What happened in the markets - 6 - 10 Nov 2023
Introduction
The S&P 500 Index almost matched its longest winning streak in nearly two decades, gaining for the eighth consecutive day. The Nasdaq Composite Index also marked its ninth win. However, the market’s strength was surprisingly narrow. An equally weighted version of the S&P 500 Index was 1.90% behind its market-weighted counterpart, and the Russell 1000 Value Index lagged its growth counterpart by 404 basis points—the largest margin since March. Third-quarter corporate earnings releases are winding down, but positive surprises from tech-oriented firms seemed to boost growth indexes. Specifically, cloud monitoring and security firm Datadog's stronger-than-expected earnings and guidance sent its stocks soaring by 28% on Tuesday, which seemed to generally lift high-valuation software stocks.
Key Takeaways
The year-end surge in stocks has commenced.
The 10-year Treasury note yield was down about 1 basis point at 4.622%.
The rates of savings have experienced a decrease, bank lending criteria continue to be stringent
Year-end rally in equities has started
(Friday market close) U.S. stocks rebounded Friday from losses the previous day as Treasury yields dropped, leading to the second consecutive weekly gain for both the S&P 500® Index (SPX) and Nasdaq Composite (COMP). These indexes are now close to two-and-a-half-month highs.
Investors seemed to disregard, for the time being, hawkish remarks from Federal Reserve Chair Jerome Powell on Thursday. These comments, along with a disappointing Treasury auction, triggered a brief surge in the 10-year yield (TNX) to its highest level in over a week. However, this didn't seem to shake the belief that the Fed may have finished raising interest rates. The focus now shifts to the upcoming Consumer Price Index (CPI) and Producer Price Index (PPI) reports for October.
Kevin Gordon, Schwab Senior Investment Strategist, suggests that stocks are buoyed by the expectation that yields might not rise much more, but he warns that any resurgence in bond market volatility could still unsettle stocks.
There's generally an inverse relationship between bond yields and stock prices. This is because if virtually risk-free bonds offer higher returns, the returns from riskier assets like stocks become less attractive. The 10-year yield is also a significant reference point for lending rates.
Investors pay close attention to Treasury auctions
Our traders report that this week's U.S. Treasury debt auctions influenced the equity and bond markets more than usual. The successful auctions of three-year Treasury notes on Tuesday and 10-year notes on Wednesday seemed to raise market confidence.
However, the end of the major indexes’ winning streaks appear to be triggered by Thursday’s USD 24 billion auction of 30-year U.S. Treasury bonds. This auction saw the lowest demand in two years. Lately, investors are closely watching if demand can meet the government’s high borrowing needs, especially following the temporary lift of the federal debt ceiling.
This week had few economic data releases, most of which met expectations. An exception was the University of Michigan’s preliminary measure of consumer sentiment released on Friday, which unexpectedly dropped to a six-month low. The survey's lead researcher suggested that this was due to the wars in Gaza and Ukraine and ongoing concerns about rising interest rates. Long-term inflation expectations also hit 3.2%, marking the survey's highest level since 2011.
Treasury yields mostly fell until midweek, then rose on Thursday due to a weak 30-year Treasury auction. Traders may have responded to Fed Chair Jerome Powell's lack of confidence in achieving a restrictive monetary policy to lower inflation to 2%. The tax-free municipal market was affected by these higher yields but saw considerable interest in many new deals during the week.
The investment-grade corporate bond market saw a lot of new issuance met by strong demand. In the high yield bond market, buyers seemed more selective, but high-quality bank loans still attracted substantial interest.
Savings rates have declined, bank lending standards remain tight
Heading into the year-end and holiday shopping season, it's unclear if consumers can maintain their current spending pace. The following factors suggest a potential slowdown in consumption:
Decline in Savings Rates - A unique result of the pandemic period is that households were filled with stimulus money. As per the San Francisco Federal Reserve, households amassed around $2.1 trillion in excess savings in 2021. Yet, this could be largely exhausted now, with consumers spending on goods and services over the last two years.
Household saving rates have dropped to nearly post-pandemic lows, as the following chart shows. It suggests that many consumers are spending significantly more than usual, instead of saving. This coincides with increasing costs and dwindling stimulus-era savings. Lower-income households may particularly feel the strain of decreased savings and the necessity to spend more on goods and services due to high inflation. While there hasn't been a significant reduction in consumer spending yet, if savings rates revert to a pre-pandemic average of about 6% over time (currently around 3.4%), consumption may naturally slow down.
Bank Lending Standards Continue to be Strict - Consumers continue to face high rates and strict bank lending standards. The Fed's latest quarterly Senior Loan Officer's Survey reveals that borrowing remains difficult for consumers and businesses. Banks have tightened the standards for loans for consumers and businesses of all sizes, maintaining high loan requirements. This inevitably impacts consumption as those unable to secure a loan will not proceed with additional planned purchases, repairs, and projects. As shown in the chart below, bank lending standards are high, mirroring the levels seen in previous economic downturns.
Which segments will benefit the most from a year-end rally?
Stocks that are 'bond proxies' (companies with stable business models) have been hit hard over the past 18 months, primarily due to bonds. As a result, we could expect some recovery in sectors such as food, utilities, and real estate. However, analysts believe that the most undervalued stocks, especially small and mid-cap stocks in the US, have more potential in the coming weeks. These stocks were hit the hardest as their weaker balance sheets make them more vulnerable to rising rates. On a positive note, the overall market is likely to improve.
Analysts’ Stocks Highlights
The following companies experienced significant stock price changes due to quarterly earnings, analyst ratings, or other news:
Hologic (HOLX) increased 7.3% after the medical product company reported better-than-expected quarterly earnings and revenue.
Illumina (ILMN) fell 8.1% after the biotechnology company lowered its full-year earnings guidance.
Plug Power (PLUG) plummeted 40% after reporting weaker-than-expected quarterly results and highlighting "unprecedented supply challenges" in the North American hydrogen network.
The Trade Desk (TTD) declined 17% after the advertising platform issued a weaker-than-expected outlook for the current quarter.
Unity Software (U) increased 7% after the video-game engine maker announced layoffs.
Wynn Resorts Ltd (WYNN) dropped 5.7% after aspects of the resort and casino operator's earnings disappointed investors.
What to Expect on Next Week
Next week, results from over 700 companies are anticipated. Major retailers reporting include Home Depot (HD) on Tuesday, Target (TGT) and TJX Companies (TJX) on Wednesday, Macy's (M) and Walmart (WMT) on Thursday, and BJ's Wholesale Club Holdings (BJ) on Friday. Retailer results and management comments will be closely examined by investors to understand consumer spending trends for the upcoming holiday season.
The key event of the week is the release of inflation data, including the Consumer Price Index (CPI) on Tuesday and the Producer Price Index (PPI) and import prices later in the week. Updates on retail sales and industrial production will be important, as well as regional business surveys for November from the New York and Philadelphia Fed Districts. There will also be a lot of housing market data, including housing starts, building permits, and homebuilder sentiment. Other updates include small business optimism, business inventories, and international capital flows. Additionally, investors will monitor Friday's deadline for Congress to pass a budget or another continuing resolution to prevent a government shutdown.
Curated by: Setiawan, T. H.
Source: EdwardJones, T.RowePrice, Charles Schwab, Wells Fargo Investment Institute, Julius Bär
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
