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Powell & Fed friendly, jobs report not so much — Week of November 6, 2023

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Wall Street needed to cover shorts, now lets get to work on a real rally

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index 5.88 15.03 19.11 10.66 11.74 4,358.34
Dow Jones Industrial Average 5.07 4.53 8.75 9.61 8.47 34,061.32
Russell 2000 Small Cap 7.59 1.19 0.45 4.25 3.97 1,760.71
NASDAQ Composite 6.62 29.65 31.49 7.35 13.89 13,478.28
MSCI Europe, Australasia & Far East 3.14 6.40 19.86 6.05 5.07 2,006.05
MSCI Emerging Markets 1.19 -0.18 11.40 -3.30 1.43 930.62
Barclays U.S. Aggregate Bond Index 1.29 -1.21 2.28 -5.06 0.32 2,023.84
Merrill Lynch Intermediate Municipal 0.80 -0.93 3.00 -1.69 1.45 296.02

As of market close November 3, 2023. Returns in percent.

Investment Insights

 — Steve Orr 

Snap back

Can we cram half of a year’s worth of returns into a week? Traders certainly tried last week. Our charts reminded us of January’s 10.5% run by the NASDAQ. A 5% rally in one week is a pretty rare event. Going back to monochrome monitor days in 1985, the NASDAQ has posted 32 weeks of 5% or better returns, or 2.9% of the time. The slightly less volatile S&P 500 has risen that much or more only 2% of the time. Bonds also had a stellar week, with longer dated maturities rising between 2% and 3%.

Why the sudden turn after 12 weeks of grinding lower into correction territory? There is never one single reason. The news channels focus on the fundamentals. We find that weighting the fundamentals with the technical backdrop gives a better picture of the markets. The fundamental picture this fall starts with central banks and their raising of interest rates to fight inflation. Whether rates are the correct tool, we will leave aside for the moment.

The Fed has not raised rates since its July meeting. FOMC members have indicated that they can be patient and see if more increases are needed. Chairman Powell repeated that line after Wednesday’s meeting. In our post-FOMC note to clients, we noted that the committee had added the word “financial” in reference to economic conditions. We believe that reference acknowledges 8% mortgages and double-digit borrowing rates for small businesses. Both levels are new to a lot of the population. If job growth continues to slide, then we think the Fed holds at these rate levels and is done raising rates.

Here are three more headwinds: inflation is not going away anytime soon. Weaker job growth and ISM manufacturing surveys in October suggest the economy is finally weakening. Earnings growth is just okay. Geopolitical risk is the highest it’s been in recent memory. Perhaps the Most Anticipated Recession Ever is finally leaving the stable. None of those help earnings in coming quarters rise. 

Trending higher 

The October job report is just what all markets wanted. Here’s the thinking: If job growth is slowing just a bit, then a “soft landing” means that the Fed can sit tight with no more hikes. Fewer jobs mean less pressure on wage increases, and then inflation will come down. Then earnings can catch up to higher rates and stocks can rally. That is the line of thinking. We would suggest the times that has happened are on par with the percentage of time the NASDAQ has rallied more that 5% in a week.

October non-farm payrolls, the business survey, registered a net gain of 150,000 jobs. Most were in education and healthcare. The prior two months were revised lower. Eight of the last 9 months’ readings have been revised lower. The household survey showed unemployment rose 0.1% to 3.9%. Remember, the Fed last year stated that unemployment needed to rise to around 4.5% in order to slow wage inflation. Since the low was 3.4% earlier this year, we are almost halfway there. Fewer jobs is not something to celebrate. 

So, what’s up?

Sentiment is a short-term influence on market direction. Markets like certainty, and after Powell’s speech, markets want to believe that the Fed is done raising rates. Stopping the pain of future rate increases is the first step to coping with higher rates. The prospect of higher rates and a Fed only focused on fighting inflation helped push bond prices down and yields higher over the last 12 weeks. Both weighed on stocks and momentum traders shorted both stocks and bonds.

Markets were nervous enough last week that traders were relieved the Treasury would not issue quite as much long-term debt as feared. The quarterly refunding announcement was a big jump anyway. Prior quarters were in the $80 to $100 billion range of new debt. Wednesday’s announcement of $112 billion was below the expected $114 billion. In 30 years of trading and managing money, we cannot remember stock traders caring about the refunding announcement. Clearly traders were looking for any reason to sell. When “good” news hit, it was time to cover shorts. Bonds rallied that morning after the refunding news, and then stocks followed suit right through Powell’s press conference.

Earnings from four of the tech “Magnificent 7” — Alphabet, Meta, Amazon and Microsoft —showed strong growth last quarter. Apple disappointed with lower sales for the fourth quarter in a row, but most chalked that up to China. Earnings improving above forecasts further helped market tone. A lot of the buying looked like short covering to us.

Technically, markets still have ground to cover. Advancing volume did beat declining stock volume the last three days of the week. A breadth thrust of 9 to 1 up volume would be an encouraging sign of a trend change. Friday’s +0.9% return in the S&P 500 was an 5 to 1 up over down volume day. Thursday’s was 8 to 1, so as in horseshoes, we are close. Breadth thrusts have a good track record of signaling higher stock markets six months to a year out. Another encouraging sign was the Dow Industrials, S&P and NASDAQ all sprinting above their 50-day moving average.

One technical hurdle remains for the S&P 500. We mentioned a couple of weeks back the air pocket at 4,400. Breaking and staying above that level will give the index a chance at regaining its first half of 2023 momentum. Earnings need to stay solid and rates in the mid-to-high four percent area where they finished on Friday.

Seasonal strength should be kicking in, if markets can navigate the headwinds. November ranks number one in monthly returns for the S&P 500 and number two for the Dow Industrials and NASDAQ. Pre-election year returns average one half to one percent gains. We blew past that average last week. History does suggest that when presidents are up for re-election over the last sixty years, the S&P 500 has positive returns during the election year.

Wrap-Up

In last week’s note we mentioned that a small bounce was possible. A 5% increase is not a small bounce, and we will not look a gift bull in the mouth. Until 4,400 is broken to the upside, we put the rally in the doubt column.

Long-term bonds have fallen a quarter of a percent or more five times this year, only to see rates drift higher a month later. Is this four-tenths of a percent drop the start of lower rates? The bond market wants to say yes, and they want the Fed to cut rates. We think there is a high probability that the Fed stands pat and lets rates sit about where they are today through much of 2024.


Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on X here

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