Following its strong showing on Friday, the market decided that it liked the upside once again and as a result, things began higher yesterday and then accelerated into the close with the major averages ending near their best levels of the session.
The Dow finished with a closing gain of 254 up to 33,129 led by advances in CRM, AAPL which has gotten hot lately, BA, GS which bounced back from its awful showing last week and CAT.
And as usual on days such as this, the S&P did better with a 47 point gain up to 4020 as it got help from the large technology stocks once again with AAPL, MSFT, NFLX, NVDA and TSLA leading the upside charge. For the second day in a row, the Nasdaq helped the better showing with a strong 223 point gain up to 11,354 with ADM chipping in as well and this index is leading the upside this year with an 8% 2023 advance after capturing the booby prize last year with a 31% decline.
The Russell 2000 Index of small stocks did well again with a 23 point gain up to 1890 while the VIX continued to drift lower down to 19.81.
Markets have been churning for weeks with sharp swings in both directions. On one hand, they have benefited from hopes that the nation’s high inflation will continue to cool and get the Federal Reserve to loosen up on its series of interest rate hikes. On the other hand, things have also come down on worries about a possible recession because of rate hikes already pushed through by the Fed.
Monday’s gains follow a strong Friday, when stocks rallied on comments from a Fed official seen as a signal that the central bank may raise rates by just 0.25 percentage points next week. That would be a downshift from last month’s 0.50 point increase and from four straight earlier hikes of 0.75 points.
The betting now is that the Fed raises by 25 basis points next week after already pushing the federal funds rate up to a range of 4.25% to 4.5% from virtually zero early last year.
The bigger question is how much further the Fed goes from there, and how long it will wait before it cuts interest rates. Investors are predicting that some rate cuts will take place in the second half of the year despite the central bank being adamant that it plans on holding rates high at least until 2024.
The yield on the two-year Note rose to 4.22% from 4.18% late Friday while the 10-year got up to 3.52% from 3.48%.
This year’s rally so far, with the S&P up more than 4% in January already, is largely a result of how deeply pessimistic investors had become late last year, as most of the inflation data is improving more than expected, which is opening the door for the Fed to take its foot off the extreme upside pedal.
More recently, concerns have also been rising on Wall Street about the strength of profits at companies because of the slowing economy and higher expenses. That is key because profits are one of the main levers that determine stock prices.
BKR, which provides services and equipment at oil fields, fell in choppy trading after reporting weaker profit and revenue for its latest quarter than expected, despite the strong orders and other encouraging signals in the report.
The earnings calendar this week is the busiest of the year with some major reports coming out in the next few days (see below).
Some big tech-oriented companies have already been announcing layoffs to cut expenses after acknowledging they misread the boom coming out of the pandemic and grew too quickly as SPOT gained after saying that it will cut 6% of its workforce.
After soaring through the pandemic thanks to super-low interest rates and a surge in demand from suddenly homebound customers, they have been struggling over the last year as the Fed has been sharply raising rates.
More recently, though, the combination of moderating inflation, easing rate hikes and steady job growth is making technology stocks and other high-valuation, growth-oriented companies more attractive as seen by the fact that the Nasdaq is the leading gainer so far this year.
And the value-type, consumer staples stocks have been lagging this year, with such former leaders such as JNJ, PG, PEP and so on not doing well recently.
Meanwhile, another partisan battle in Washington about the nation’s ability to borrow may add pressure on markets. Investors have seen this argument many times already, but if the two parties can’t agree to allow the U.S. government to borrow more, economists say it could create chaos in markets and cause a recession on its own.
This week sees the largest number of S&P companies reporting earnings for the fourth-quarter so we will just list them day by day: yesterday: BKR and SYF lower; today – Dow components 3M, JNJ lower and VZ higher in addition to COF, DHI, GE, LMT, RTX and UNP lower; tonight – Dow component MSFT and TXN. The rest of the week will be highlighted by GOOG, AAPL and TSLA, among hundreds of others.
Economic reports will have: today – December L.E.I. fell by 1%; Thursday – weekly jobless claims, December durable goods orders, December new home sales, first estimate of 4Q G.D.P.; Friday – December personal income and spending, final U. of Michigan January Consumer Sentiment Survey.
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.