What happened in the markets - 20 - 24 Nov 2023
Introduction
Hey Gotraders, The U.S. equity market had a mixed close on Friday, but the S&P 500® Index (SPX) and Nasdaq Composite® (COMP) managed to post gains for the fourth consecutive week. Investors were keeping a close eye on Treasury yields and early-holiday season shopping activity, which could provide insights into the health of consumer spending. Shares of retail giants Target (TGT) and Walmart (WMT) rose by 0.7% and 0.9% respectively, contributing to the retail sector's strong performance for the day. However, a surge in Treasury yields, albeit from two-month lows, may have slightly dampened the enthusiasm for stocks. Despite this, the market remained buoyant due to growing investor confidence that interest rates have peaked and the Federal Reserve will refrain from further interest rate hikes. This optimism has propelled the S&P 500 up by over 8% this month. Quite impressive, isn't it?
Key Takeaways
The S&P 500, the NASDAQ, and the Dow all posted gains of around 1% in a holiday-shortened trading week. This marks the fourth week in a row of climbing for these indexes.
An index that tracks investors’ expectations of short-term U.S. stock market volatility also fell for the fifth week in a row. This suggests that investors are feeling more confident and less uncertain about the market's direction.
In the most recent U.S. Federal Reserve policy meeting, Fed officials gave no indications that they were inclined to begin cutting interest rates anytime soon. This news has likely contributed to the ongoing positive sentiment in the market.
The short-term outlook for U.S. retail sales was mixed as of Black Friday, the unofficial start of the U.S. holiday shopping season. It's still too early to tell how this will impact the market in the coming weeks.
Steady rise
The stock market has been on a rollercoaster ride lately, but it seems like we're on the upswing again! After a 10% correction in the S&P 500 in October, November has been a month of recovery. The S&P 500 has risen over 7%, the Nasdaq has climbed over 9%, and even the Russell 2000 (the small-cap stock index) has bounced back over 6%. As we gear up for Thanksgiving, analysts have identified three key ingredients that could keep the market rally going through the typically stronger fourth quarter:
Ongoing moderation in inflation: This has been a major factor in the rally so far. The headline consumer price index (CPI) inflation for October dropped to 3.2% year-over-year, while core inflation moderated to 4.0%. Analysts expect both headline and core inflation to continue to moderate in the coming months, which could push Treasury bond yields lower and give the market a boost.
A Fed that is stepping to the sidelines: The second key ingredient for a sustained rally is a Federal Reserve that continues to hold off on rate hikes. After the lower inflation readings for October, the market probability of a rate hike at the December meeting has fallen to almost zero. The market seems to like the idea that the Fed may be done for now, and that both inflation and rates could normalize over time.
A pinch of cooling in economic growth : The final key ingredient for a rally is a gradual slowdown in the economy. While there have been some early signs of moderation – lower retail sales, slightly higher jobless claims – analysts believe this "Goldilocks" pace of slowing (not too hot, not too cold) has supported the recent rally. They predict that household consumption could soften in the coming months and the labor market may cool, which would slow economic growth but perhaps help the U.S. avoid a recession.In this scenario, a slowdown could help keep inflation in check and keep the Fed on the sidelines with rate hikes. Prices may ease as companies adjust to a slower demand environment, and wage gains may also moderate as demand and supply for workers become more balanced. Thus, a gradual economic slowdown could be the perfect seasoning to keep this rally recipe cooking.
Quiet market
The CBOE Volatility Index, also known as the VIX or the "fear index," has been on a steady decline for the past five weeks. This index, which tracks investors' expectations of short-term U.S. stock market volatility, was trading around 42% below its recent peak on October 20. Year to date, the VIX is down by roughly the same amount. On Friday, the VIX closed at 12.46, marking its lowest close since January 2020. What's causing this drop in volatility? Well, it could be a combination of factors. The recent hopes for a more lasting ceasefire between Hamas and Israel could be boosting sentiment and risk appetite.
Fed’s rate outlook
The Federal Reserve is anticipated to make a measured cut to interest rates in 2024, with the majority of the action expected in the second half of the year. Currently, the Fed Funds target rate stands at 5.25% to 5.5%. However, market predictions suggest a drop of approximately 1% by the end of 2024. This is based on the CME FedWatch Tool, which gauges the debt market's implied expectations. The current range of outcomes indicates that short-term rates could likely be between 4% and 5% by December 2024. Interestingly, the Fed's own projections from September 20 are more hawkish than the market's view. They suggest that rates may not decline as much, falling to the 4.5% to 5.5% range by December 2024. Fed policymakers are set to update these projections at their next interest rate decision on December 1, where rates are expected to remain steady. Until now, Fed officials have suggested that rates could potentially increase from here. However, this scenario is now being described more as a potential outcome under certain economic conditions rather than the base case for interest rates.
The bond market has been serving up a rather bitter dish for investors lately. Interest rates have been on a sharp upward trajectory this year, extending a three-year trend of rising yields. The rapid rise in rates over a relatively short span has led to a significant drop in bond prices, causing a level of discomfort that's been hard to swallow for many. The pressure from these rising yields has resulted in a roughly 13% loss in value for U.S. investment-grade bonds over the past three years. However, with credit spreads remaining stable, high-yield bonds have managed to weather the storm a bit better. U.S. high-yield bonds have even seen a modest increase of about 4% over the same period, underscoring the benefits of a diversified portfolio. But it's not all doom and gloom. More recently, interest rates have started to pull back, thanks to signs of slowing inflation and economic growth. This retreat in yields has been a welcome palate cleanser, leading to a roughly 1% increase in U.S. investment-grade bonds from a year ago. Moreover, despite their recent dip, interest rates are still at their highest levels in over a decade. This presents a sweet opportunity in the fixed-income market, especially for disciplined investors with a forward-looking approach. So, while the bond market may have left a sour taste in our mouths recently, it seems there could be a sweet finish on the horizon.
Holiday shopping outlook
Black Friday, the much-anticipated shopping event of the year, saw a significant increase in both in-store and online retail sales, according to Mastercard’s SpendingPulse insights. Apparel, jewellery, and restaurant categories experienced considerable growth. In-store sales saw a modest increase of just over 1%, while e-commerce took the lead with a robust 8.5% increase. Sensormatic Solutions, a company that monitors shopper traffic in physical stores, reported a 4.6% increase in visits on Black Friday compared to 2022. This is a positive shift for retailers, as foot traffic has been down by an average of 2.4% this year. "Consumers are again finding joy in brick-and-mortar shopping, seeing it as an experience to be shared with loved ones. It’s a testament to the hard work retailers have done to streamline journeys and deliver satisfying experiences,” said Grant Gustafson, head of retail consulting and analytics at Sensormatic. Adobe Analytics, which tracks US online shopping, reported a record $9.8 billion in Black Friday sales, a 7.5% increase from 2022. The surge was driven by high demand for electronics such as televisions, smart watches, and audio equipment. Interestingly, most shoppers made their purchases on their phones, with mobile purchases accounting for $5.3 billion in sales. Adobe expects that smartphone purchases this holiday season will surpass those made by desktops for the first time. The "buy now, pay later" (BNPL) option also saw significant usage, with 72% more shoppers using BNPL plans compared to the week before, according to Adobe. Shopify, the e-commerce platform, reported record sales exceeding $4 billion worldwide, a 22% increase from last year. The average cart price for US consumers was $124, with personal care, clothing, and kitchenware being the top-selling categories. As we approach Christmas, analysts predict a busy period for retailers. Adobe forecasts that Cyber Monday will be the biggest retail event of the year, driving a record $12 billion in sales, more than 6% higher than last year. Sensormatic predicts that eight of the season’s busiest in-person shopping days will be in December. Combined with Black Friday weekend, these days are expected to account for 40% of all holiday foot traffic this year.
Analysts’ Stocks Highlight
Here's a quick rundown of some notable stock movements driven by quarterly earnings, analyst ratings, or other news.
Apple(AAPL) Apple shares took a slight dip of 0.7% after a report from Reuters highlighted a decline in the tech giant's smartphone sales during China's recent Singles Day. Shares of Apple closed down 0.7% for the day.
Nvidia Corp.(NVDA) Nvidia Corp. shares fell by 1.9% after Reuters reported that the chipmaker has informed its China clients about a delay in the chip designed to comply with U.S. export restrictions until next year. Shares of Nvidia Corp. closed down 1.9% for the day.
Heading to This Week
As we step into the holiday season, all eyes are on the retail sector. Investors are keenly watching for updates on holiday shopping over the Black Friday weekend. This puts major retailers like Amazon (AMZN), Best Buy (BBY), Kohl's (KSS), Macy's (M), Target, and Walmart under the market's spotlight. The National Retail Federation (NRF) is expecting a 9.4% increase from last year, with 182 million people projected to shop in-store and online from Thanksgiving Day through Cyber Monday. Next week, we also have a few major companies set to report their quarterly results. Keep an eye out for Dollar Tree (DLTR) and Salesforce (CRM) on Wednesday, and Dell Technologies (DELL) on Thursday. On the economic front, October's New Home Sales data is due on Monday. Analysts are predicting a seasonally adjusted annual rate of 730,000 sales, a slight dip from 759,000 in September. This comes in the wake of a surge in mortgage applications as the average rate fell below 7.5%. However, mortgage applications are still down about 20% from a year ago. The most anticipated data point of the week is arguably the Personal Consumption Expenditures (PCE) report due next Thursday. As the Fed's preferred inflation gauge, a higher-than-expected PCE number could trigger a rise in Treasury yields, potentially pressuring stocks. Other key reports next week include the government's second estimate of third-quarter Gross Domestic Product (GDP) and the Institute for Supply Management's (ISM) Manufacturing Index for November. GDP is expected to rise at an annualized rate of 5%, up from 4.9% in the first government estimate. Investors are also keeping a close eye on the Federal Open Market Committee (FOMC) as any stronger-than-expected economic numbers could prompt a rethink of the widely held view that the Fed is done raising rates. As of now, the market sees a 72% chance the Fed could cut rates by a quarter-point or more in June.
Curated by: Setiawan, T. H.
Source: Edward Jones, Charles Schwab, John Hancock Investment Management, Investing, S&P Global, Statista, Forbes, Yahoo! Finance
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