Digesting the Gains

Mar 18, 2024

By Pete Biebel, Senior Vice President, Senior Investment Strategist
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For the second consecutive week, investors have taken a figurative breather, backing away from the stock market smorgasbord. The S&P 500 Index (SPX) ended last week just a bit below its level of two weeks prior. Last week’s 0.13% loss was just half of the prior week’s 0.26% decline. The NASDAQ Composite Index (COMP) also pared its 1.17% loss in the prior week to a mere 0.70% loss last week. Those are relatively tiny losses in the big picture, but it marked the first time either index had back-to-back losing weeks since last October. Compared to their steep rise in recent months, stock prices have been as flat as a pancake in recent weeks.

Stocks have wolfed down huge gains over the past several months. Even net of the recent setbacks, SPX has fattened itself by more than 7% year-to-date and has gobbled up a gain of more than 24% from its October low. Over that same time, COMP has stuffed itself by nearly 27% and has more than a 6% gain YTD.

So, it’s not surprising that the market might take a break from the feeding frenzy of the previous four months. Stock indices had been borderline overbought several times in January and February. In several sectors, rallies had stretched their fundamental valuations to pricey extremes. In fact, what is really surprising is that stocks haven’t given back more of those voracious gains.

The two big economic reports last week offered up opportunities for selling on a silver platter. On Tuesday morning, the Consumer Price Index (CPI) report for February showed inflation last month was just a tick higher than expected on nearly every metric (headline and core, month-over-month, and year-over-year). Investors chose to ignore what could have been a bitter pill to swallow and apparently savored the lack of really bad news. Stocks rallied steeply on the opening that morning, with SPX and COMP each rising more than 1% in the early hours.

Hopes for a second helping of not-so-bad inflation news on Thursday morning were dashed. The Producer Price Index (PPI) data for February showed an increase in the headline number of 0.6%, double what had been expected. In response, stocks gave back a big chunk of Tuesday’s gains on Thursday. Still, both SPX and COMP were modestly in the green for the week through Thursday’s close.

Last week’s modest losses in the major averages were easy to swallow considering the degree to which interest rates have increased. Higher interest rates have been like an unpleasant funk wafting through the dining room that suppresses everyone’s appetite. The yield on the benchmark 10-year U.S. Treasury notes was below 3.9% as 2024 began and again as recently as early February. But that rate had been chopping above 4% for the past month, pushed higher in part by the growing consensus of fewer U.S. Federal Reserve (Fed) rate hikes this year. Last week, largely in response to the higher inflation numbers, the 10-year yield shot up from 4.07% on Monday to end the week at 4.32%, near its high of the year.

The funk of higher interest rates dampened investor appetites for real estate stocks in particular. That sector, which had only recently climbed back into positive territory for the year, is back in the red after losing about 2.8% last week. The higher rates also weighed on small-cap stocks. The Russell 2000 index of small cap stocks (RUT) has been trailing behind its large cap peers all year. Last week’s 2.14% loss erased about two-thirds of RUT’s year-to-date gain.

As investors’ appetites for stocks have been a bit repressed in recent weeks, that has led to a big shift in the relative performance among the industry sectors. Technology, which led all sectors with a gain of more than 50% in 2023, was again leading through the first five weeks of this year. But investors may have had their fill of tech, at least temporarily. That sector was down nearly 1% last week and now has a net loss over the past five weeks. A subgroup of technology, semiconductor stocks, has had a similar swing in investor tastes. Semis led tech and the overall market as investors gobbled up stocks of anything with a hint of exposure to artificial intelligence. That feeding frenzy seems to have peaked a little over a week ago with climactic blow-off reversals in several of the leading stocks. One leading index of semiconductor stocks was showing a YTD gain of more than 30% just 10 days ago. That index lost 3.2% last week.

Financials and industrials, which were just middle-of-the-pack sectors through January and February, are now among the top four sectors, with YTD gains of 8.6% and 7.1% respectively. The sector that really has investors drooling is energy. Early in the year, the sector was barely on the menu. It was still showing a YTD loss as recently as five weeks ago. Thanks to stronger crude oil prices, the energy sector has rallied nearly 10% in the past five weeks, climbing close to 4% last week alone. Incredibly, energy is now the best performing of the U.S. equity sectors YTD.

Two quiet weeks does not a consolidation make. Another couple weeks of a reduced appetite for stocks seems likely. SPX ended last week near 5117. As I wrote two weeks ago, “I think it’s very unlikely that the index can climb even another 1% higher before a more extended consolidation phase ensues.” SPX could fall a full 3% without doing any technical damage. But we wouldn’t want to see it much below 4970.

The world’s central bankers will have a lot on their plate this week. For us, the main entree will be the policy announcement and press conference from the U.S. Federal Open Market Committee (FOMC) on Wednesday. Recent Fed rhetoric and pesky inflation data have all but eliminated any chance of a rate cut at the March meeting. And the market doesn’t currently expect much chance of a cut at the May meeting. Traders will also be watching policy updates from the Bank of Japan and the Reserve Bank of Australia on Tuesday and from the Bank of England and the Swiss National Bank on Thursday.

Economic Calendar (3/18/24 – 3/22/24)



Monday 3/18/2024 Homebuilder Confidence Index, February



Tuesday 3/19/2024 Housing Starts, February, SAAR



Building Permits, February, SAAR



Wednesday 3/20/2024 FOMC Policy Announcement & Press Conference
Thursday 3/21/2024 Initial Jobless Claims



Continuing Claims



Philadelphia Fed Manufacturing Survey, March



U.S. Services PMI-Flash, March



U.S. Manufacturing-Flash, March



Leading Economic Indicators. February, M/M



Existing Home Sales, February, SAAR



Friday 3/22/2024 No Reports Scheduled


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