By Pete Biebel, Senior Vice President, Senior Investment Strategist
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If the market could look in a mirror, I’m pretty sure it would be very pleased with what it sees. In what is traditionally an ugly time for stocks, the market has maintained a healthy glow. The major market averages are near all-time highs. The economy’s growth seems solid, not too strong and not too weak. The scars of past inflation are fading. The specter of high interest rates is also fading as the U.S. Federal Reserve (Fed) has begun its long-awaited process of reducing its target overnight lending rate. But like an aging diva, the market is also conveniently ignoring some ugly blemishes. Among the wrinkles that the market may have to face in the near future are an uncertain election outcome, the likely escalation of geopolitical conflict and the impact the conflict could have on crude oil prices and economic growth. It may also have to face an era of higher-for-longer long-term interest rates, even while the Fed cuts its short-term rate.
Last week, the stock market did a little more preening and got a little better looking as the week progressed. And that was despite an East Coast dockworkers strike and hints from the Fed that future rate cuts will be on the small side. The event that so greatly improved the market’s appearance last week was the release of employment data Friday morning. The numbers showed a much stronger employment situation than had been expected. Nonfarm payrolls increased by 254,000 jobs in September. That was more than 100,000 jobs above the consensus of economists. To add to the surprise, the unemployment rate, which had been expected to hold steady at 4.2%, declined by a tick to 4.1%. At a higher degree of precision, the drop in the unemployment rate was even greater – from 4.22% to 4.05%. Stock index futures and interest rates spiked higher on the news. The major averages, which had been showing losses for the week through Thursday, all gained about 1% on Friday.
The market’s performance for the week was like a reflection in a fun house mirror: The large-cap indices got a tad fatter while the small-cap and equal-weight averages got a bit thinner. The large-cap averages all posted small net gains. The S&P 500 Index (SPX) added 0.22%, the NASDAQ Composite Index (COMP) gained 0.10% and the Dow Jones Industrial Average (DJIA) tacked on 0.09%. It was a reverse image for the smaller-capitalization stocks. The equal-weight version of the S&P 500 shed 0.26% on the week. The S&P mid-cap index was down just a whisker, -0.03%. The Russell 2000 Index of small-cap stocks (RUT) lost about 0.5%.
At the sector level, energy stocks were the fairest of them all last week as the escalating conflict in the Middle East led to a spike in crude oil prices. West Texas Intermediate (WTI) crude oil, which was trading near $68 a barrel early last week, ended the week near $75. The largest gains came midweek as the possibility of an Israeli attack on Iranian oil facilities suddenly became more likely. A 5.1% gain on Thursday was WTI’s largest daily increase in nearly a year, and the 9.1% gain for the week was its largest since January 2023. The S&P GSCI energy sector index gushed higher by more than 8% for the week. No other sectors looked nearly as good. Financials and utilities were in a near dead heat for second-best with gains of just over 1%. On the uglier end of the spectrum, the consumer staples sector and the materials sector both fell nearly 2% last week.
While the market continues to admire the appearance of an economy with a rosy complexion in an era of continuing Fed rate cuts, it tries to ignore the potential cold sore that is the increasing risk of higher long-term interest rates. 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. Since the Fed cut its benchmark rate a week and a half ago, the yield on 10-year Treasury notes has increased steadily from 3.78% to 3.96%. 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.
Another recent development is something that no one saw coming. For much of the year, stock indices in China were underperforming just about all other countries. The China indices were lifeless; they could barely fog a mirror. But the recent financial easing by Chinese authorities effectively turned the ugly duckling Chinese market into a swan. The rush back into this under-owned sector has fueled a steep rally. One index of large-cap China stocks gained 11% last week, lifting its five-week increase to a whopping 35%. The sector is now clearly overbought, so while future gains are likely, the net gain over the next five weeks will probably be much less.
SPX ended last week near 5751, just an eyelash below its record high. While higher highs are certainly within reach, the index has been bumping up into this same range for three months and has been unable to make any significant progress beyond the old highs. The index’s 50-day moving average is about 3.5% below its current level, so there’s a lot of breathing room to the downside before the technical picture would take on a bearish complexion. Valuations are already stretched. Bulls will be hoping for larger-than-expected profits from reporting companies when the new earnings season unfolds over the next several weeks.
Yes, though it may be hard to believe, another earnings season is about to begin. Objects in the mirror are closer than they appear. Late in the week we’ll get the first of the reports. Several large banks, after reflecting on their recent operating performance, will publish their third-quarter results on Friday. This week’s economic report calendar features critical inflation data with the Consumer Price Index (CPI) numbers on Thursday and the Producer Price Index (PPI) results on Friday. The market has enjoyed favorable CPI and PPI data in the rearview mirror. Current expectations are for that trend to continue.
| Economic Calendar (10/7/24 – 10/11/24) | Previous | Consensus | |
| Monday 10/7/2024 | Consumer Credit, September, M/M | +$25.5B | +$12.0B |
| Tuesday 10/8/2024 | NFIB Optimism Index, September | 91.2 | 91.6 |
| U.S. Trade Deficit, August | $78.8B | $70.8B | |
| Wednesday 10/9/2024 | Wholesale Inventories, August, M/M | +0.2% | +0.2% |
| Thursday 10/10/2024 | Initial Jobless Claims | 225K | 230K |
| Continuing Claims | 1.826K | ||
| Consumer Price Index, September | +0.2% | +0.1% | |
| CPI ex-Food & Energy, M/M | +0.3% | +0.2% | |
| CPI ex Food & Energy, Y/Y | +3.2% | +3.2% | |
| Friday 10/11/2024 | Producer Price Index, September | +0.2% | +0.1% |
| PPI ex-Food & Energy, M/M | +0.3% | 0.0% | |
| PPI ex Food & Energy, Y/Y | +3.3% | ||
| Consumer Sentiment, October | 70.1 | 70.3 | |
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