By Pete Biebel, Senior Vice President, Senior Investment Strategist
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Like a busy neighborhood bakery, the U.S. economy has been wafting pleasing aromas that have had investors salivating to buy stocks through much of this year. Whatever pheromones have been emitted as a result of increasing corporate earnings and declining inflation have investors lusting after stocks. Through the course of the year, that lust vacillated with investors variously craving utility stocks, artificial intelligence stocks and even small modular nuclear reactor stocks. More recently, that bullish scent was intensified by the results of the early-November election.
Over the past four months, the NASDAQ Composite Index (COMP) has rallied about 25% from its early-August low. COMP has gained about 5% since Election Day, including a net gain of 0.34% last week and is now up nearly 33% year-to-date. COMP closed above the 20,000 level for the first time last Wednesday. Things haven’t been quite as rosy for the S&P 500 Index (SPX). SPX lost 0.64% last week. That loss reduced its net gain over the past five weeks to less than 1%, though the index is still showing a year-to-date gain of nearly 27%. The recent performance of the Dow Jones Industrial Average (DJIA) has had a bit more of an unpleasant tang. DJIA lost nearly 2% last week and is now showing a small net loss over the past five weeks. But it has been the small-cap stocks that have been emanating a dumpster-like effluvium. The Russell 2000 Index (RUT) lost 2.2% last week. Both DJIA and RUT have seen their year-to-date gains diminish to something around 16%.
The broad averages all had a negative bias through the week. The only break in the short-term downward trends was an enthusiastic, though short-lived, rally early on Wednesday following the release of the latest Consumer Price Index (CPI) data. While there were fears that a higher-than-expected inflation reading could harsh the market’s vibe, both headline and core CPI came in as expected: both indices had a 0.3% increase in November.
Of the 11 S&P industry sectors, consumer discretionary was the most pleasingly fragrant last week. The S&P 500 Consumer Discretionary Index gained about 2% last week, lifting its post-election gain to more than 13%. The two largest component stocks in the index are Amazon.com, Inc. and Tesla Inc. Since Election Day, AMZN has gained about 10% and TSLA is up a whopping 71%. Nine of the 11 sectors ended the week with losses, ranging from a small percentage loss in consumer staples to losses of more than 2% in five sectors: real estate, industrials, healthcare, utilities and materials.
It seems that the blissful state of the market indices continuing to make higher highs has taken on a bit of a funk. We’re back in that world where just a relative few sweet-smelling mega-cap stocks are masking the stench of decaying stocks and sectors. Since Black Friday, S&P growth stocks as a group have gained about 4%, while S&P value stocks have lost about 4%. On each of the past 10 consecutive trading days, SPX has had more of its individual stocks declining than advancing. That’s the first such 10-day stretch since 2000. On the entire New York Stock Exchange, there have been more decliners than advancers in nine of the past 10 sessions.
That sense of decay can be attributed to several factors. First, and most obvious, is just the general expensiveness of the stock market. The forward price-to-earnings ratio of SPX is 22+. In the past, when the market has been that expensive, it was always followed (eventually) by a correction of some degree. Second, and probably most palpable, is the uber exuberance and excess speculation that is evident in the market. Last week, Conference Board polling indicated that bullishness among U.S. consumers had reached a new all-time high. Add to that a large spike in options speculation and cryptocurrency prices. History has shown that when the bias of the crowd approaches extremes, it has been wise to fade the crowd.
What was really stinking up the room last week was an unpleasant and persistent increase in the yields on U.S. Treasury notes and bonds. For most of this year, the stock market has been drooling over the anticipated interest rate cuts by the U.S. Federal Reserve (Fed). The Fed eventually provided a healthy taste with a 50-basis-point reduction in its overnight lending rate in September. That was followed by a quarter-point cut last month and the expectation of another 25-basis-point cut this week. The market had been hoping for these cuts on the theory that longer-term rates would see similar decreases causing stocks to rally. But that’s where the theory broke down. Whether it’s because of the potential for rekindling inflation or the massive fiscal debt and deficits or both, yields on T-notes and T-bonds are now much higher than they were in mid-September. The 10-year T-note yield, which was 3.6% just before the Fed’s first rate cut, stood at 4.15% a week ago. During last week, that rate steadily increased, and ended the week at 4.4%. And that was in spite of two relatively favorable auctions of new T-notes and T-bonds last week. In my recent article, “A Little Rain on the Red Sweep Parade,” I described in detail why I have believed that Fed reductions in its benchmark rate would not result in lower long-term interest rates.
Just a whiff of increasing inflation and/or a sense that fiscal deficits will remain higher for longer could push those yields even higher, even with a Fed rate cut this week. So, like I wrote last time, keep an eye on that 10-year yield. If that yield pushes much above 4.5%, then the stock market will likely get funkier.
The seasonal bias between now and early January is decidedly bullish. There’s no reason to fight that bias unless and until more evidence of further deterioration is present. But recently there has been a foulness that seems to be creeping into what has been a pleasant, bullish environment. If the fundamental negatives of an extremely rich valuation and excessive optimism are complimented by negative technical conditions, then the odds will greatly increase that the market will have seen an important intermediate-term top.
Since reaching a high of 6099.97 in the opening hour of Friday, December 6, SPX has trended lower and ended last week near 6051. Friday’s decline effectively broke the uptrend line off the November lows. The index’s 50-day moving average is just above 5900 and rising about seven points per day. With that moving average about 2.5% below Friday’s close, it would require a significant decline (in a seasonally bullish environment) to threaten that level. But sustained trading below that moving average, at any time in the next several weeks, would shift the technical picture to a more negative bias. Falling much below the mid-November lows around 5850 would indicate that an intermediate-term top had been seen.
Christmas comes early for the economic report calendar. This week brings a long list of sugar plum reports. Like an Advent calendar, each day brings new surprises. Monday’s Purchasing Managers’ Index (PMI) reports both anticipate a small decrease; you better watch out if they come in much worse than that. The retail sales data on Tuesday probably won’t do much to ring the register. Wednesday is Fed-day. The unemployment and gross domestic product (GDP) numbers on Thursday have a good chance of sparking a market reaction. We’ll end the week with potentially the most significant data: the November numbers for the Fed’s favored measure of inflation, the personal consumption expenditures price index. The market will see a spike in volume on Friday as the expirations of stock and index options and futures bring the final quarterly “quadruple witching” expiration of the year.
| Economic Calendar (12/16/24 – 12/20/24) | Previous |
Consensus |
|
| Monday 12/16/2024 | Empire State Manufacturing Survey, December |
31.2 |
10.0 |
| S&P Flash U.S. Services PMI, December |
56.1 |
55.3 |
|
| S&P Flash U.S. Manufacturing PMI, December |
49.7 |
49.6 |
|
| Tuesday 12/17/2024 | U.S. Retail Sales, November, M/M |
+0.4% |
+0.6% |
| Retail Sales ex-Autos, November, M/M |
+0.1% |
+0.4% |
|
| Industrial Production, November, M/M |
-0.3% |
+0.2% |
|
| Home Builder Confidence Index, December | 46 |
47 |
|
| Wednesday 12/18/2024 | Housing Starts, November, SAAR |
1.31mm |
1.34mm |
| Building Permits, November, SAAR |
1.42mm |
1.43mm |
|
| FOMC Policy Decision & Press Conference |
|
||
| Thursday 12/19/2024 | Initial Jobless Claims |
242K |
229K |
| Continuing Claims |
1.886mm |
||
| GDP, Second Revision, Q3, SAAR |
+2.8% |
+2.9% |
|
| Philadelphia Fed Manufacturing Survey, December |
-5.5 |
+2.4 |
|
| Existing Home Sales, November, SAAR |
3.96mm |
4.0mm |
|
| Leading Economic Indicators, November, M/M |
-0.4% |
-0.1% |
|
| Friday 12/20/2024 | Personal Income, November, M/M |
+0.6% |
+0.4% |
| Personal Spending, November, M/M |
+0.4% |
+0.5% |
|
| PCE Price Index, November, M/M |
+0.2% |
+0.2% |
|
| PCE Price Index, November, Y/Y |
+2.3% |
+2.5% |
|
| Core PCE Price Index, November, M/M |
+0.3% |
+0.2% |
|
| Core PCE Price Index, November, Y/Y |
+2.8% |
+2.9% |
|
| Consumer Sentiment, December |
74.0 |
74.0 |
|
| Quadruple Expiration of Stock and Index Options and Futures | |||
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market