Market Recap - Market Struggles as Fed Does the Expected

After The S&P 500 Ended Last Week At A Closing Record High, The Benchmark Index Fell 1.9% This Week, As Investors Took Profits And Digested The FOMC Policy Decision. The Russell 2000 (-1.7%) And Dow Jones Industrial Average (-1.7%) Both Declined 1.7% While The Nasdaq Composite (-3.0%) Underperformed With A 3.0% Decline.

As expected, the Fed left the target range for the fed funds rate unchanged at 0.00-0.25%, said it will double the reduction of asset purchases to $30 billion per month ($20 billion for Treasuries and $10 billion for agency MBS), and signaled three rate hikes in 2022 amid expectations for continued inflation pressures.

On a related note, the Producer Price Index for November came in hotter than expected, with the index for final demand up 0.8% month-over-month (Briefing.com consensus 0.5%) and up 9.6% year-over-year.

Interestingly, the only day the S&P 500 closed higher was Fed decision day, and that was largely due to short-covering activity on the view that Fed Chair Powell didn't sound as hawkish as feared. The market fumbled that rally over the next two days, leaving the sectors mixed by week's end.

The information technology (-5.1%), consumer discretionary (-4.3%), and energy (-5.0%) sectors were the weakest performers with losses over 4.0%. The defensive-oriented health care (+2.5%), real estate (+1.6%), consumer staples (+1.2%), and utilities (+1.2%) sectors rose more than 1.0%.

With Apple (AAPL) nearly hitting a $3.0 trillion market capitalization, investors presumably felt it was appropriate to take profits, especially when also taking into consideration downside guidance from Adobe (ADBE) and the continuing spread of the coronavirus.

The 10-yr yield fell nine basis points to 1.40% amid increased demand while the 2-yr yield decreased two basis points 0.64% despite the Fed signaling three rate hikes next year.

Elsewhere, the Bank of England increased its bank rate by 15 basis points to 0.25% in a surprise move. The European Central Bank and Bank of Japan left rates unchanged, as expected, and announced a further tapering of asset purchases.

Market Recap - S&P 500 Snaps Back to a Record Close

The S&P 500 Rallied 3.8% This Week, And Closed At A Record High, As The Market Overcame Concerns About The Omicron Variant And Reacted Positively To Hot Consumer Inflation Data. The Dow Jones Industrial Average (+4.0%) And Nasdaq Composite (+3.6%) Also Rose More Than 3.5% While The Russell 2000 Rose 2.4%.

All 11 S&P 500 sectors ended the week with gains over 2.0%. The information technology sector (+6.0%) was the strongest performer with a 6% gain, and on the other end was the consumer discretionary sector (+2.5%) with a 2.5% gain.

A bulk of the gains were registered in the first two days of the week on optimism that the Omicron variant wasn't as bad as originally feared. The market's thinking received some confirmation on Wednesday after Pfizer (PFE) and BioNTech (BNTX) said preliminary data suggested that three doses of their current vaccine neutralize the Omicron variant and that two doses protect against severe disease.

The Pfizer-BioNTech news solidified the rally effort, which was further supported by lawmakers moving closer to raising the debt ceiling. On Friday, the big market event was the Consumer Price Index (CPI) report for November, which was taken in stride by the large-cap stocks.

Briefly, total CPI increased 0.8% m/m in November (Briefing.com consensus 0.6%), leaving it up 6.8% yr/yr for its highest yearly increase since 1982. Core CPI, which excludes food and energy, increased 0.5% m/m, as expected, and was up 4.9% yr/yr.

Stocks reacted positively to the report, presumably because inflation tends to be sign of robust economic activity and offer companies pricing power for greater earnings potential. The interesting price action was in the Treasury market, which held its ground despite the implications of a more aggressive Fed.

It's worth positing, though, that Treasury yields might have already anticipated the data. Versus last Friday's levels, the 10-yr yield rose 15 points to 1.49%, and the 2-yr yield rose eight basis points to 0.66%. The U.S. Dollar Index decreased 0.1% to 96.03.

Market Recap - S&P 500 and Nasdaq Surrender 50-Day Moving Averages

S&P 500 and Nasdaq Surrender 50-Day Moving Averages

The stock market endured a volatile week as uncertainty related to the Omicron variant of the coronavirus dominated the conversation. The Dow and S&P 500 lost a respective 0.9% and 1.2% for the week while the Nasdaq under performed, falling 2.6%.

Concerns related to the new coronavirus variant appeared to be on the backburner during a Monday rebound from last Friday’s loss, but selling pressure returned to the market as the week went on, driving the S&P 500 past its 50-day moving average (4544.74) while the Nasdaq also fell below its 50-day moving average (15276.38), reaching its lowest level since late October.

Nine out of eleven sectors ended the week in negative territory with communication services (-2.8%), consumer discretionary (-2.4%), and financials (-2.0%) recording the widest losses while the real estate sector (+0.1%) and utilities (+1.0%) finished the week in positive territory.

Growth stocks were among the weakest performers with the likes of Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA) losing between 1.8% and 6.2%. In earnings, DocuSign (DOCU) plunged to its lowest level since mid-2020 after disappointing guidance overshadowed a Q3 beat.

Like stocks, crude oil faced a volatile week, failing to hold its 200-day moving average (69.88). WTI crude ended the week lower by $1.79, or 2.6%, at $66.38/bbl. OPEC+ announced on Thursday that it is keeping its plan for a 400,000-bpd output increase in January.

In Washington, Fed Chairman Powell said during his Congressional testimony that the word “transitory” should no longer be used when describing inflation. He added that the central bank may bring forward the planned end of asset purchases by a few months and that an acceleration of the taper will be discussed at the policy meeting in December. Separately, Congress voted in favor of another short-term funding bill that will delay the risk of a government shutdown into mid-February.

Market Recap - Omicron Variant Takes Down the Market

Ten of the 11 S&P 500 sectors closed lower, led by consumer discretionary (-3.6%), communication services (-3.3%), and information technology (-3.2%) with losses over 3.0%. The energy sector (+1.7%) escaped with a nice gain, even though it fell 4% on Friday. 

Before the variant news on Friday, the market was experiencing a rotation into value stocks from growth stocks amid growing expectations for the Fed to be more aggressive in tightening policy. These expectations were supported by the following developments:

• President Biden announced he will nominate Jerome Powell for a second term as Fed Chair and nominate Lael Brainard for Vice Chair of the Board of Governors.

• Weekly initial claims (199,000) fell to their lowest level since Nov. 15, 1969, and the Fed’s preferred inflation gauge in the PCE Price Index was up 5.0% yr/yr in October.

• The FOMC Minutes from the November meeting explicitly corroborated these expectations.

• The 2-yr yield was up 13 basis points in three days.

Everything was upended on Friday following news of the Omicron variant, which was first identified in South Africa. A risk-off mindset permeated global markets: Stocks in Asia, Europe, and the U.S. closed sharply lower, Treasury yields dropped precipitously, WTI crude futures dropped 12% (-9% for the week), and the CBOE Volatility Index spiked more than 50%.

Likewise, rate-hike expectations were tempered, according to the CME Fed Watch Tool. The probability for a rate hike in May 2022 decreased to 36.4% from 55.3% on Wednesday, and the probability for a rate hike in June 2022 decreased to 61.8% from 82.1% on Wednesday.

The 2-yr yield was down 12 basis points to 0.52% ahead of the bond market close at 2:00 p.m. ET Friday. The 10-yr yield was down 16 basis points to 1.49% after brushing up against 1.70% early in Wednesday’s session.

Separately, the U.S. confirmed plans to release 50 million barrels of oil from the Strategic Petroleum Reserve over several months. China, India, Japan, South Korea, and the UK are also expected to tap into their oil reserves.

Market Recap - Mega Cap Excellence

Mega-Cap Excellence

After snapping a lengthy winning streak last week, the market returned to its winning ways, and by “market,” we mean the mega-cap stocks. The Vanguard Mega Cap Growth ETF (MGK) rose 2.2%, while the Invesco S&P 500 Equal Weight ETF (RSP) fell 1.2%.fell 1.0%.

The S&P 500 (+0.3%) and Nasdaq Composite (+1.2%), which have more exposure to mega-cap growth, set record closing highs this week. The Dow Jones Industrial Average (-1.4%) and Russell 2000 (-2.9%), which are more exposed to cyclical names, ended the week with 1% and 3% declines, respectively.

The broader market was slowed down by lingering growth concerns after Walmart (WMT) and Target (TGT) said they will absorb inflation pressures to keep prices down, Cisco (CSCO) issued a revenue warning due to ongoing supply issues, and Austriare imposed a COVID lock down.

In turn, Treasuries pushed higher in a flight to- safety trade, and oil prices fell 6% amid expectations for softer demand and potentially supply if countries tap into their oil reserves. The 10-yr yield declined four basis points to 1.54%. The U.S. Dollar Index rose 1.0% to 96.03.

From a sector perspective, the consumer discretionary (+3.8%) information technology(+2.4%), and utilities (+0.9%) sectors were the only sectors that closed higher. The energy (-5.2%), financials (-2.8%), materials (-2.0%), and industrial s (-1.2%) sectors fell noticeably.

The economic data, meanwhile, was encouraging. Retail sales for October, industrial production and capacity utilization for October, the NAHB Housing Market Index for November, and the Philadelphia Fed Index for November were each better than expected. Weekly jobless claims also showed continued improvement.

In addition, President Biden signed the $1.2 trillion bipartisan infrastructure bill, the House passed the $1.75 trillion Build Back Better Act, and a CDC advisory committee recommended in a unanimous vote for all adults to get COVID-19 booster shots from Pfizer (PFE) or Moderna (MRNA) six months after the second dose.

Nevertheless, investors leaned defensively with the market at record highs and continued to bid up shares of the mega-cap companies for their dependable earnings growth. Notably, NVIDIA (NVDA) rose 8.5% after providing pleasing earnings results and guidance.

Winning Streak Snapped

The Stock Market's Five-Week Winning Streak Was Put To An End This Week, As Well As The S&P 500'S Eight-Session Winning Streak And The Nasdaq Composite's 11-Session Winning Streak. Both Declined 0.3% And 0.7%, Respectively, While The Dow Jones Industrial Average Fell 0.6% And The Russell 2000 Fell 1.0%.

The consumer discretionary (-3.2%) and energy (-1.7%) sectors were by far the weakest performers with 3.2% and 1.7% declines, respectively. The former was pressured by a 15% decline in Tesla (TSLA), as CEO Elon Musk started to sell shares in accordance with a Twitter poll that indicated he sell 10% of his stake. 

Five of the 11 S&P 500 sectors, however, closed higher. The materials sector was impressive with a 2.5% gain, although no other sector rose at least 0.7%.

The impetus for the setback at the index level was profit-taking interest and a sharp rise in Treasury yields, which were catalyzed by hawkish Fed expectations for next year following a hotter-than-expected Consumer Price Index for October.

Specifically, total CPI rose 0.9% m/m (Briefing.com consensus +0.6%) and was up 6.2% yr/yr -- the largest 12-month increase since November 1990. Core CPI, which excludes food and energy, rose 0.6% m/m (Briefing.com consensus +0.4%) and was up 4.6% yr/yr.

As of 4:05 p.m. ET Friday, the probability for a rate hike in June 2022 was 69.1%, versus 50.9% last week, according to the CME Fed Watch Tool. The probability for a second rate hike next November increased to 64.9% from 44.7% last week.

The 2-yr yield rose 12 basis points to 0.52%, and the 10-yr yield rose 13 basis points to 1.58%. The U.S. Dollar Index rose 0.8% to 95.09.

Walt Disney (DIS) and Rivian (RIVN) were two other story stocks. Disney shares dropped 8% following its earnings report. RIVN finished 66% above its IPO price, bringing the EV-maker's market capitalization over $110 billion.

SMALL-CAPS COME ALIVE IN RECORD-SETTING WEEK

Each Of The Major Indices Set Intraday And Closing Record Highs This Week, And None Rose More Than The Small-Cap Russell 2000 With Its 6.1% Gain. The Nasdaq Composite Rose 3.1%, The S&P 500 Rose 2.0%, And The Dow Jones Industrial Average Rose 1.4%.

The animal spirts were in full force, supported not only by a sentimental fear of missing out on further gains but also fundamental factors:

• Fed Chair Powell made it clear the central bank is in no hurry to raise rates after the FOMC announced plans to taper asset purchases by $15 billion starting this month.

• The October employment report was stronger than expected, featuring 531,000 additions to nonfarm payrolls (Briefing.com consensus 400,000) and a 4.6% unemployment rate (Briefing.com consensus 4.7%).

• Interest rates dropped noticeably amid tempered rate-hike/inflation expectations. Fed Chair Powell said inflation should be less of an issue by the second or third quarter of 2022.

• Pfizer (PFE) said its COVID-19 oral antiviral reduced the risk of hospitalization or death by 89% in interim data.

• Pleasing earnings news from a host of companies, including Qualcomm (QCOM), which catalyzed a 12% gain in NVIDIA (NVDA) in one day.

Nine of the 11 S&P 500 sectors ended the week with gains. The consumer discretionary (+5.0%) rose 5% to a first-place finish, followed by 3% gains in information technology (+3.3%) and materials (+3.2%). The health care (-0.7%) and financials (-0.6%) sectors were the two sectors that closed lower. 

Notably, Avis Budget (CAR) was up as much as 218% in 90 minutes in an epic short squeeze after the company beat earnings estimates. The stock eventually cut those gains in half, but the crazy move exemplified the intense spirit of this bull market. 

Recapping the moves in the Treasury market, the 2-yr yield dropped ten basis points to 0.39%, and the 10-yr yield dropped 11 basis points to 1.45%. 

WTI crude futures briefly retreated below $80.00 per barrel after OPEC+ agreed to maintain its current production schedule for December. Oil prices bounced back on Friday but still ended the week lower by 2.7% to $81.25/bbl. 

MARKET CLOSES OUT THE MONTH AT RECORD HIGHS

Each Of The Large-Cap Indices Set Intraday And Closing Record Highs This Week Amid Continued Strength In The Mega-Cap Stocks. The Nasdaq Composite Rose 2.7%, Almost Matching The 2.9% Gain In The Vanguard Mega Cap Growth ETF (MGK). The S&P 500 Rose 1.3%, While The Dow Jones Industrial Average (+0.4%) And Russell 2000 (+0.3%) Rose Modestly.

Seven of the 11 S&P 500 sectors closed higher, led by communication services (+2.0%) and information technology (+2.0%) with 2% gains. The financials (-0.9%), energy (-0.8%), industrials (-0.3%), and utilities (-0.5%) sectors closed lower.

It was a big week for earnings, which included approximately one-third of the S&P 500 components and reports from Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOG), and Facebook (FB).

Most companies exceeded EPS estimates, but commentary was littered with supply chain issues and higher costs. One key takeaway was that companies experienced robust demand, which provided them the opportunity to raise prices to offset inflationary pressures. Unfortunately, these supply chain issues are expected to persist in the fourth quarter.

These supply chain woes likely contributed to the underperformance of value stocks, evident by the 0.5% decline in the Russell 1000 Value Index this week. In addition, the Advance Q3 GDP report was weaker than expected, and Democrats continued to drag their feet on infrastructure after President Biden announced a framework for the $1.75 trillion budget reconciliation bill.

Back to the mega-caps, Microsoft and Alphabet were the earnings winners this week with 7% weekly gains. Tesla (TSLA), though, was the biggest winner with a 22.5% gain that was jumpstarted by an agreement to sell 100,000 vehicles to Hertz Global (HTZZ). TSLA reached a $1 trillion market capitalization.

Facebook made news not because of its earnings report but because it confirmed a name change to "Meta" and a ticker change to "MVRS," starting Dec. 1.

The Treasury market, meanwhile, was a bit of a mess throughout the week. The 2-yr yield finished two basis points higher at 0.49%, while the 10-yr yield dropped ten basis points to 1.56%.

The increase in the 2-yr yield reflected continued expectations for the Fed to hike rates sooner than forecasted due to inflation. In turn, fears that the economy could be further stymied by a policy mistake may have fueled the price action in longer-dated yields.

MARKET ABSORBS INFLATION PRESSURES & RALLIES AMID POSITIVE EARNINGS NEWS, ECON

The Stock Market Had A Great Second Half Of The Week, Bolstered By Better-Than-Expected Earnings Reports, Relatively Encouraging Economic Data, And Improving Technical Factors. The Nasdaq Composite (+2.2%) Led The Way With A 2.2% Gain, Followed By The S&P 500 (+1.8%), Dow Jones Industrial Average (+1.6%), And Russell 2000 (+1.5%) With Decent Gains. 

Ten of the 11 S&P 500 sectors finished the week in positive territory. The consumer discretionary (+3.6%), materials (+3.6%), and real estate (+3.5%) sectors each gained around 3.5%, while the communication services sector (-0.4%) was the lone holdout.

The start of the Q3 earnings-reporting season went well with most companies (predominately banks) exceeding expectations. In addition, there was a surprising 0.7% m/m increase in total retail sales for September (Briefing.com consensus -0.3%), and weekly initial claims (293,000) fell to their lowest level since the start of the pandemic.

The good news helped the market overlook persistent inflation pressures indicated in the Consumer Price Index and Producer Price Index reports for September, higher oil prices ($82.26/bbl, +2.86, +3.6%), and ongoing supply chain challenges highlighted by companies and reports.

More accurately, though, the stock market took its inflation cue from the Treasury market, which signaled a renewed tolerance for the peak-inflation narrative. This view stemmed from core CPI and core PPI coming in softer than expected on a month-over-month basis. The 10-yr yield decreased three basis points to 1.58%.

Technical factors helped, too. The S&P 500 closed above its 50-day moving average on Thursday, and the positive-minded price action carried over into Friday. This follow-through from buyers was viewed as a good indicator among traders.

Separately, the FOMC Minutes from the September meeting showed that asset purchases would be reduced on a monthly basis by $15 billion ($10 bln in Treasury securities and $5 bln in agency MBS) if begun later this year and lasting until the middle of 2022.

Value Stocks Lead Market Rebound Amid Some Relief on the Debt Ceiling

The S&P 500 Advanced 0.8% This Week, Overcoming A Tough Monday Session, As Investors Bought The Dip And Breathed A Sigh Of Relief That A Debt-Ceiling Agreement Was Reached In The Senate.

The Dow Jones Industrial Average outperformed with a 1.2% gain, while the Nasdaq Composite increased just 0.1% and the Russell 2000 decreased 0.4%.

Eight of the 11 S&P 500 sectors closed higher, led by energy (+5.0%) with a 5% gain and financials (+2.3%) with a 2% gain. These groups helped drive the outperformance of the Russell 1000 Value Index (+1.2%) versus the Russell 1000 Growth Index (+0.3%). Conversely, the real estate (-0.8%), health care (-0.3%), and communication services (-0.1%) sectors closed lower.

Among the many issues overhanging the market (infrastructure, supply chain disruptions, raw material shortages, and inflation, to name a few), lawmakers moved to make the debt ceiling an issue for another day. The Senate passed a bill Thursday to extend the debt ceiling by $480 billion until Dec. 3.

The news was the basis for a large chunk of the 3.3% gain in the S&P 500 from Wednesday's intraday low to Thursday's intraday high. The benchmark index, however, saw some resistance near the underside of its 50-day moving average (4438), and risk sentiment was challenged on Friday following the release of a mixed September employment report.

September nonfarm payrolls increased by only 194,000 (Briefing.com consensus 450,000), which led some to reasonably argue that the Fed could delay its taper announcement past November. Beneath the headline number, however, were figures that supported the case for tapering sooner rather than later.

Specifically, private sector payrolls increased by 317,000 (Briefing.com consensus 385,000); the unemployment rate was 4.8% (Briefing.com consensus 5.1%), versus 5.2% in August; and average hourly earnings increased by 0.6% (Briefing.com consensus 0.4%).

The latter reflected inflation pressures stemming from supply-related constraints. Rising oil prices and interest rates further reflected inflation concerns/expectations. WTI crude briefly topped $80 per barrel for the first time since 2014 while the 10-yr yield climbed 15 basis points to 1.60%.