Weekly Wrap

It was a good week for the stock market. In fact, it was the best week for the S&P 500 since the election, which is notable given that Donald J. Trump will be inaugurated Monday as the 47th President of the United States of America.

This week, however, wasn't so much about politics as it was about other factors, namely the market's perception of inflation trends and its excitement over the earnings results from many of the nation's largest financial institutions. Politics did play a part though. 

There was an exhale on the news that Israel and Hamas reached a ceasefire agreement; and there was some speculative energy related to the impending arrival of a new administration to the White House that is pushing deregulation and lower tax rates.

That push was reiterated by Treasury Secretary nominee Scott Bessent in his confirmation hearing on Thursday along with the view that the U.S. needs to get its fiscal house in order. On a related note, the Congressional Budget Office (CBO) issued a report on Friday in which it projected a $1.9 trillion budget deficit for fiscal 2025.

The stock market did not wallow in the CBO's report. Rather, it was still basking in the glow of the December PPI and CPI reports from earlier in the week that were better than feared, helping to temper some of the market's inflation angst. That applied to the Treasury market as well, which saw yields drop sharply in the wake of the CPI report, which featured a dip in the year-over-year rate for core-CPI to 3.2% from 3.3%.

The 2-yr note yield fell 13 basis points this week to 4.27% while the 10-yr note yield dropped 17 basis points to 4.61%.

The lower Treasury yields ignited a stock market rally that saw the Dow, Nasdaq, and S&P 500 log their biggest daily gains on Wednesday since the day after the election. The stock market was also enjoying a slate of earnings news that day from the likes of JPMorgan Chase (JPM), Goldman Sachs (GS), BlackRock (BLK), Wells Fargo (WFC), and Citigroup (C) that was much better than expected.

Those reports fueled a 6.1% gain for the financial sector in a week filled with big returns. The energy sector was also up 6.1%; the materials sector jumped 6.0%; the industrials sector increased 4.8%; the utilities sector added 4.3%; and the consumer discretionary sector rose 4.0%, making it a week that predominately had a cyclical charge to it.

It was also a week that saw value outperform growth, small caps outperform large caps (and mega caps), and the equal-weighted S&P 500 (+3.9%) outperform the market cap-weighted S&P 500 (+2.9%), which on Friday reclaimed a posture above its 50-day moving average.

• S&P Midcap 400: +4.5% for the week / +3.8% YTD
• Russell 2000: +4.0% for the week / +2.1% YTD
• S&P 500: +2.9% for the week / +2.0% YTD
• Dow Jones Industrial Average: +3.7% for the week / +2.2% YTD
• Nasdaq Composite: +2.4% for the week / +1.7% YTD

Monday:

The stock market started the week on a mixed note. The Nasdaq Composite (-0.4%) closed lower, clipped by losses in the mega cap space, while the S&P 500 (+0.2%), Russell 2000 (+0.2%), and Dow Jones Industrial Average (+0.9%) closed higher.

Buying picked up in the afternoon, but the overall vibe in the stock market was negative in the early going. The downside bias was related to rising market rates and ongoing concerns about inflation. The 10-yr yield rose another three basis points today to 4.80% and the 2-yr yield settled unchanged at 4.40%. The 30-yr bond yield settled just below 5.00%, up two basis points to 4.99%.

Rising oil prices ($78.99/bbl, +2.67, +3.6%) and the New York Fed's Survey of Consumer Expectations stoked the market's fears about higher inflation for longer. Expectations were unchanged at 3.0% at the one-year ahead horizon and increased to 3.0% from 2.6% at the three-year-ahead horizon. They declined to 2.7% from 2.9% at the five-year-ahead horizon.

There was no specific catalyst to account for the improvement in the stock market. Early on, market breadth favored decliners by a 3-to-2 margin at the NYSE and by a better than 2-to-1 margin at the Nasdaq. At the close, advancers led decliners by an 11-to-10 margin at the NYSE and decliners led advancers by a 4-to-3 margin at the Nasdaq.

Outsized moves in the equity market were reserved for individual names with specific news items. UnitedHealth (UNH 541.14, +20.45, +3.9%) jumped in response to news that the U.S. proposed a 4.3% increase to Medicare Advantage plan payments, a $21 billion boost to insurers for Medicare payments, according to Bloomberg.

Moderna (MRNA 35.15, -7.10, -16.8%) was one of the biggest individual losers after slashing its FY25 revenue outlook.

Bank stocks outperformed in front earnings reports this week from big names in the sector. The SPDR S&P Bank ETF (KBE) gained 1.2%.

There was no US economic data of note today.

Tuesday:

The stock market had a mixed session at the index level, but the vibe under the surface was positive. Market participants were reacting to the cooler-than-expected inflation data released at 8:30 ET, which garnered a muted response from Treasuries and helped the upside bias in equities. There was also some momentum in play after the stock market staged a turnaround yesterday thanks to buy-the-dip interest.

The December Producer Price Index (PPI) readings exceeded expectations, reflecting a welcome easing in inflationary pressures on a month-to-month basis. The year-over-year numbers were less market-friendly with PPI up 3.3% versus 3.0% in November, and core-PPI, which excludes food and energy, up 3.5%, unchanged from November. Treasuries still responded favorably, leading the 10-yr yield settled two basis points lower at 4.79% and the 2-yr yield settled four basis points lower at 4.36%.

The choppy moves in the major indices were related to volatility in the mega cap space. NVIDIA (NVDA 131.76, -1.47, -1.1%), Tesla (TSLA 396.36, -6.95, -1.7%), and Alphabet (GOOG 191.05, -1.24, -0.6%) traded lower with no specific news driving the movement while other names like Microsoft (MSFT 415.67, -1.52, -0.4%), Eli Lilly (LLY 744.91, -52.57, -6.6%), and Meta Platforms (META 594.25, -14.08, -2.3%) reacted negatively to headlines.

MSFT reportedly paused hiring in its US consulting unit as part of a cost-cutting plan, according to CNBC; LLY lowered Q4 revenue guidance; and META reacted to reports that TikTok US is not going to be sold after initial reporting suggested that may be the case.

Small cap stocks soared while mega cap languished, leading the Russell 2000 to jump 1.1% from yesterday's close. This move was helped out by strength in its regional bank components, which outperformed in front of earnings reports from bank stocks this week.

Strength in the bank space also led the SPDR S&P Bank ETF (KBE) to close 3.3% higher and the SPDR S&P Regional Banking ETF (KRE) to close 3.4%. The S&P 500 financial sector was among the top performers today, gaining 1.3%.

Reviewing today's economic data:

• December NFIB Small Business Optimism 105.1; Prior 101.7
• December PPI 0.2% (Briefing.com consensus 0.3%); Prior 0.4%, December Core PPI 0.0% (Briefing.com consensus 0.2%); Prior 0.2%
  • The key takeaway from the report is that the better-than-expected monthly readings have been clouded by the less inspiring year-over-year readings, as well as the understanding that inflation at the wholesale level moved in the wrong direction in 2024 (versus 2023) and remains elevated relative to the Fed's 2% inflation target.

Wednesday:

The stock market rallied following pleasing inflation data in the form of the December Consumer Price Index (CPI) report. The S&P 500 (+1.8%) traded above its 50-day moving average (5,957) at its session high before closing shy of that key technical level.

The CPI report reflected a drop in the year-over-year rate in core-CPI to 3.2% from 3.3%. The 10-yr yield, which is most sensitive to changes in inflation, settled 14 basis points lower at 4.65% and the 2-yr yield settled ten basis points lower at 4.26%. The 30-yr bond yield, which settled just below 5.00% yesterday, declined 11 basis points from yesterday to 4.88%.

Broad-based buying interest in the stock market was also supported by solid earnings results from influential names in the financial sector, along with short-covering activity that drove additional buying in the bond market, too.

JPMorgan Chase (JPM 252.35, +4.88, +2.0%) and Citigroup (C 78.27, +4.77, +6.5%) were among the top performing names in the financial space, reaching fresh 52-week highs after better-than-expected earnings.

The S&P 500 financial sector benefitted from the positive responses to earnings results, gaining 2.6% compared to yesterday's close. The consumer discretionary (+3.0%), communication services (+2.7%), and information technology (+2.2%) sectors were also top performers, reflecting rebound action in the mega cap space.

The defensive-oriented consumer staples (-0.1%) and health care (+0.2%) sectors were at the bottom of the lineup among the 11 sectors.

Reviewing today's economic data:

• Weekly MBA Mortgage Applications Index 33.3%; Prior -3.7%
• December CPI 0.4% (Briefing.com consensus 0.3%); Prior 0.3%, December Core CPI 0.2% (Briefing.com consensus 0.2%); Prior 0.3%
  • The key takeaway from the report for a market worried about inflation heating up again is that these results were better than feared which, at first blush, shrouded the reality that the consumer inflation rate is still running well above the Fed's 2% target (albeit a target tied to the PCE Price Index).
• January Empire State Manufacturing -12.6 (Briefing.com consensus -2.0); Prior was revised to 2.1 from 0.2

Thursday:

Today's trade was mixed following yesterday's CPI-induced surge. The Nasdaq Composite underperformed its peers, dropping 0.9%, while the Dow Jones Industrial Average (-0.2%) and S&P 500 (-0.2%) traded around their prior closing levels. The Russell 2000 eked out a 0.2% gain.

There was a big batch of economic data, earnings news, and headlines to digest today and most of them could've acted as support for the stock market. Retail sales and weekly jobless claims reflected ongoing strength in the economy and labor market, Treasury Secretary nominee Scott Bessent reiterated at his confirmation hearing that the U.S. must get its fiscal house in order while also pursuing pro-growth policies, and Fed Governor Waller (FOMC voter) said he believes that there could possibly be 3-4 rate cuts this year, depending on the data.

Treasury yields declined after Fed Governor Waller's remarks. The 10-yr yield settled five basis points lower at 4.61% and the 2-yr yield settled two basis points lower at 4.24%.

Equities still struggled, though, due to technical resistance after the S&P 500 could not maintain a posture above its 50-day moving average (5,962) and due to losses in influential names. Apple (AAPL 228.26, -9.61, -4.0%), NVIDIA (NVDA 133.57, -2.67, -2.0%), Tesla (TSLA 413.82, -14.40, -3.4%), Amazon.com (AMZN 220.66, -2.69, -1.2%), Meta Platforms (META 611.30, -5.82, -0.9%), and Microsoft (MSFT 424.58, -1.73, -0.4%) were among the standouts in that respect.

Some companies that reported earnings traded lower despite better-than-expected results. Bank of America (BAC 46.64, -0.46, -1.0%) and US Bancorp (USB 48.03, -2.87, -5.6%) were among them while Morgan Stanley (MS 135.81, +5.26, +4.0%) hit a fresh 52-week high in response to earnings.

Dow component UnitedHealth (UNH 510.59, -32.83, -6.0%) was another name that reported results, stumbling after reporting Q4 and year-end results that featured a higher medical care ratio.

Losses in some of the aforementioned names weighed down the S&P 500 information technology (-1.3%), communication services (-1.0%), and consumer discretionary (-0.9%) sectors while the remaining eight sectors registered gains ranging from 0.4% (health care) to 2.6% (utilities).

Reviewing today's economic data:

• December Retail Sales 0.4% (Briefing.com consensus 0.5%); Prior was revised to 0.8% from 0.7%, December Retail Sales ex-auto 0.4% (Briefing.com consensus 0.5%); Prior 0.2%
  • The key takeaway from the report is that retail sales, which are not adjusted for price changes, were more subdued than expected in December, suggesting consumers spent in a more considerate manner. Importantly, though, they remained inclined to spend.
• Weekly Initial Claims 217K (Briefing.com consensus 212K); Prior was revised to 203K from 201K, Weekly Continuing Claims 1.859 mln; Prior was revised to 1.877 mln from 1.867 mln
  • The key takeaway from the report is that there was nothing disruptive about it in terms of the market's understanding that the labor market, overall, continues to be in pretty good shape.
• January Philadelphia Fed Index 44.3 (Briefing.com consensus -6.0); Prior was revised to -10.9 from -16.4
  • The key takeaway from the report is that there was a marked increase in nearly every index component, including new orders (to 42.9 from -3.6) and prices paid (to 31.9 from 26.6), that is indicative of improved demand.
• December Export Prices 0.3%; Prior 0.0% December Export Prices ex-ag. 0.3%; Prior was revised to 0.0% from 0.1% December Import Prices 0.1%; Prior 0.1% December Import Prices ex-oil 0.1%; Prior was revised to 0.1% from 0.0%
  • The key takeaway from the report is that import and export prices are tracking in a more subdued manner that is helping to ease some of the market's inflation angst.
• November Business Inventories 0.1% (Briefing.com consensus 0.1%); Prior was revised to 0.0% from 0.1%
• January NAHB Housing Market Index 47 (Briefing.com consensus 45); Prior 46

Friday:

The stock market put its rally cap back on Friday, paced by mega-cap leadership, growth optimism, and a speculative buzz ahead of Monday's inauguration of Donald J. Trump as the 47th President of the United States of America.

That buzz was a catalyst for cryptocurrencies and crypto-related stocks, which advanced on a Bloomberg report that President Trump is planning an executive order to declare cryptocurrency a national policy priority. That report was met with other reports that suggested the incoming president might potentially announce a cascade of executive orders soon after taking office.

We heard from President-elect Trump today that he had a phone call with China's President, Xi Jinping, that was described as "a very good one" that touched on topics like trade, fentanyl, and TikTok. Coincidentally, the Supreme Court today upheld the TikTok ban that is slated to go into effect Sunday; however, the market remained inclined to think that President Trump will order a pause on that ban for 90 days.

Separately, there was some speculation that Elon Musk could purchase TikTok. That speculation helped drive Tesla (TSLA 426.50, +12.68, +3.1%), which was one of several mega-cap stocks that carried the market today. The Vanguard Mega-Cap Growth ETF (MGK) ended the day up 1.4% after being up as much as 1.8%.

The influence of the mega-cap stocks was evident in the consumer discretionary (+1.7%), information technology (+1.7%), and communication services (+1.1%) sectors, which outperformed the market. In fact, they were the only sectors that outperformed the S&P 500, which closed above its 50-day moving average (5,966).

Still, every S&P 500 sector was higher today with the exception of the real estate sector (-0.04%) and the health care sector (-0.7%). The latter was upended by a weak showing from the drug stocks, which were undercut by the Department of Health and Human Services announcing 15 additional drugs for Medicare's price negotiations, including Novo Nordisk's (NVO 78.71, -4.36, -5.3%) Ozempic and Wegovy.

Small-cap and mid-cap stocks finished the day higher but trailed the large-cap stocks, which were today's favored trades.

Elsewhere, Treasury yields were little changed from Thursday's settlement, but they failed to hold some overnight gains following the release of stronger-than-expected housing starts, building permits, and industrial production in December. Those reports followed on the heels of China posting better-than-expected retail sales, industrial production, and GDP data.

Reviewing today's economic data:

• Total housing starts increased 15.8% month-over-month in December to a seasonally adjusted annual rate of 1.499 million units (Briefing.com consensus 1.318 million). Total building permits were down 0.7% month-over-month to a seasonally adjusted annual rate of 1.483 million (Briefing.com consensus 1.454 million).
  • The key takeaway from the report is that there were gains in single-unit starts (+3.3%) and single-unit permits (+1.6%), which is encouraging for a housing market that needs new supply to compensate for the limited inventory in the existing home market.
• Total industrial production increased 0.9% month-over-month in December (Briefing.com consensus 0.3%) following an upwardly revised 0.2% increase (from -0.1%) in November. The capacity utilization rate jumped to 77.6% (Briefing.com consensus 77.0%) from an upwardly revised 77.0% (from 76.8%) in November. Total industrial production increased 0.5% yr/yr while the capacity utilization rate was 2.1 percentage points below its long-run average.
  • The key takeaway from the report is that industrial production showed some rebound verve after being depressed in recent months by the hurricanes and the Boeing strike.
• November Net LT Tic Flows $79.0 billion; prior revised to $159.1 billion from $152.3 billion