In another astounding session last Friday that ended higher after a sharply lower opening, the market ended the week with the S&P putting in its best week in two months as earnings reporting season gets underway and C.E.O.’s begin to show how well or poorly they are dealing with high inflation and a slowing economy.
The session was astounding because the various indices were sharply lower to start based on initial negative reactions to earnings from the large banks. For instance, the Dow was off by 275 points, the S&P was down by a large 36 points while the Nasdaq fell by 100.
But from those worst levels at around 10am, things began to improve as the large financial institutions went from negative to positive, and this upside turnaround applied to Dow component JPM in addition to C, BAC and WFC. So as a result of this upside reversal, the various indices pushed higher as the session wore on and as a result the Dow finished the day with a closing advance of 112 up to 34,302 led by CAT, which seems to make a new high every day, plus GS which reports today, in addition to the aforementioned JPM plus MCD.
The S&P gained 16 to end at 3999 as it made a 52 point intraday upside reversal with help from some of the large beaten-down former technology leaders such as AMZN, NFLX and NVDA which also got the Nasdaq into positive territory as well with a 78 point closing advance up to 11,079.
The Russell 2000 Index of small stocks also continued to gain with an 11 point final push up to 1887 and how about the VIX, which broke down further to end at 18.35 which is the lowest close in months. If the market is going to continue moving higher, the next downside support level would now appear to be at the 16 level that occurred in late 2021 before the negative market this past year. On the other hand, it could indicate a near-term overbought situation which could move the VIX back up.
This year has begun with optimism that cooling inflation trends could get the Federal Reserve to ease off soon on its sharp hikes to interest rates. Such increases can drive down inflation, but they do so by slowing the economy and therefore risk causing a recession that can hurt equity prices.
Several big banks said a recession is likely on the horizon for the U.S. economy, but it will probably be mild, and that consumers remain healthy. That has added to hopes that the Fed could achieve its goal of taming inflation without inflicting too much damage on the economy.
As opposed to the banks that finally did well on Friday were DAL, which declined after reporting stronger results for the end of 2022 than expected, but its forecast for profit this quarter fell short of analysts’ expectations. In addition, Dow component UNH remained lower after its report.
Also, TSLA declined after slashing prices dramatically on several versions of its electric vehicles. The move could drum up more sales but could also cut into its overall revenue.
One big worry is that S&P companies may report a drop in profits for the fourth quarter from a year earlier. It would be the first such decline since 2020, when the pandemic was crushing the economy. Perhaps more importantly, the fear is that weakness could be just the beginning, so the important thing to watch going forward it the guidance that companies give going forward.
Treasury yields rose with the 10-year Note up to 3.50% from 3.45% late Thursday while the 2-year gained up to 4.21% from 4.15%.
The mid-January U. of Michigan Consumer Sentiment Survey showed that consumers decreased their expectations for inflation in the coming year, down to 4%, which is the lowest reading since April 2021. Longer-run expectations for inflation, meanwhile, remain stuck in the narrow range of 2.9% to 3.1% that they have been in for 17 of the last 18 months. The overall number for the report was a gain up to 64.6.
The fourth-quarter earnings parade continues this week with the following: Dow component GS lower in addition to UAL and MS higher; Wednesday – SCHW, JBHT, KMI and PNC; Thursday – FAST, NFLX, KEY, FITB, NTRS, MTB and Dow component PG; Friday – SLB and SST.
Economic reports will have: Wednesday – December retail sales, December P.P.I, December industrial production and capacity utilization, Fed Beige Book; Thursday – weekly jobless claims and December housing starts; Friday – December existing home sales.
Donald M. Selkin
Chief Market Strategist
Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.