As the market appears to be taking a rest and consolidating its $2.7 trillion rally leading up to the Thanksgiving holiday, the historical pattern over the last five years suggests the shortened holiday week typically enjoys modest gains. With concerns over the resiliency of consumer spending, however, the market can be affected by any indication that Black Friday does not witness the throngs of consumers out hunting for bargains, or indications that the start to Cyber Monday will not result in the billions of dollars that are spent online. In a period in which “bad news is good news,” and sometimes “bad news is just plain bad news,” traders and investors alike may react positively to a marked slowdown in consumer demand as it would amplify the prevailing view that the Federal Reserve (Fed) has completed its rate hiking campaign and is preparing for a “dovish pivot.”
In addition, this year financial markets are also focused on NVIDIA (ticker: NVDA), the latest entrant to the pantheon of the mega-technology realm, which together represents approximately 29% of the total market capitalization of the S&P 500. NVIDIA reports earnings this week, and its guidance is considered a key barometer for the AI theme that has helped underpin the dramatic rise of the “Magnificent Seven” technology companies.
Positive seasonality is a major tailwind for the market as it navigates through a clutch of sometimes conflicting headlines and resumes its upward leaning trend following a period of assimilating recent gains. The strong market performance in early 2023 began to erode as concerns took hold over rising interest rates, escalating drama regarding the possibility of a government shutdown, questions regarding whether the Fed was going to continue raising interest rates, and exceptionally negative fall seasonality.
Analysts began to question whether the presumption—and overriding consensus—of an end of the year rally was possible, while investors and the trading community similarly turned bearish as markets continued to sell-off. Markets became deeply oversold while the notion of a rally became deeply contrarian. With the 10-year Treasury yield working its way towards 5%, markets were obsessively following every inch higher in yields. On October 19, the 10-year yield briefly touched 5%.
Somehow “the market” very often seems to punish overwhelmingly strong and one-sided consensus views and the more pessimism sets in, the possibility of a positive catalyst can change the market’s direction.
Although there was a pickup in rumors that the Treasury Department—uneasy about the volatility in the Treasury market—would lower the amount of funding in upcoming auctions, markets were on guard waiting for the official announcement on November 1, the same day as the Fed’s rate announcement. Expectations were that the Fed was not going to raise rates; the Treasury’s plans took precedence for market participants.
The announcement from the Treasury Department did not disappoint, as it indicated they would slow the number of increases in longer-dated debt auctions which been settled with higher yields. Treasury yields edged lower following the news and helped reset equity markets.
As interest rates began to edge comfortably lower, and as mutual funds finished their tax-loss harvesting trades, slowly but surely markets gained momentum in November, the most hospitable month for equities. On November 14, the softer than expected Consumer Price Index report ignited a strong bout of short covering in concert with options traders piling on, which created a squeeze and moved the S&P 500 above key levels. This “squeeze” phenomenon was a prime factor during 2021 when stock prices climbed quickly for “meme” stocks.
Volume began to gain strength as the markets moved higher and the fear of missing out, the FOMO trade, caught fire. A solid Q3 earnings season, with margin expansion and more positive earnings revisions than expected, has pointedly offered support for markets. Importantly, breadth in the market expanded as the surge continued last week, with the Russell 2000 participating in the rally.
Not surprisingly, as markets reached short-term overbought levels, questions as to the durability of the rally fanned across business media. Recession alarm bells are ringing and calls for the Fed to be on alert to cut interest rates as soon as next summer are ubiquitous.
Markets have been meandering sideways and up again rather than undergoing panic selling as the latest spate of economic reports portend an ongoing economic slowdown. The comments from Walmart’s CFO noting the “softening” of consumer spending began in October and that it “gives us reason to think slightly more cautiously about the consumer versus 90 days ago,” made headlines but did not cause the market to abruptly.
selloff. More worrisome was the observation from Walmart’s CEO that “in the U.S. we may be managing a period of deflation in the months to come.” One analysis of Walmart’s concerns is that their client base tends to be lower wage earners, who understandably are under pressure from higher credit card rates and higher prices. Late payments and credit card delinquencies are rising among that cohort.
The onset of the UAW strike, which ended in mid-November, also skewed consumer spending as the strike lasted longer than initial assumptions.
As Treasury yields continue to inch lower questions dominate headlines as to whether the move represents a recession scare or just the process of rates normalizing. Calls for a “dovish” Fed pivot are intensifying now that the data, accompanied by Walmart’s warnings, suggest a broader slowdown in consumer spending. Consumer purchases reliably represent nearly 68% of GDP, so markets focus on any changes in spending patterns.
As Treasury yields continue to inch lower, questions dominate headlines as to whether the move represents a recession scare or just the process of rates normalizing. Calls for a “dovish” Fed pivot are intensifying now that the data, accompanied by Walmart’s warnings, suggest a broader slowdown in consumer spending. Consumer purchases reliably represent nearly 68% of GDP, so markets focus on any changes in spending patterns.
While the Fed tries to engineer a “soft landing,” the market will enjoy the benefits of a strong package of support from positive seasonality, a positive presidential cycle that points to a typically upbeat finish to the year when the incumbent is running for office in the following year, and the extremely rare occurrence for the S&P 500 to close lower for two years in a row.
Do not be surprised if amid conflicting data and Fedspeak, the S&P 500 surprises the bears and keeps working its way higher. History advocates that this is usually what happens.
The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Data provided by Bloomberg, FactSet, and LPL Financial, tracking #507080.
- US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity.
- The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
- International investing involves special risks such as currency fluctuation and political instability. These risks may be heightened for investments in emerging markets.