Weekly Wrap

The stock market logged sharp declines. The week started in better form, but equities hit a wall Wednesday after the Fed implied with its words and guidance that further rate cuts can wait until there is more progress on inflation. Wednesday's session left the S&P 500 178 points lower, the Nasdaq Composite was 3.5% lower, and the Dow Jones Industrial Average closed more than 1,100 points lower, logging its tenth consecutive decline.

This followed the FOMC's decision to cut rates 25 basis points to 4.25-4.50%, as expected. It was not a unanimous vote. Cleveland Fed President Hammack dissented in favor of leaving the target range for the fed funds rate unchanged at 4.50-4.75%.

The Summary of Economic Projections showed that the median estimate for PCE inflation and core PCE inflation was increased for 2024 and 2025, and the estimate for unemployment was decreased for 2024 and 2025.

Additionally, the median estimate for the 2025 fed funds rate was bumped up to 3.9% from 3.4%, signaling an outlook for only 50-basis points of easing in 2025 versus 100-basis points when the September projection was released.

Rising market rates put added pressure on stocks. The 10-yr yield jumped 12 basis points to 4.52% and the 2-yr yield settled seven basis points higher.  

Small and mid cap stocks underperformed their larger peers, leading the Russell 2000 to sink 4.5% since last Friday and the S&P Mid Cap 400 to close 4.7% lower than last week. The S&P 500 declined 2.0%, the Nasdaq Composite fell 1.8%, and the Dow Jones Industrial Average logged a 2.3% loss.

Mega cap stocks held up better than the "rest" of the market, but still garnered selling interest. The equal-weighted S&P 500 fell 3.0% and the Vanguard Mega Cap Growth ETF (MGK) registered a 1.4% loss.

The S&P 500 energy sector struggled more than other sector, falling 5.6%. The rate-sensitive real estate sector was the next worst performer, dropping 5.0%. The only sector that settled less than 1.0% lower was information technology, which declined 0.7%.

The market staged a rebound on Friday following the Personal Income and Spending Report for November, which didn't show any improvement in inflation, but importantly, the data was better than some had feared. The PCE Price Index rose to 2.4% on a year-over-year basis versus 2.3% in October, and core PCE was 2.8%, which was unchanged from October. Consensus estimates however, pegged them coming in at 2.5% and 2.9%, respectively.

The S&P 500 (+0.4%) and Nasdaq Composite (+1.5%) closed off session highs, while the Dow Jones Industrial Average, which was trading higher initially, settled 0.3% lower. Market participants took advantage of weakness following last week's pullback in the major indices. The "buy-the-dip" mentality also coincided with a seasonally strong period for equities (the second half of December).

Rising interest rates, which surged last week following hotter-than-expected inflation data, dampened initial buying interest.

Despite the pressure from rising rates, some individual stocks traded sharply higher, providing integral support to the S&P 500 and Nasdaq.

Reviewing Monday's economic data:

• December NY Fed Empire State Manufacturing 0.2 (Briefing.com consensus 10.0); Prior 31.2
• December S&P Global US Manufacturing PMI - Prelim 48.3; Prior 49.7
• December S&P Global US Services PMI - Prelim 58.5; Prior 56.1

Tuesday:

The stock market closed lower at the index level. The Russell 2000 underperformed, dropping 1.2%, while the S&P 500 (-0.4%), Nasdaq Composite (-0.3%), and Dow Jones Industrial Average (-0.6%). Many names participated in a broad retreat, leading the equal-weighted S&P 500 to decline 0.8%.

Reviewing Tuesday's economic data:

• November Retail Sales 0.7% (Briefing.com consensus 0.5%); Prior was revised to 0.5% from 0.4%, November Retail Sales ex-auto 0.2% (Briefing.com consensus 0.4%); Prior was revised to 0.2% from 0.1%
  • The key takeaway from the report is in the ex-auto number, which was up modestly and a reflection of some softening spending activity given that it is not adjusted for price changes. In other words, the overall sales increase, excluding autos, appears to be more price driven than volume driven.
• November Industrial Production -0.1% (Briefing.com consensus 0.3%); Prior was revised to -0.4% from -0.3%, November Capacity Utilization 76.8% (Briefing.com consensus 77.3%); Prior was revised to 77.0% from 77.1%
  • The key takeaway from the report is that industrial production didn't show any strong rebound from the prior two months that were adversely impacted by the hurricanes. There was some modest strength in manufacturing output, but total industrial production is still lagging.
• October Business Inventories 0.1% (Briefing.com consensus 0.2%); Prior was revised to 0.0% from 0.1%
• December NAHB Housing Market Index 46 (Briefing.com consensus 47); Prior 46

Wednesday: 

Wednesday's session was disappointing for stocks. The S&P 500 slid 178 points, the Nasdaq Composite was 3.5% lower, and the Dow Jones Industrial Average closed more than 1,100 points lower, logging its tenth consecutive decline.

The major indices traded slightly higher until selling picked up at 2:00 ET as investors grappled with the likelihood that the Fed will be pausing its rate-cut campaign and that rates are going to remain higher for longer.

The bond market also reacted strongly to the notion that rates may remain elevated if inflation remains sticky above the Fed's 2.0% target while the labor market remains strong.

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications Index -0.7%; Prior 5.4%
• November Housing Starts 1.289 mln (Briefing.com consensus 1.347 mln); Prior was revised to 1.312 mln from 1.311 mln, November Building Permits 1.505 mln (Briefing.com consensus 1.430 mln); Prior was revised to 1.419 mln from 1.416 mln
  • The key takeaway from the report is that single-unit starts were up 6.4%, led by a bounce back in the South (+18.3%) following the hurricanes; however, single-unit permits, a leading indicator, were up just 0.1%.
• Q3 Current Account Balance -$310.9 bln (Briefing.com consensus -$283.0 bln); Prior was revised to -$275.0 bln from -$266.8 bln

Thursday:

The stock market started the session in rebound-mode after the major indices registered sharp declines yesterday in response to the FOMC's decision and acknowledgement that committee members expect rates to stay higher for longer. Market breadth was positive and gains in the mega cap space provided an added boost to the broader market. Things deteriorated as the session progressed, though.

Disappointing earnings results and/or guidance from Micron (MU) and Lennar Corp. (LEN) contributed to the negative vibe in the session.

Reviewing Thursday's economic data:

• Weekly Initial Claims 220K (Briefing.com consensus 237K); Prior 242K, Weekly Continuing Claims 1.874 mln; Prior was revised to 1879 mln from 1.886 mln
  • The key takeaway from the report is the low level of initial jobless claims, which connotes a reluctance on the part of employers to layoff staff.
• Q3 GDP - Third Estimate 3.1% (Briefing.com consensus 2.8%); Prior 2.8%, Q3 GDP Deflator - Third Estimate 1.9% (Briefing.com consensus 1.9%); Prior 1.9%
  • The key takeaway from the report is that it is dated (we're less than two weeks away from the end of the fourth quarter); however, the report speaks to the enduring -- and surprising -- strength of the U.S. economy despite the Fed raising rates 12 times between March 2022 and July 2023.
• December Philadelphia Fed Index -16.4 (Briefing.com consensus 3.0); Prior -5.5
• November Existing Home Sales 4.15 mln (Briefing.com consensus 4.10 mln); Prior 3.96 mln
  • The key takeaway from the report is that it shows how lower mortgage rates can move the needle on existing home sales given the pent-up demand; however, with mortgage rates having risen noticeably again, expectations for continuing strength in existing home sales will be tempered by affordability concerns.
• November Leading Indicators 0.3% (Briefing.com consensus -0.1%); Prior -0.4%

Friday:

The stock market bounced back today after sharp declines this week. The major indices all settled at least 1.0% higher on above-average volume on this quarterly options/futures expiration day.

Friday's positive price action was fueled by a drop in market rates, along with comments from Chicago Fed President Goolsbee (2025 FOMC voter) indicating he thinks rates "will come down a fair bit more."

Bonds and equities responded favorably to the release of the Personal Income and Spending Report for November.

Reviewing Friday's economic data:

• Personal income increased 0.3% month-over-month in November (Briefing.com consensus 0.4%) following an upwardly revised 0.7% (from 0.6%) in October. Personal spending rose 0.4% month-over-month (Briefing.com consensus 0.5%) following a downwardly revised 0.3% increase (from 0.4%) in October. The PCE Price Index was up 0.1% month-over-month (Briefing.com consensus 0.2%); however, it ticked up to 2.4% year-over-year from 2.3% in October. The core-PCE Price Index, which excludes food and energy, also increased 0.1% month-over-month and held steady at 2.8% year-over-year.
  • The key takeaway from the report is that there wasn't any improvement in the year-over-year readings for PCE and core-PCE inflation.
• The final University of Michigan Index of Consumer Sentiment for December held steady at 74.0 (Briefing.com consensus 74.2) from the preliminary reading. In the same period a year ago, the index stood at 69.7.
  • The key takeaway from the report is the understanding that consumers are expecting future price increases for large purchases, which is driving a pickup in current buying conditions.