What happened in the markets - 13 - 17 Nov 2023
Introduction
Hey Gotraders, Looks like we're set to wrap up the week on a high note! Lower-than-expected consumer price inflation for October and increased liquidity in November have sparked a growing (though analysts believe misguided) market sentiment that the Federal Reserve's (Fed) impending rate tightening cycle won't put a damper on rising equity prices. A drop in producer price inflation and a rise in jobless claims have further cemented this consensus. Next week, we've got our eyes on updates from the manufacturing and services sectors, the housing market, and consumer sentiment. Plus, we'll be getting the Federal Open Market Committee's (FOMC) minutes from its latest meeting. Meanwhile, we're nearing the end of earnings season, with almost 95% of S&P 500 Index companies having reported. While third-quarter earnings have generally exceeded expectations, forward guidance has been a bit of a letdown.
Key Takeaways
In recent trading sessions, economic data has been striking just the right balance - not too hot, not too cold. This Goldilocks scenario has helped stocks reach a two-month high, effectively placing the October correction in our rearview mirror.
Inflation, a key concern for many investors, seems to be making progress. Core CPI, a measure of consumer price inflation, has fallen to its lowest reading in two years. This, coupled with a cooling labor market, suggests that the Federal Reserve may soon be able to step to the sidelines. In fact, we could potentially see rate cuts starting in the second half of next year.
This cooling inflation has fostered another drop in long-term Treasury yields, bringing them to their lowest level since mid-September.
Stocks build on gains in broad advance
The S&P 500 Index is on a roll! It has built on its strong gains over the past two weeks and has soared past the 4,500 barrier for the first time since September. Now that's what we call a comeback! The week's advance was not just limited to the S&P 500. An equally weighted version of the S&P 500 Index outperformed its market-weighted counterpart by a full percentage point. The Russell 1000 Value Index also outshone its growth counterpart and has now moved back into positive territory for the year to date. Small-cap indexes weren't left behind either, they too outperformed. Traders at T. Rowe Price noted that macroeconomic factors seemed to be the star of the show as the third-quarter earnings reporting season started to wind down. However, some notable results from retailers also provided a glimpse into the health of the consumer. In particular, shares in Target skyrocketed nearly 18% on Wednesday after smashing consensus earnings expectations and offering a better-than-expected outlook for the fourth quarter. Shares in rival Walmart seemed to ride on Target's coattails and reached a record high. However, the stock then took a tumble of over 8% on Thursday after the company lowered guidance due to increasing customer caution and falling prices for some goods.
Inflation surprises on the downside
As we approach the end of the month, let's take a moment to discuss a key economic indicator - inflation. In October, inflation took a downward turn, with the headline consumer price index (CPI) remaining unchanged and the annual rate dropping from 3.7% to 3.2%. This was largely due to a significant decrease in gas prices, with oil prices now 20% lower than their September peak. What's happening with inflation? Core CPI, which excludes food and energy and provides a clearer picture of the underlying trend, also dipped from 4.1% to 4.0%. Although this is still above the Fed's target, it's the lowest we've seen in two years. What's driving these changes? A closer look at the data reveals some promising trends. For the fifth month in a row, prices for goods outright declined in October, largely due to falling used car and truck prices. Further declines in used car prices are expected, according to private wholesale data. Improvements in supply chains and lower transportation costs are also contributing to decreasing prices for other goods. What about housing inflation?Shelter inflation remains a significant contributor to overall CPI, but we saw a notable decrease in the pace of monthly increases in October. The sharp drop in price increases for newly signed leases should continue to pull housing inflation lower through most of 2024. Any other interesting inflation news? In a potentially hopeful sign for inflation, the American Farm Bureau's annual Thanksgiving dinner survey showed that a typical dinner is expected to cost 4.5% less in 2023, thanks to falling prices for seven out of 11 food items (including turkey). However, the meal still costs considerably more (USD 61.17 versus USD 53.31) than it did in 2021. What about retail sales? Wednesday’s retail sales report from the Commerce Department may have also encouraged investors. Retail sales (which are unadjusted for inflation) fell 0.1% in October, less than expected and due in part to a drop in gasoline and auto sales. While home-related spending on furniture and building materials continued to decline, consumers continued to increase spending at bars and restaurants and online.
Long-term yields hit two-month low
As we head into the short holiday week, let's take a moment to discuss the recent market trends. The cooling inflation signals have led to another drop in long-term Treasury yields, with the benchmark 10-year note hitting an intraday low of around 4.40% on Friday, its lowest level since mid-September. Remember, bond prices and yields move in opposite directions. In the tax-exempt municipal primary market, our traders have noticed a trend of accelerating new issues, taking advantage of the recent market strength. U.S. Investment-Grade Corporate Bonds U.S. investment-grade corporate bonds showed strong performance leading into Friday, bolstered by falling U.S. Treasury yields. High Yield Bonds and Leveraged Loan Market Meanwhile, high yield bonds followed equities higher after the release of the encouraging inflation data. The leveraged loan market maintained its recent firmness, with loan investors primarily focusing on earnings and individual company headlines. Why are Equity and Bond Markets Rallying? One key reason both equity and bond markets have rallied in November is the easing inflation pressures. Coupled with signs of a cooling labor market, this has increased confidence that the Fed is likely done hiking rates. After core inflation hit its lowest reading in more than two years, markets were quick to price out a December hike and price in an earlier start to rate cuts. The Fed policy-sensitive 2-year Treasury yield declined below 5.0%, while the growth-sensitive 10-year yield declined below 4.5%.
A preview into 2024?
Last week, the market dynamics offered a slightly different flavor from what we've seen for most of the year, with leadership notably broadening. The Fed-friendly data pushed both stocks and bonds higher, extending the November rally. Most of the equity-market gains have been driven by a small number of stocks, the so-called "Magnificent 7" (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla). The S&P 500 is now down only 6% from its all-time high in early 2022, while the equal-weight S&P 500, which assigns the same weight to all the stocks in the index, is down 12%. The Russell 2000, which is the proxy for small-cap stocks, is down 27% from its highs. Last week's outperformance from small-caps and the "average" stock potentially offers some insight into what might unfold in 2024. Analysts see an opportunity for laggards to catch up as the headwind of rising yields subsides. These include bond proxies (like the traditional defensive sectors), small-caps, and value-style investments. A smooth cooling in the economy that allows the Fed to cut rates next year looks increasingly possible. In this scenario, the U.S. dollar could weaken, helping international returns. On the fixed-income side, a peak in rates presents an opportunity to start extending duration, with bond returns likely outperforming cash in 2024. As analysts have articulated in their prior notes, the ingredients for a year-end rally are in place, helped by the right balance of moderating, though still resilient, economic data. However, markets don't move in a straight line, and stocks could pause to digest the recent gains. Looking into 2024, the lagged effects of high interest rates will continue to filter through the economy, driving softer growth, which could trigger periods of volatility. Still, they think that lower rates and modestly rising earnings will help equities build on this year's gains and help the battered bonds rebound.
Analysts’ Stocks Highlights
Here's a quick rundown of some notable stock movements driven by quarterly earnings, analyst ratings, or other news:📉
Applied Materials (AMAT) took a 3.9% hit after Reuters reported that the Justice Department is investigating the semiconductor company for potentially ignoring export restrictions on a Chinese chip company.📉
Expedia Group (EXPE) climbed 5.2% after an Evercore ISI analyst upgraded the online travel site to "outperform" from "in line," citing expectations for accelerating revenue growth.📉
Ross Stores (ROST) rose 7.2% after the retailer reported stronger-than-expected quarterly results.📈
Heading to Next Week
As we gear up for a short trading week due to Thanksgiving, a few key companies are set to report their quarterly results. The spotlight will be on artificial intelligence powerhouse, NVIDIA (NVDA), which is slated to report on Tuesday after the market closes. NVIDIA's shares have skyrocketed this year, tripling in value and hitting near-record highs, all thanks to the growing excitement around AI. Zoom Video Communications (ZM) is also on deck to report results on Monday. Tuesday will see a flurry of earnings from retailers including Best Buy (BBY), Dick's Sporting Goods (DKS), Kohl's(KSS), Lowe's (LOW), and Nordstrom (JWN). Medical device manufacturer Medtronic (MDT) is also set to report on Tuesday. On Wednesday, we'll hear from farm equipment manufacturer Deere & Co. (DE).
In addition to earnings, investors will be keeping a close eye on the first look at November's purchasing managers' indexes (PMIs) for manufacturing and services from S&P Global, due on Friday. The minutes from the FOMC's November 1 meeting, October's durable goods orders, and the Conference Board's index of leading economic indicators will also be in focus.Other key data to watch include October's existing home sales, the Chicago Federal Reserve's National Activity Index, and the finalized November consumer sentiment and inflation expectations from the University of Michigan. In the auction space, the U.S. Treasury department will issue $57 billion in 2-, 10-, and 20-year securities.
Curated by: Setiawan, T. H.
Source: EdwardJones, Wells Fargo Investment Institute, T.RowePrice, Charles Schwab
https://www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update
https://www.wellsfargoadvisors.com/research-analysis/commentary/looking-ahead/looking-ahead.pdf
https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html
