By Pete Biebel, Senior Vice PresidentPrint This Post
Coming down the home stretch of 2019, the market averages continue to gallop ahead. The Dow Jones Industrial Average (DJIA) gained a little over1% for the week, lifting its year-to-date gain to a little over 20%. The S&P 500 Index (SPX) added 0.89% last week to nose-out DJIA with more than a 24% YTD gain. The NASDAQ Composite Index (COMP) advanced just 0.77% for the week, but it’s still the lead horse, up nearly 29% in 2019. All three of the indices ended the week at their best levels ever.
Even the twelve-month gains are now comfortably into double digits. DJIA is up a little more than 10% over the past 52 weeks. SPX is up just over 14%. And COMP is again in the lead with nearly an 18% 52-week gain. Just two short months ago, those three indices were barely above breakeven on their twelve-month returns. That big swing sounds impressive, but it is really just a little statistical sleight of hand. It’s just a matter of the sample period chosen. The major averages peaked around September in 2018, so any comparison looking back to that period is at a disadvantage. The subsequent two months in 2018 were some particularly rocky ones for the markets, so looking back to weeks following big market sell-offs makes for a much more favorable result.
Still, the stock market has seen a substantial strengthening over the past couple months and that’s due to three distinct changes, or at least changes in perception. First, in late-summer, the market was expecting a dramatic slowdown in economic growth, perhaps even recession, both domestically and globally. Since then, as trade talk optimism has increased, fears of slowing growth have subsided. Second, coming into the third-quarter earnings reports, slower earnings growth and even earnings declines were expected. Turns out that overall earnings were lower but still on balance much better than expected.
Third, the Fed has not only proclaimed its dovishness, but it has also begun to again aggressively pump liquidity into the banking system. That action was initially taken to loosen a locked-up inter-bank lending market. The Fed responded with billions of dollars of nightly short-term repos. But those repos continue to this day. What appeared to be a band-aid fix has turn into long-term care. And while the Fed insists that the repos are not a new round of “Quantitative Easing,” this new flood of funds into the banking system seems to be having a positive impact on asset prices as was the case during the QE era.
The first two of those three factors have put upward pressure on the yield of the benchmark Ten-Year Treasury Notes. A healthier than expected economy and stronger than expected earnings have contributed to generally rising interest rates over the past few months. The Ten-Year yield had climbed to just above 1.90% by early-November (its highest level in more than two months) but sank back to 1.83% last week. The Fed may have been partially responsible for last week’s lower rates. Their overnight repo injections were larger than normal last week, totaling well over $300 billion for the week. The Real Estate and Utilities sectors, which had been underperforming in recent months as interest rates rose, were once again among the best of the U.S. equity sectors last week as rates fell.
The Healthcare sector was looking a little peaked from mid-summer into early-October, but it has made a dramatic recovery over the past five weeks. Gains of 5% and more from several of the sector’s large healthcare insurance providers helped Healthcare to gain about 2 ½% last week, leading all other sectors. It has now gained about 8 ½% in just five weeks, and, again, that performance leads all other sectors over that time.
On any longer-term basis, the Technology sector has easily been the top performer. That sector gained about 1.3% last week and almost 7% over the past five weeks. Year-to-date, Tech is up a little over 40%. Even its 52-week performance is almost double that of the second-best sector. Tech’s 12-months gain is a little under 28% while the next-best sector, Industrials, shows a gain of about 14 ½%. The strength in the Technology sector is the reason that COMP has outperformed all the other major averages.
SPX hit its low of the week on Monday’s opening then recovered much of that early loss as it slowly trended higher over the balance of the session. The index briefly poked above the 3100 level for the first time ever early Tuesday, but as expected, that level was a barrier to forward progress for the next several days. SPX see-sawed in very narrow-range trading between about 3085 and the high-3090s most of the week and closed Thursday just below 3097. The Wall Street Journal reported that SPX had not closed up or down more than 0.5% for nine straight trading days through Thursday. That was the longest such streak since October of last year.
Friday morning brought encouraging comments on progress in trade negotiations from the White House Economic Advisor, Larry Kudlow. That was all the spark the market needed to launch higher. SPX gapped above the 3100 level and didn’t look back. The index closed very near its high for the day and the week just below 3120.
The market’s rally over the past six weeks has pushed the averages into overbought territory. Significant additional progress this week seems unlikely. Still, there’s a lot of room between current levels and any downside levels that might set off alarms.
This week brings another relatively quiet economic report calendar. The Fed meeting minutes on Wednesday afternoon will likely be the most anticipated event of the week. Recent comments from Chairman Powell have already contributed to a high degree of Fed dovishness being priced into the market. So, if there’s a surprise on Wednesday, it’s more likely to be a negative than a positive. Earnings season is winding down; companies reporting this week feature many notable retailers. This week also will continue to test the market’s level of concern over the impeachment process. And, as has been the case lately, news of progress, or lack thereof, in the trade talks will probably continue to have the greatest short-term impact on market performance.
|Monday 11/18/2019||Housing Market Index||71||71|
|Tuesday 11/19/2019||Housing Starts, SAAR||1.256mm||1.320mm|
|Wednesday 11/20/2019||FOMC Meeting Minutes|
|Thursday 11/21/2019||Jobless Claims||225K||219K|
|Philadelphia Fed Business Outlook Survey||5.6||7.5|
|Existing Home Sales, M/M||-2.2%||+2.1%|
|Leading Indicators, M/M||-0.1%||-0.1%|
|Friday 11/22/2019||PMI Composite Flash||51.2||51.2|
|Kansas City Fed Manufacturing Survey||-3|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.