By Jack Kraft, CFA, Advisor Directed Portfolio AnalystPrint This Post
The U.S. equity market experienced a much-needed relief rally last week as stocks surged from their 2020 “Low down days” amid better-than-feared corporate earnings reports and central bank comments that were perceived as dovish. In the past few weekly recaps, we have been attributing the trend in Friday equity losses to investor hesitancy to hold stocks into the weekend. Heading into last week, the S&P 500 lost sizable ground on the last eight out of nine Fridays with the average decline tallying 1.5%. U.S. Equities were able to buck this trend as the S&P 500 rallied 2.4% on Friday, pushing the weekly gain to more than 4.7%. This capped the best week for U.S. stocks since June as the Dow jumped 4.9% and the Tech-heavy Nasdaq added 5.2%
The leg higher in stocks Friday was attributed to a Wall Street Journal article that stated some Fed officials were becoming wary about the pace of interest rate hikes and the effect on economic growth. The Fed is set to meet on Nov. 1-2 with investors anticipating a third 75-basis point hike. Helping add to the risk-on sentiment last week was the anticipation that the Fed will debate at the upcoming meeting whether to slow the pace of tightening to 50-basis points in December. Both San Francisco (non-voter) and Chicago’s (non-voter) Fed presidents warned of the risk of overtightening, while Cleveland’s president (voter) said “wishful thinking can’t drive policy” and remains in favor of 75 basis points until the data proves tame inflation. This gave way for press surrounding the idea that some investors were calling for peak rates, resulting in bullish positioning on longer-dated Treasuries. However, there is still skepticism surrounding this view and the recent rally given elevated inflation, a robust labor market, and lingering risks to earnings estimates.
Also notable was the fact that equity markets were able to digest a modest rise in Treasury yields last week. On Thursday, the two-year was up 16-basis points before sharply reversing Friday to end the week slightly higher, while the 10-year yield finished the week at 4.21% for its 12th straight week of increases, marking the longest streak of Treasury losses since 1984. In equities, all 11 S&P 500 sectors ended the week higher with Energy (+8.1%) and Technology (+6.5%) pacing gains.
Earnings season continued to ramp up last week with some mixed takeaways from quarterly corporate calls. On the positive side, companies mentioned the consumer is remaining resilient. Credit card companies said that consumers have demonstrated a willingness to pay higher prices and not cut back on food, entertainment, and travel. Other themes highlighted include elevated mentions of inflation pressures and wage pressures. Meanwhile, supply chains constraints are easing although not back to normal. What comes as no surprise is housing and mortgage companies are feeling the most immediate fallout from tighter monetary policy as the average 30-year mortgage rate hit 7.20% according to bankrate.com. This slowdown in housing has trickled down to appliance companies with demand falling 10%. Another positive sign out of last week was that many industry bellwether companies reported “better than feared” earnings with Netflix (Streaming), AT&T (Telecom) and Schlumberger (Energy) all gaining double digits last week.
In geopolitics, investors were closely watching the 20th Party Congress of the Chinese Communist Party. The Chinese Party of Congress meets every five years to set social and economic policy, while also electing ruling officials. This in particular is one of the more significant events in China’s modern history because President Xi is expected to secure an unusual third term and will likely pave the way for him to hold office for life. During opening remarks President Xi put more emphasis on national “security” rather than the “economy” compared to his remarks five years ago. Meanwhile, the topic of China’s zero-Covid policy was not mentioned with many state media outlets and senior officials reiterating that it will remain in effect for the near future. The Hong Kong Hang Seng fell 1.9%, deepening its negative year-to-date returns to -30.9%.
Heading into this week investors hope to keep the positive momentum going as more key companies are scheduled to post profit tallies along with economic releases being closely watched. In earnings, the remainder of the FAANG members will report with Amazon, Apple, Meta Platforms (formally Facebook), and Google’s parent company Alphabet. Other notable companies set to report include Visa, Mastercard, Boeing, Caterpillar, Merck, Exxon, and Chevron. Headlining the economic calendar will be a Thursday Gross Domestic Product (GDP) reading for the third quarter. It is expected to show the U.S. economy expanded at a 2.4% annualized rate during July through September. Investors will be watching closely to see if the U.S. economy can avoid three consecutive quarters of negative real GDP growth. Elsewhere, investors will get an update on the Federal Reserves preferred proxy on inflation, the PCE price index. Other notable releases include a preliminary update on Services/Manufacturing PMI (Monday), Consumer Confidence (Tuesday), and Consumer Sentiment (Friday).
|MONDAY, OCT. 24|
|8:30 AM||Chicago Fed national activity index||Sept.||—||0|
|9:45 AM||S&P U.S. manufacturing PMI||Oct.||51.8||52|
|9:45 AM||S&P U.S. services PMI||Oct.||49.7||49.5|
|TUESDAY, OCT. 25|
|9:00 AM||S&P Case-Shiller U.S. home price index (SAAR)||Aug.||—||-2.90%|
|9:00 AM||FHFA U.S. home price index (SAAR)||Aug.||—||-6.90%|
|10:00 AM||Consumer confidence index||Oct.||105.3||108|
|WEDNESDAY, OCT. 26|
|8:30 AM||Trade in goods (advance report)||Sept.||—||-$87.3 billion|
|10:00 AM||New home sales (SAAR)||Sept.||588,000||685,000|
|THURSDAY, OCT. 27|
|8:30 AM||Real gross domestic product, first estimate (SAAR)||Q3||2.40%||-0.60%|
|8:30 AM||Real final sales to domestic purchasers, first estimate (SAAR)||Q3||—||0.20%|
|8:30 AM||Initial jobless claims||Oct. 22||—||214,000|
|8:30 AM||Continuing jobless claims||Oct. 15||—||1.39 million|
|8:30 AM||Durable goods orders||Sept.||0.00%||-0.20%|
|8:30 AM||Core capital equipment orders||Sept.||—||1.40%|
|FRIDAY, OCT. 28|
|8:30 AM||Employment cost index (SAAR)||Q3||4.80%||5.40%|
|8:30 AM||PCE price index||Sept.||—||0.30%|
|8:30 AM||Core PCE price index||Sept.||0.40%||0.60%|
|8:30 AM||PCE price index (12-month change)||Sept.||—||6.20%|
|8:30 AM||Core PCE price index (12-month change)||Sept.||4.90%||4.90%|
|8:30 AM||Real consumer spending (SAAR)||Sept.||—||1.20%|
|10:00 AM||UMich consumer sentiment index (late)||Oct.||59.8||59.8|
|10:00 AM||UMich consumer 5-year inflation expectations (late)||Oct.||—||2.90%|
|10:00 AM||Pending home sales index||Sept.||—||-2.00%|
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market