Weekly Market Insights
All major indexes finished the week in positive territory, marking a strong run across the board. This week’s gains extended the Dow, S&P 500, Nasdaq, and mid-cap S&P 400 to six consecutive weeks of growth. The small cap Russell 2000 also posted its second straight weekly gain, and its fourth rise in the last six weeks. Notably, the Dow Jones Industrial Average and the S&P 500 reached new record-high closing levels during this rally while the NASDAQ is just a stone’s throw away from this mark.
Supported by expectations of a slower pace of interest rate cuts from the Federal Reserve and growing prospects of a potential Trump return to the White House, the yield on the 10-year US Treasury note remained above 4.0%. (USA Today: 10.21.2024) This rise reflects diminished hopes for a sharp reduction in interest rates. The dollar index remained firm, continuing its rally for the third consecutive week and all this put pressure on the commodities complex. Last week’s strong retail sales data, coupled with robust job and inflation figures earlier this month, signaled resilient consumer spending and indicated that the US economy is still far from a downturn. Markets now anticipate a 91% likelihood that the Fed will opt for a smaller 25 basis point rate cut in November, with the potential to hold off on further cuts in December. Politically, the increasing possibility of Donald Trump regaining the presidency has bolstered the dollar, as his tariff and tax policies are seen as inflationary, likely maintaining pressure on US interest rates. This current backdrop is a tailwind for Gold, which once again posted fresh highs.
Source: Stockcharts.com
Source: Optuma and DTN IQ
Key Takeaway:
Last week brought a series of positive developments. Earnings were generally solid, with strong results from banks and some of the key technology companies. Economic data also supported the soft-landing narrative, with solid retail sales and a drop in jobless claims. On the geopolitical front, China announced more stimulus, and Israel’s assurance of avoiding escalation in Iran helped ease tensions.
Despite this favorable news, the equity markets saw only a modest rally, and here’s why: First, much of the positive news—such as steady growth, stable earnings, etc., already appear priced into the market. Second, while major risks like a sharp economic slowdown or soaring inflation, seem contained, the market’s high valuations and extremely positive sentiment leave stocks vulnerable to smaller risks, creating a mixed outlook for deploying new capital.
The Week Ahead:
Earnings season rolls on with key companies like Tesla, Coca-Cola, 3M and General Motors, set to release their quarterly results. On the U.S. economic front, this week’s highlights will be the October Flash PMI’s (which provide our first look at the economy each month), durable goods orders, and updates on both existing and new home sales. Of course, we will get the weekly unemployment data but all expect a large skew due to recent strikes and hurricanes.
Source: Trading Economics (https://tradingeconomics.com/united-states/calendar#)
Tidbits & Technicals: (New developments will be denoted via***)
Current Headwinds:
- Valuations seem frothy leaving the markets subject to a potential swift pullback.
- “Higher for Longer” – Risk that the Federal Reserve waited too long to begin lowering rates or leaves rates too high and threatens economic growth.
- ***Recent employment trends have “cooled” with major revisions to past data
Current Tailwinds:
- Optimism surrounding Artificial Intelligence (AI)(recently waning)
- The Federal Reserve has begun their rate-cutting cycle and vows more cuts in the future
- Strong Labor Market (signs of rising unemployment are showing up, yet jobs are available)
- Solid Economic Growth
- Continued Earnings Growth (the pace of which may be slowing)
- Momentum
- 10-year Treasury yields are just off the lows of the year
Sentiment:
- Credit Spreads have retreated to cycle lows
- The VIX (CBOE Volatility Index) remains elevated at this time
- ***The CNN FEAR & Greed Index has moved into Extreme Greed Status
Source: https://www.cnn.com/markets/fear-and-greed
Intermarket Trends:
- ***The major Indices (Dow Jones Industrial Average, S&P 500, and NASDAQ) are trading at or near all-time highs signifying a positive trend
- ***Dow Theory- The transports have recently broke out to fresh highs, confirming the industrials bullish conviction
- Interest rates have been volatile all year and appear to be trending lower.
- ***The US Dollar has broken its upward trend line but has been climbing over the past several weeks
- ***Gold recently broke out of its trading range to record highs
- Industrial Metals, have been trending lower lately
- Oil futures trading near the low end of their one-year trading range
Tying it all together:
Stock market momentum remains strong, and for good reason. Inflation is gradually cooling, and interest rate cuts are providing a boost while economic growth is robust, and the job market is showing steady resilience. On top of that, corporate earnings projections are climbing.
It looks like the Fed’s strategy to guide the economy toward a “soft landing”, a scenario where an economy slows down just enough to curb inflation without falling into a recession, is bearing fruit, and the market is reacting positively.
The primary driver behind the stock market rally is the seemingly prevailing belief that the economy will avoid a severe downturn, achieving a soft landing instead, which, combined with potential Fed rate cuts, could create an ideal “Goldilocks” scenario for stocks. However, it’s crucial to remain cautious, as challenges persist, and current valuations appear somewhat “frothy.”
Encouragingly, investor sentiment is optimistic, but not yet euphoric, and stock price gains are now extending beyond just the technology sector. Broad sector participation is a positive sign for sustained market growth, and we are seeing this at a time when historically significant seasonal patterns are coming into play. The old adage, “Sell in May and go away” [until October], is ringing in the ears of Wall Street participants as we enter the traditionally “strong” season of November-through-April.
Recently, I have noted that volatility expectations are on the rise. Wall Streets “fear gauge”, the VIX (volatility index), has been spending more time in the upper part of its range, which is somewhat puzzling given the strong investor sentiment readings and potential Goldilocks economic backdrop. Some of this can be attributed to the complex geopolitical landscape with the Isreal-Hamas conflict, escalating tensions between Isreal and Iran, the war in Ukraine, and a host of political elections throughout the developed world providing various future economic uncertainties. These types of events are nothing new to the markets, but tend to foster headline reactions in the short-term rather than shape longer-term trends.
Volatility has also been particularly pronounced in the bond market this year, with long-term interest rates showing some of the most significant fluctuations in decades. The 10-year Treasury yield hit a peak of around 5% last October, started the year in the upper 3% range, rallied back to approximately 4.75% around May, and has since returned close to where it began this year. Meanwhile, short-term rates have remained more stable, aligning more closely with Federal Reserve policy and showing signs of easing as the first rate cuts have taken effect. Recently, a shift has occurred in the yield curve: for the first time since mid-2022, long-term Treasury yields (10-year) exceeded short-term rates (2-year), breaking a historic inversion that lasted 783 days.
With the first rate cuts now implemented, it seems that the economic disruptions triggered by the COVID outbreak and governmental stimulus efforts—such as inflation, workforce challenges, and supply chain issues—are receding into the past. The primary focus has shifted back to future growth, earnings, employment, and innovation, signaling a potential return to “normal” in the markets, if such a state is indeed achievable.
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