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By Pete Biebel, Senior Vice President

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Yep, that’s the title of the new, just-released James Bond movie. It seemed appropriate for a stock market recap on a week in which the market was shaken, not stirred. Perhaps an even more appropriate title would have been from an older Bond movie: Die Another Day. That was one from the Pierce Brosnan era, but its cast also included Halle Berry and Rosamund Pike, so it wasn’t a total loss.

Last week’s script began with a dead drop, but not the covert, spy craft kind; it was more the “Look out below!” gravitation and falling rock kind. The S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) both quickly fell below their lows of the previous week to their lowest levels in three months. After losing more than 2% in the previous week, SPX was quickly down an additional 1.8% through the first two hours of trading. COMP, which lost more than 3% in the previous week, got burned for another 2.5% in the early hours last Monday. Tumbling mega-cap tech stocks and concerns over the debt ceiling propaganda from Capitol Hill took the blame for the early weakness.

Things were not looking good for the protagonist. Stocks were staggered by the early beating and were unable to recover much of those losses through the balance of the session on Monday. But then, in true Hollywood fashion, stocks ripped higher on Tuesday. It looked like a B-movie special-effects rally as the mega-cap tech stocks sprang back into action even as the yield on 10-Year Treasuries shot up from 1.48% to 1.54%. The rising longer-term interest rates reinvigorated bank stocks, helping the Financials sector to be among the top performers on Tuesday.

Wednesday was the day that nearly brought our hero’s demise. European markets were sharply lower that morning on fears that the steep spike in natural gas prices there would stall the economic recovery. Stocks gapped lower here, pushing the major averages to near their Monday lows in the opening hour of trading. It was a cliffhanger moment. If the early selling pressure continued through the morning, it could have been curtains for our hero. But, in typical Bond fashion, the market made a death-defying escape. As natural gas prices receded, stocks recovered from their morning lows.

Later in the session, news that Senate Minority Leader Mitch McConnell, R-Ky., had proposed a stop-gap suspension of the debt ceiling inspired more buying and the averages ended near their highs of the day with respectable gains. After beginning the day with potentially fatal losses, the averages not only avoided further damage, but by climbing back into the plus column for the day, they put a decidedly bullish spin on what could have been a dangerously bearish week.

The following morning brought confirmation from Senate Majority Leader Chuck Schumer, D-N.Y., that an agreement had been reached on a short-term extension of the debt ceiling. The bullish mood was further enhanced by news that the weekly Initial Unemployment Claims report came in at 326,000, a post-Covid low. Stocks shot higher faster than an Aston Martin with rocket power.

That morning launch lifted the averages to what would prove to be their highs of the week. From their Thursday morning peak, the averages did a slow-motion fade over the remainder of the week, but still managed to eke out gains in what began as a very threatening week. The Dow Jones Industrial Average gained 1.22% for the week. SPX managed to advance 0.79% while COMP was able to eke out a mere 0.09% net improvement. It would all have been a bit of an anti-climax if not for the midweek save and reversal.

Perhaps the most critical plot twist in last week’s drama was that none of the major averages were able to climb back above their 50-day moving averages. Despite last week’s reversal, the negative bias that the market developed in late-August and September has not been displaced. A blockbuster market through the first eight months of the year could still wind up with a blooper reel performance late in 2021.

The market is still awash in liquidity, and while the Fed is likely to reduce its monthly purchases in the coming months, their policy actions will continue to inject funds well into next year. That’s a known subplot; what seems to be bothering stocks now is the potential for continuing inflation with slower economic growth. “Stagflationary” periods have typically brought negative stock market returns. The combination of falling profit margins and rising interest rates has not been a favorable backdrop for healthy market returns.

The bond market could be a clue. The yield on the benchmark 10-Year Treasuries continued its climb last week, ending at 1.605%, its highest level in four months. The stock market was able to stomach higher interest rates when the 10-Year yield was wavering in the 1.2% to 1.5% range, but significant increases from here could cause some indigestion. On SPX, the 4440 – 4460 area seems to be critical to the market’s near-term performance. Sustained trading above that range would suggest that the six-week timeout had run its course and the averages were on their way to new highs.

If instead this week begins as a sequel to last week’s early weakness, then the ability of the major indices to hold above key levels will be critical to the narrative. Obviously, taking out last week’s lows would be an extremely negative development. But even before that, just falling below the 4355 level on SPX would be a bad omen. That level represents a 50% retracement of the rally off last week’s low and is also roughly the level of the index’s 100-day moving average.

This week’s economic report calendar is lengthy but largely uneventful. The CPI and PPI data later this week seem to be the reports most likely to spark a market reaction.  The week also brings the debut of the third-quarter earnings reports. The action just gets going this week with several big bank stocks in the spotlight with the more numerous reports in the following weeks. Nevertheless, watching how the market reacts to the first batch of announcements could be instructive.

Date Report Previous Consensus
Monday 10/11/2021 Columbus Day, Banks & Bonds Closed, Stocks Open
Tuesday 10/12/2021 NFIB Small Business Optimism, September

100.1

99.5

JOLTS Job Openings, October 10.934mm  

11.013mm

Wednesday 10/13/2021 Consumer Price Index, September, M/M

+0.3%

+0.3%

CPI ex-Food & Energy, September, M/M

+0.1%

+0.2%

FOMC Meeting Minutes
Thursday 10/14/2021 Initial Jobless Claims

326K

320K

Producer Price Index, September, M/M

+0.7%

+0.5%

PPI ex-Food & Energy, September, M/M

+0.6%

+0.5%

Friday 10/15/2021 Retail Sales, September, M/M

+0.7%

-0.1%

Retail Sales ex-Vehicles & Gas, September, M/M

+2.0%

0.7%

Empire State Manufacturing Index, October

34.3

25.0

Import Prices, September, M/M

-0.3%

+0.6%

Export Prices, September, M/M

+0.4%

+0.5%

Business Inventories, August, M/M

+0.5%

+0.7%

Consumer Sentiment, October

72.8

74.0

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.

 

October 11, 2021 |