5643 and climbing) is about 4% below SPX’s current level, so there’s a lot of downside room to play with before the technical picture would begin to look more bearish. Between the current level and the 50-day we can expect pretty solid support in the 5675 to 5750 range.
This should be a fun week for those who want to play along at home. Watch how individual stocks react when their quarterly results are released. It will be one of the busiest weeks of the new earnings season. Big bucks, no whammies! On Wednesday, the Fed will release an update of its Beige Book, which provides an assessment of economic conditions in each of the 12 Federal Reserve districts. Thursday should be the most entertaining day for economic reports with the unemployment claims numbers and the Purchasing Managers’ Index for both services and manufacturing.
| Economic Calendar (10/21/24 – 10/25/24) | Previous | Consensus | |
| Monday 10/21/2024 | U.S. Leading Economic Indicators, September, M/M | -0.2% | -0.3% |
| Tuesday 10/22/2024 | No Reports Scheduled | 91.2 | 91.6 |
| Wednesday 10/23/2024 | Existing Home Sales, September, SAAR | 3.86mm | 3.83mm |
| Fed Beige Book | |||
| Thursday 10/24/2024 | Initial Jobless Claims | 241K | 250K |
| Continuing Claims | 1.826K | ||
| S&P Flash U.S. Services PMI, October | 55.2 | ||
| S&P Flash U.S. Manufacturing PMI, October | 47.3 | ||
| New Home Sales, September, SAAR | 716K | 720K | |
| Friday 10/25/2024 | Durable Goods Orders, September, M/M | 0.0% | -1.0% |
| Durable Goods Orders ex-Transportation, September, M/M | +0.5% | ||
| Consumer Sentiment, October | 68.9 | 69.0 | |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market