I think the market moves higher before it moves lower: Pelletier
Wall Street kicked off the week with small moves in stocks, bonds and the dollar ahead of inflation figures that will help define the scope and timing of Federal Reserve rate cuts.
Less than 24 hours before the consumer price index, the S&P 500 wavered. While the data is expected to underscore further disinflation, traders remained unwilling to commit to big bets. That sense of caution also prevailed after five straight weeks of gains that drove equities above overbought levels, triggering some calls for at least consolidation.
“Keeping the age-old adage in mind that ‘trees don’t grow to the sky,’ we think it’s important to keep the party hats in the box for now,” said John Stoltzfus at Oppenheimer Asset Management. “We remain positive on stocks, view bonds as complementary to stocks for prudent diversification and look for a further broadening of the equity rally which emerged from the lows of late October.”
The S&P 500 lost steam after approaching 5,050. The Nasdaq 100 underperformed, led by declines in Microsoft Corp., Apple Inc. and Tesla Inc. Chip designer Arm Holdings Plc soared 29 per cent. Nvidia Corp. briefly overtook Amazon.com Inc. in market value. Treasury 10-year yields were little changed at 4.17 per cent. Bitcoin hit US$50,000.
“Most people will be fixated on this week’s inflation numbers, but there’s also a potential tug-of-war between how extended the current market rally may be versus the buzz surrounding the S&P 500 topping 5,000,” said Chris Larkin at E*Trade from Morgan Stanley. “While it’s true the S&P has often pushed higher after crossing ‘round-number’ thresholds like this one, it hasn’t always done it after the type of rally that has unfolded since late October.”
The S&P 500 is approaching a technical roadblock after eclipsing 5,000 for the first time — triggering a contrarian sell signal for stocks on Friday, according to Piper Sandler’s Craig Johnson.
“The current state of the equity market can be summed up by the 1981 hit from 38 Special: “Hold on loosely, but don’t let go’,” Johnson wrote in a note to clients. “To be clear, we are not bearish on the stock market. However, as ‘bad breadth’ lingers, the market is ripe for a healthy correction, likely in the range of 5 per cent to 10 per cent.”
The gauge’s quick journey to 5,000 has already left the consensus Wall Street target for 2024 tracked by Bloomberg — 4,819.40 as of Friday — in the dust.
Because of the old adage that “large round numbers act like rusty doors and require several attempts before finally swinging open,” investors now wonder if it is time to take some profits, according to Sam Stovall at CFRA.
If history is any guide, while short-term digestions of gains have indeed occurred, they have been fairly short in duration, he noted.
When looking at the S&P 500’s cumulative return in the 3-, 6-, and 12-months after crossing above the 100, 500, 1,000, 2,000, 3,000, and 4,000 levels, the gauge posted average price gains of 4.7 per cent, 9.8 per cent, and 12.3 per cent — and rose in price during 83 per cent of all periodic observations, Stovall said.
“This run to 5,000 has been supported by the fundamentals, with a soft landing looking increasingly likely and earnings season nicely exceeding expectations after a messy start,” said Jeffrey Buchbinder at LPL Financial. While the current valuation seems high, “it’s reasonable if the US economy avoids recession and earnings grow double-digits this year — which is not out of the question.”
The S&P 500 is currently trading around 20 times forward earnings — a level it has only hit in two other periods over the last 25 years: the dot-com bubble and the post-pandemic bull market, said Nicholas Colas at DataTrek Research.
“Valuations get to these levels when investors have high confidence in three factors: monetary/fiscal policy, the US/global banking system, and strong corporate earnings,” Colas added. “Even with 2022’s bear market, investors feel that the future is highly predictable. It will likely take an exogenous shock to change their minds.”
To Rob Swanke at Commonwealth Financial Network, some caution is warranted at the current valuation levels.
“I wouldn’t say we’re in bubble territory, but the market is pricing closer to perfection now and companies will have to continue to hit high earnings targets in 2024, something they didn’t have to do in 2023,” he added.
Last week’s news and data reinforced the four drivers of this bull market: Fed rate cuts by May, solid economic growth, continued disinflation and strong earnings, according to Tom Essaye at the Sevens Report.
“It’s important to acknowledge that this rally has been driven by actual good news and bullish expectations being reinforced by actual data,” Essaye said. “At the same time, the risks that kept investors worried in October (and even throughout 2023) haven’t been vanquished — they simply haven’t shown up yet.”
The annual CPI is forecast to have dropped to 2.9 per cent in January from 3.4 per cent the prior month, according to consensus estimates of economists surveyed by Bloomberg. That would be the first reading below 3 per cent since March 2021.
A survey conducted by 22V Research showed 51 per cent of investors polled think the market reaction to CPI on Tuesday will be “risk-on” — and only 19 per cent said “risk-off”.
US consumer expectations for inflation over the medium term fell to the lowest level since at least 2013, a Fed Bank New York survey showed Monday. Fed Governor Michelle Bowman reiterated the central bank’s benchmark lending rate is in a good place to keep downward pressure on inflation, and she doesn’t see a need to ease policy soon. Fed Bank of Richmond President Thomas Barkin said it’s premature to believe inflation pressures are over.
Traders started pricing in that the Fed will carry out just four — or five at the most — quarter-point rate cuts in 2024, only slightly more than the three penciled in by policymakers. That’s a sharp shift from the end of last year, when futures traders were wagering on seven such moves.
“It’s important not to lose sight of the big picture, which is that continued disinflation should allow the central bank to start easing this year,” said Mark Haefele at UBS Global Wealth Management. “This is a significant change in the investment landscape, so we think it’s less important whether the Fed cuts three, four, or five times this year.”
Even if the Fed doesn’t scale back interest rates, the S&P 500 can still extend its climb this year, according to Bank of America Corp.’s Savita Subramanian.
“Recall that our constructive view on stocks is not because of what the Fed will do, but what the Fed has already done,” she added, referring to central bank taming inflation without a recession.
The Federal Reserve slapped Citigroup Inc. with a series of demands to change the way it measures the risk of its trading partners, according to a Reuters report, the latest blow to Chief Executive Officer Jane Fraser’s turnaround effort.
Diamondback Energy Inc. agreed to buy fellow Permian Basin driller Endeavor Energy Resources LP in a $26 billion deal that’ll create the largest explorer focused exclusively on the western hemisphere’s busiest oil field.
Gilead Sciences Inc. agreed to purchase CymaBay Therapeutics Inc., a developer of an experimental liver disease drug, for $4.3 billion in equity value.
Hewlett Packard Enterprise Co. is seeking as much as US$4 billion from Autonomy Corp.’s former bosses following a London judge’s finding that they fraudulently boosted the value of the company before its sale.
Key Events this Week:
- Germany ZEW survey expectations, Tuesday
- US CPI, Tuesday
- Eurozone industrial production, GDP, Wednesday
- BOE Governor Andrew Bailey testifies to House of Lords economic affairs panel, Wednesday
- Chicago Fed President Austan Goolsbee speaks, Wednesday
- Fed Vice Chair for Supervision Michael Barr speaks, Wednesday
- Japan GDP, industrial production, Thursday
- US Empire manufacturing, initial jobless claims, industrial production, retail sales, business inventories, Thursday
- ECB President Christine Lagarde speaks, Thursday
- Atlanta Fed President Raphael Bostic speaks, Thursday
- Fed Governor Christopher Waller speaks, Thursday
- ECB chief economist Philip Lane speaks, Thursday
- US housing starts, PPI, University of Michigan consumer sentiment, Friday
- San Francisco Fed President Mary Daly speaks, Friday
- Fed Vice Chair for Supervision Michael Barr speaks, Friday
- ECB executive board member Isabel Schnabel speaks, Friday
Some of the main moves in markets:
- The S&P 500 was little changed as of 4 p.m. New York time
- The Nasdaq 100 fell 0.4 per cent
- The Dow Jones Industrial Average rose 0.3 per cent
- The MSCI World index was little changed
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0774
- The British pound was unchanged at $1.2628
- The Japanese yen was little changed at 149.34 per dollar
- Bitcoin rose 4.2 per cent to $50,156.96
- Ether rose 5.6 per cent to $2,643.7
- The yield on 10-year Treasuries was little changed at 4.17 per cent
- Germany’s 10-year yield declined two basis points to 2.36 per cent
- Britain’s 10-year yield declined three basis points to 4.06 per cent
- West Texas Intermediate crude rose 0.2 per cent to $77.03 a barrel
- Spot gold fell 0.2 per cent to $2,020.19 an ounce
- This story was produced with the assistance of Bloomberg Automation.