By Pete Biebel, Senior Vice President
Since the take-off from their lows in early-October, the market averages have been gaining altitude at a dizzying rate. Last week, the rate of climb steepened even further. A peek at the altimeter indicates that all of the major averages reached record heights on at least four days last week; they all ended the week at new highs.
The most impressive flight plan belonged to the Russell 2000 Index of small-cap stocks (RUT), which was finally able to climb through the ceiling of a nine-month trading range. After gaining virtually nothing since mid-February, RUT soared an ear-popping 6.03% higher last week. The NASDAQ Composite Index (COMP) also had a great week, though it gained only about half as much as RUT. The S&P 500 Index (SPX) rose 2.00% and the Dow Jones Industrial Average (DJIA) gained 1.42%.
Several developments last week combined to provide a significant tailwind for stocks. A stronger-than-expected employment report and a larger-than-expected decrease in the Unemployment Rate delivered some extra lift. The mid-week Fed policy announcement indicated that the FOMC has a steady hand on the controls. A bit of additional late-week thrust came from news that a second pharmaceutical company had developed a very promising anti-viral pill that was shown to be highly effective in reducing the severity and hospitalization rate of individuals infected with Covid. Friday also brought news that Congress had finally passed the much-debated infrastructure bill.
Technology and Consumer Discretionary stocks were again on the leading edge of the formation. The S&P Consumer Discretionary Sector Index rose almost 5% last week and has now gained nearly 17% in the past five weeks. The Technology sector counterpart is up a little more than 10% in that time, including a gain of more than 3% last week.
One subsector of Technology stocks, which had been just trundling along down the runway for the past several months, lifted off and soared higher last week. That subsector is semiconductor stocks. The MVIS U.S. Listed Semiconductor 25 Index shot up about 150% from its March 2020 low to its February-April highs earlier this year. For the next six months, that index churned sideways; strong performance in a couple of its component companies was offset by weakness in others. Last week that index took off to a new high on Monday and never looked back. It continued to climb over the balance of the week, racking up an 8.4% gain.
One crosswind that might have thrown the market off course was how individual stocks reacted to their earnings announcements. So far this quarter, a very high percentage of companies are reporting better-than-expected results; and the market reaction to those reports has been generally positive. A trend that had been developing in recent weeks, and which was clearly evident last week, is for some of the previously high-flying stocks to experience windshear declines following their earnings announcements. Many of the stocks that have suffered such nose-dives recently are the same ones that soared to incredible heights in 2020. Many of them were the businesses that enjoyed accelerated adoption of their services as a result of the shelter-at-home mandate. Companies that provided virtual meetings, online exercise and social networking are now seen as unlikely to deliver the level of future revenue and earnings growth that the pandemic generated (and that had been priced into their stocks) through late-2020 and early-2021.
Two U.S. equity sectors that acted as a drag on the market last week were Healthcare (-0.91%) and Financials (-0.60%). It’s a bit surprising in a week with such good news on the medical front that the Healthcare sector would hit some turbulence. In fact, it was likely the news on Friday morning that caused the instability. The stock of the company that developed the new anti-viral had a great day. Unfortunately, in response to the news, several other pharma stocks hit an air pocket.
While the Financials sector includes insurance companies, securities exchanges and financial services firms, it was relative weakness in big bank stocks that was the strongest headwind for the group. What caused the big banks to yaw off course was a sudden pitch lower in the yield of the 10-Year Treasury Notes. Through much of September and October, as the 10-Year yield levitated from near 1.25% to almost 1.70%, most of the big banks climbed higher with several of them hitting new highs. Higher rates and a steeper yield curve imply higher profitability for money lenders. But that benchmark rate reversed course a couple weeks ago. The 10-Year yield began a glidepath lower in late-October and continued to descend from about 1.60% to 1.45% last week. That’s the lowest the 10-Year yield has been since late-September.
That swoon in yields is another symptom of the nuttiness that has been evident in the markets in recent weeks. It’s almost as if everyone expected the seasonal weakness in September. When that materialized, it confirmed that the market was following the seasonal script; therefore, everyone expected a rally into year-end to follow. When the averages climbed back above their 50-day moving averages in mid-October, all the momentum traders concluded that the market was cleared for takeoff.
It’s been a great market for momentum traders. It seems that momentum now trumps gravity. While some individual stocks have succumbed to gravity and have had significant losses over the past week or two, stocks that have managed a little forward momentum have attracted buyers. The breakout of RUT last week is another symptom. As soon as a stock or sector can display evidence of upward momentum, just put it on autopilot, sit back and enjoy the flight.
As a rule of thumb, every flight has to end at some point. There seems to be no news likely in the near future that can make the market alter its course. The current upward momentum in the market indicates that it’s probably too soon to put down the landing gear. Two weeks ago, I guessed that a good upside target for SPX would be the 4600 – 4650 range. Though progress stalled in the lower end of that range early last week, the index blew through the top of that range and ended the week near 4700. Updating the flight plan, my new near-term destination is SPX 4740 – 4780.
The strong run of the past five weeks has left a lot of space between the market’s current position and any potential downside danger levels. There’s probably no cause for concern as long as the averages hold above their 50-day moving averages. On SPX that average is near 4478 and climbing. The 4500 level represents about a 50% retracement of the October-November rally to date. While it’s a low probability over the near-term, seeing SPX fall below 4500 would be a signal to make sure your seatbacks and tray tables are in their full upright and locked position.
Earnings Season continues this week though at a much subdued pace. Results from several of the high volatility meme stocks will probably be the most fun to watch. The most fun on this week’s economic report calendar will likely come from the PPI and CPI reports. Economists expect just a slight uptick in the October numbers from the September readings. A big surprise one way or the other could make for a bumpy flight. Fasten your seatbelts.
| Date | Report | Previous | Consensus |
| Monday 11/8/2021 | Several Fed speeches but no economic reports | ||
| Tuesday 11/9/2021 | NFIB Small Business Optimism Index, October |
99.1 |
98.5 |
| PPI-Final Demand, October, M/M |
+0.5% |
+0.6% |
|
| PPI-FD, ex-Food & Energy, October, M/M |
+0.2% |
+0.4% |
|
| Wednesday 11/10/2021 | Consumer Price Index, October, M/M |
+0.4% |
+0.5% |
| CPI, ex-Food & Energy, October, M/M |
+0.2% |
+0.4% |
|
| Initial Jobless Claims |
269K |
267K |
|
| Wholesale Inventories, September, M/M |
+1.2% |
+1.0% |
|
| Thursday 11/11/2021 | Veterans’ Day, Banks & Bond Market Closed, Stock Market Open | ||
| Friday 11/12/2021 | Consumer Sentiment, November |
71.7 |
72.3 |
| JOLTS Job Openings, September |
10.439mm |
10.100mm |
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market