Double, Double Toil and Trouble

Oct 23, 2023

By Pete Biebel, Senior Vice President, Senior Investment Strategist
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Last week, the fire burned, and the caldron bubbled. Whatever bearish charm the spirits have put on the market was in full effect. Through the first day and a half of the week, the indices were able to bump up into the area of their recent highs, but stocks were cursed with a double whammy, not from eye of newt and toe of frog, but from both interest rates and crude oil prices spiking higher. By the end of the week, the S&P 500 Index (SPX) was about 2.4% below where it ended the previous week, and for the first time since the banking crisis last March, the index fell below its 200-day moving average. The NASDAQ Composite Index (COMP) lost about 3.2% for the week. The number of declining issues on the New York Stock Exchange (NYSE) exceeded the number of gainers by a ratio of 3.1-to-1.

Last week, the NYSE registered 569 new 52-week lows among its listed companies. That was the second-highest total this year, exceeded only by the 642 new lows two weeks prior. Those are the highest number of weekly new lows since this week a year ago, when 756 NYSE stocks hit new lows.

Only two of the 11 S&P industry sectors were able to fight off the bad mojo: The resurging Energy sector, thanks to those rising crude oil prices, gained another 0.75% last week, and is now up a little more than 3% year to date. And the long-suffering Consumer Staples sector was able to get the monkey off its back last week, gaining 0.7%. That sector is still down nearly 10% YTD. The most bewitched sectors were Consumer Discretionary and Real Estate, each losing about 4.6% for the week. Three other sectors fell 3% or more: Industrials, Basic Materials and Financials.

For a charm of powerful trouble, like a hell-broth boil and bubble, the key ingredient has been steeply rising interest rates. The yield on 10-Year U.S. Treasury notes, which was about 3.35% six months ago and about 3.8% three months ago, has spiked to near 5%, including an increase from 4.63% to 4.93% last week alone. The 30-Year U.S. Treasury bond and all maturities of bills and notes of two years and less are yielding more than 5%. All the maturities in between are very near that level.

The curse of suddenly sharply higher interest rates has conjured up concerns on a range of topics: Is the stock market fundamentally overvalued? Is the U.S. economy now more likely to fall into recession? Will there be more bank failures? Will the high rates cripple many smaller companies? Those concerns have been evident in not just the weakness in the overall stock market, but also in the sectors and subsectors that have suffered unusually poor performance. Small-cap stocks, as measured by the Russell 2000 Index (RUT), have fallen nearly 10% in the past five weeks and are now down nearly 5% for the year. The S&P Financials sector ended last week at its lowest level in 4½ months. The big credit card companies all suffered significant losses. An S&P index that tracks big banks has fallen about 18% in the past 2½ months. The S&P index of regional banks is now 20% below its July rebound high.

There was also weakness in semiconductor stocks. That pocket of the tech sector was a key contributor to the market’s rally last spring when the mania over artificial intelligence (AI) invoked big gains in many of the leading chip stocks. One key measure of the subsector, which had been drifting lower since its late summer highs, fell more than 4% last week. Much of that decline came midweek on news that the U.S. government was placing new restrictions on the export of AI chips to China. The overall market is going to have trouble reversing its southerly course if the weakness in financials and semiconductor stocks persists.

Two weeks ago, in my article “What’s in a Number?”, I wrote, “SPX ended the week a bit below 4309. With a little follow-through on Friday’s big rally, climbing into the 4350–4400 range is conceivable but probably not much more than that. The key in the next week or two should be whether SPX falls back into the mid-to-low 4200s.” In the time since, SPX did climb into that target range, but no further. It ended last week near 4224, its lowest closing level since early June just before the index blasted above 4200.

The odds now favor at least a test of the 4200 level. The week ahead could tell us a lot about the market’s trend in the coming month or two. Sustained trading below 4200 would likely lead to a decline into the 4050–4100 range. Big price swings in the bond market and/or in crude oil would likely have a significant impact on the market’s short-term direction. Also, keep an eye on the CBOE Volatility Index, or VIX. That index, which spent most of the summer between 13 and 17, shot up from near 16 into the low 20s over the past two weeks. VIX ended last week at 21.71, its highest weekly closing level since March. That’s a strong indication that volatility could remain elevated for a while. One factor that could contribute to heightened volatility this week is a heavy calendar of corporate earnings announcements, including several of the most mega of the mega-cap companies.

There’s not much on this week’s calendar of economic reports that has the potential to roil the markets. Thursday has the best potential, with updates on unemployment claims, durable goods orders and a revised estimate of third-quarter GDP.

Economic Calendar (10/23/23 – 10/27/23) Previous Consensus
Monday 10/23/2023 Chicago Fed National Activity Index, September -0.15 +0.05
Tuesday 10/24/2023 PMI Composite Manufacturing Index 49.5
Wednesday 10/25/2023 New Home Sales, September, SAAR 675K 685K
Thursday 10/26/2023 Initial Jobless Claims 196K 206K
Durable Goods Orders, September, M/M +0.2% +1.0%
Durable Goods ex-Transportation, September, M/M +0.4% +0.2%
Gross Domestic Product, Q3, Q/Q, SAAR +2.1% +4.1%
International Trade, Trade Deficit, September $84.3B $85.4B
Wholesale Inventories, September, M/M -0.1% +0.1%
Pending Home Sales, September, M/M -7.1% +0.2%
Friday 10/27/2023 Personal Income, September, M/M +0.4% +0.4%
Personal Spending, September, M/M +0.4% +0.5%
Consumer Sentiment, October 63.0 63.0


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