By Pete Biebel, Senior Vice President, Senior Investment Strategist
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The stock market has spawned a tsunami of gains over the past seven months. The economic ecosystem provided a fertile environment for stocks: stronger corporate earnings, a growing economy, and declining inflation. The evolving market has been able to weather concerns over higher-for-longer interest rates and a thundercloud of increasing geopolitical tension. It has been an Edenic environment for stocks.
In that climate, the S&P 500 Index (SPX) has nurtured an advance of about 30% from its low last October and is now up about 12% in 2024. The NASDAQ Composite Index (COMP) has been even more productive, having climbed a bit more than 14% this year and more than 36% from its October low.
Last week, stocks endured a storm of conflicting economic data and the averages still managed to post small net gains. SPX touched a slightly higher new high Friday morning before ending the session with a small loss, precipitating a 1.32% gain for the week. COMP registered new highs on Wednesday and Thursday and ended the week with a net accumulation of 2.38%. But the week was less fruitful for other widely followed indices. The Dow Jones Industrial Average (DJIA) added a mere 0.29%, and the Russell 2000 Index of small-cap stocks (RUT) lost more than 2% for the week.
Only five of the 11 S&P industry sectors survived the week with gains. Technology (+2.38%), healthcare (+1.90%) and communication services (+1.37%) led the big dogs. The figurative runts of the litter were the energy (-3.44%) and utilities (-3.82%) sectors. The energy sector has continued to lose ground as the price of crude oil has seeped from the upper $80s in early April into the mid-$70s last week. Utilities as a group charged 15% higher in April and May as the fervor over artificial intelligence and the expectation for the resultant surge in electricity demand made the sector the new prime target for speculators. In recent weeks, the temperature in utility stocks has cooled. Friday’s spike in the yield on 10-year U.S. Treasury notes, following a stronger-than-expected employment report, put an additional chill on the sector. The 14-basis-point increase was the largest one-day gain in the 10-year yield in two months.
As is the nature of things as they age, the stock market rally is showing signs of getting a little long in the tooth. One common trait in the latter stages of a rally, narrowing participation, was evident last week. The extreme concentration in the market’s leadership has been widely noted. But in recent weeks, the strength of the Magnificent Seven pack has narrowed to just four alpha leaders. While that is at least a little concerning, the real sign of age is the underperformance in a majority of the individual stocks. In last week’s positive returns in the major indices, the New York Stock Exchange had more declining issues on the week than gainers by about a 3-to-2 ratio.
The deterioration in participation was even more damaging on a sector level. I track the number of sector component stocks that are above their 50-day and 200-day moving averages on a weekly basis. In 10 of the 11 sectors, the percentage of stocks above their 50-day averages declined last week. Only the technology sector saw an increase. In five of the 10 sectors, the percentage has declined for four consecutive weeks. The picture is similar with the 200-day averages. All but the technology sector had a decreased in the percentage of component stocks above their 200-day averages, and five sectors have now seen four consecutive weekly decreases.
It’s as if the market has taken on the nature of an iceberg. A small portion of its makeup is above the surface, while the majority of its mass is now underwater. The better-then-expected results from the first-quarter’s earnings season provided a little extra buoyancy to the market over the past month or so. But with already obese price/earnings multiples and higher-for-longer interest rates, there’s not much on the calendar in the coming weeks to provide any substantial additional lift for the market.
SPX ended last week near 5347. Neither SPX nor COMP have any significant resistance overhead. There’s really nothing beyond the current very rich valuations to restrict additional upside progress. Technically, the averages are not overextended, but they’re extended enough that I suspect any additional upside over the next couple weeks will be limited. SPX could easily slip back below 5300 during a consolidation phase without doing any technical damage. The key level to watch is 5200. That’s roughly the level of its 50-day moving average and the prior week’s low. Sustained trading below 5200 would be toxic to the market’s ecosystem. Also, watch the 10-year Treasury yield through the week; it ended last week at 4.44%, following Friday’s surge. Falling back below 4.40% would probably be beneficial for the equity biosphere. Conversely, seeing that yield increase beyond the 4.50% level would likely harsh stocks’ vibe.
The week ahead offers several significant catalysts that could cause sharp moves in bonds and stocks. Wednesday morning brings data on the Consumer Price Index update for May. A decline in the headline month-over-month number is expected. Data on the Producer Price Index follows on Thursday. In between, we’ll get the U.S. Federal Reserve policy statement and press conference on Wednesday afternoon. This time, the announcement will also include a quarterly update of the committee’s Summary of Economic Projections.
| Economic Calendar (6/10/24 – 6/14/24) |
Previous |
Consensus |
|
| Monday 6/10/2024 | No Reports Scheduled | ||
| Tuesday 6/11/2024 | NFIB Optimism Index, May |
89.7 |
89.8 |
| Wednesday 6/12/2024 | Consumer Price Index, May, M/M |
+0.3% |
+0.1% |
| CPI ex-Food & Energy, May, M/M |
+0.3% |
+0.3% |
|
| CPI ex-Food & Energy, May, Y/Y |
+3.6% |
+3.5% |
|
| Monthly U.S. Federal Budget, May |
+$210B |
-$301.1B |
|
| FOMC Policy Decision and Press Conference | |||
| Thursday 6/13/2024 | Initial Jobless Claims |
229K |
225K |
| Continuing Claims |
1,792K |
||
| Producer Price Index, May, M/M |
+0.5% |
+0.1% |
|
| PPI ex-Food & Energy, May, M/M |
+0.4% |
+0.3% |
|
| PPI ex-Food & Energy, May, Y/Y |
+3.1% |
||
| Friday 6/14/2024 | Consumer Sentiment, June |
69.1 |
72.3 |
| Import Price Index, May, M/M |
+0.9% |
0.0% |
|
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market