Perfect Weather

Jan 29, 2024

By Pete Biebel, Senior Vice President, Senior Investment Strategist
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From coast to coast, the nation has endured some dangerously severe storms in recent months, but prevailing conditions have been just right for the stock market. Again last week, the broad averages blew higher on tailwinds from favorable economic news and earnings reports. The S&P 500 Index (SPX) gained 1.06% and recorded a new all-time closing high on Thursday. The NASDAQ Composite Index (COMP) also reached new highs for the year, advancing 0.94% for the week. Those indices now have year-to-date gains of between 2.5% and 3%. The stock market has been on cloud nine.

Energy was the strongest of the U.S. equity sectors, gaining a bit over 5% for the week as the price of crude oil continued its recent climb. The Communication Services sector added about 3.8% and the resurgent Financials sector added nearly 2%. Of the three sectors that were ailing with losses for the week, the Consumer Discretionary sector was the most under the weather. The second-largest stock in the group is Tesla, which accounts for a bit more than 13% of the sector’s weight. That stock has been hit with a downburst of bad news this month and last week (more on Tesla below).

The market environment has enjoyed favorable economic trade winds. Unemployment remains near record lows, the rate of inflation continues to drift lower, and the expected drought in economic growth has yet to materialize. In fact, last Thursday we learned that Gross Domestic Product (GDP) growth in the fourth quarter of 2023 was much stronger than expected. GDP grew at a 3.3% annual rate in the quarter. While that rate was below the 4.9% growth in the third quarter, it was much better than the 2% growth that economists expected.

Last Friday brought an update on the U.S. Federal Reserve’s (Fed’s) preferred measure of inflation, the Personal Consumption Expenditures (PCE) Price Index. The index increased 0.2% in December. That was after a 0.1% decrease in November and the first positive change in three months. The core PCE index, which strips out food and energy prices, rose 0.2% in December, in line with expectations. The year-over-year rate of core PCE inflation came in at +2.9%; that was its first reading below 3% in nearly three years.

By all indications, the economy’s barometric pressure is in an ideal range for favorable weather in the stock market. Even the “Magnificent Seven” stocks, which were responsible for so much of the market’s 2023 gains, and which had gone flat from mid-November into early-January, seem to have rediscovered their spot in the sun.  And that is in spite of one of the seven stocks getting hit by a tornado of negative news. Tesla Inc. was trading near $260 late last year. But a series of headlines through the first half of January regarding price reductions, recalls and competition from Chinese car companies weighed on the share price, pushing it down to about $210 as of a week ago. On Thursday, following the release of disappointing earnings news the previous evening, the stock plunged another 12.1%. Year-to-date, the shares have fallen nearly 30%.

And Tesla wasn’t alone in its stormy week. On Monday, lightning hit Gilead Sciences Inc. and Archer Daniels Midland Co. following their earnings announcements. Those stocks were down 10.2% and 24.2% that day respectively. Last Tuesday, shares of 3M Company fell 11% following its earnings report, and homebuilder D.R. Horton saw its shares decline 9.2% on lower-than-expected quarterly profits. On Wednesday, it was DuPont Nemours Inc.; that stock lost 14% following the company’s warning that weak demand from China could impact sales growth. Following a warning that the company’s Medicare business would likely be under pressure this year, shares of insurer Humana Inc. fell more than 11% on Thursday. On Friday, shares of Intel fell 12%.

But every cloud has a silver lining. One ray of sunshine last week was price action in IBM. The stock price of that granddaddy of a tech company had been stalled between about $110 and $150 for the past eight years. While most other tech companies saw significant gains over that time, IBM shares were mired under a storm cloud.  But in recent months, the sky has brightened for the stock as the mania over artificial intelligence has apparently spread to IBM. The stock had climbed to a nearly six-year high by late-December. Following its earnings report last Thursday, the shares rose another 9.5%. They ended the week with a year-to-date gain of 14.5% and at their highest level since mid-2013.

Not to steal the market’s thunder, but virtually all of the averages’ gains last week came in just two strong opening hours on Monday and Wednesday. Those two gap-up openings coincided with big gaps down in the yield on 10-year Treasury notes. That yield, which hit a one-month high near 4.2% the previous Friday sank to 4.09% Monday morning. The suddenly lower rate inspired a bullish reaction in stocks. SPX spiked up to about 4868 that morning but was unable to make any additional progress for two sessions and ended Tuesday at roughly that same level. The 10-year yield, which had climbed back to around 4.15% on Tuesday, gapped down to 4.1% Wednesday morning and stock indices again gapped higher. SPX touched the 4900 level that morning but gave back nearly all of the opening gain over the balance of the session. Despite a flurry of earnings reports over the next couple days, SPX ended the week near 4890.

The market is banking on the fair weather to continue. The stock market is richly valued and extended. At its current level, SPX is valued at nearly 20 times its expected 2024 earnings. That’s its highest forward price/earnings ratio (P/E) in nearly two years. It is also now trading more than 10% above its 200-day moving average. That, combined with flagging market breadth, suggest that this could be the calm before the storm. According to Dow Jones Market Data, “The NYSE advance-decline line, a popular cumulative indicator that tracks the number of securities rising minus the number falling on the exchange each day, hasn’t hit a fresh all-time high for 556 trading days, the longest such stretch since a 647-day period that ended in 2009.”

In my internal commentary for our advisors, I have written that I expect SPX’s advance to stall in the 4900–5000 range. A consolidation phase that sees the index drift back to near 4800 seems likely. It could easily fall into the upper 4700s without doing any technical damage. However, the 4715 level needs to hold. Breaking below that level would be the first sign that the storm clouds are gathering once again.

The calendar of earnings and economic reports this week looms over the market like an approaching wall cloud. The week ahead promises a blizzard of earnings reports. Of the 500 companies in the S&P index, 106 are due to report this week. That total includes five of the mega-cap tech stocks: Alphabet and Microsoft will announce results tomorrow, followed by, Apple and Meta on Thursday. Those five component companies account for about 24% of the S&P 500. The market reaction in those individual stocks will likely precipitate on the overall market. If those stocks rocket higher, they will likely provide a pleasant summer breeze blowing the market northward. But, if those stocks drop steeply on their earnings news, it could hit the overall market like a Nor’easter.

The economic reports this week could also provoke stormy reactions in the stock and bond markets. On Monday, the Treasury will publish a summary of its future borrowing needs. Then on Wednesday, it will provide detail on the breakdown of the specific maturities it expects to issue. The Fed policy statement will be delivered Wednesday afternoon. Analysts are confident that the Fed will not change its target lending rate at this meeting, but the policy statement will be closely analyzed for any hints on the timing of the Fed’s likely first rate cut. Then on Friday, the Bureau of Labor Statistics will release updates on non-farm payrolls and the unemployment rate.

Economic Calendar (1/29/24 – 2/2/24)



Monday 1/29/2024 Dallas Fed Manufacturing Survey, January


Tuesday 1/30/2024 Case-Shiller Home Price Index, November, M/M



FHFA House Price Index, November, M/M



Consumer Confidence, January



JOLTS Job Openings, December



Wednesday 1/31/2024 ADP Employment Report, January, M/M



Employment Cost Index, Q4, Q/Q



Treasury Refunding Announcement
Thursday 2/1/2024 Initial Jobless Claims



Continuing Claims



PMI Manufacturing, January


ISM Manufacturing, January



Construction Spending, December, M/M



Friday 2/2/2024 Non-Farm Payrolls, January, M/M



Unemployment Rate, January



Consumer Sentiment, January



Factory Orders, December, M/M




Links to previously published commentaries can be found at Investment Insights/Weekly Market Commentary/Market