Closing Market Update Dow Prolongs Record Run Ahead of Inflation Data
February 12, 2024 Schwab Center for Financial Research
Major indexes fade from early gains as investors brace for heavy earnings lineup and key January inflation reports.
(Monday market close) The S&P 500® index (SPX) faded from an initial climb to an all-time high Monday, while the Dow Jones Industrial Average® (DJI) extended its record climb as investors settled in for one of the heaviest earnings weeks of the season and await Consumer Price Index (CPI) and Retail Sales reports that will shape expectations for the path of interest rates.
After last week's relatively light economic calendar, investors face Tuesday's CPI report from the Labor Department, followed by January updates on Retail Sales and the Producer Price Index (PPI) on Thursday and Friday, respectively. Several big earnings are also ahead, including Dow member Coca-Cola (KO) on Tuesday.
Monday's late weakness in the S&P 500 and the Nasdaq Composite® (COMP) may have reflected some profit-taking in the wake of last week's record run-up, possibly fueled by indication many stocks, particularly in technology, are overbought and due for a setback, according to Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
"The 'melt-up' mode in the S&P 500 index has continued, with much of the heavy lifting done by the technology sector," Peterson said. "However, although the bulls have the momentum, stocks are technically overbought, especially within the AI and semiconductor space. So, it shouldn't be a surprise if we get some mean-reversion profit-taking at some point over the next two weeks."
Here's where the major benchmarks ended:
- The S&P 500 index fell 4.77 points (0.1%) to 5,021.84; the Dow Jones Industrial Average gained 125.69 points (0.3%) to 38,797.38; the Nasdaq Composite lost 48.12 points (0.3%) to 15,942.55.
- The 10-year Treasury note yield (TNX) dropped more than 1 basis point to 4.173%.
- The Cboe Volatility Index® (VIX) rose 1.00 to 13.93.
Despite the mixed performance of large-cap stock indexes, several other market sectors got off to a strong start this week. Banking and retail were among the strongest performers, and the small-cap Russell 2000® Index (RUT) surged 1.8% to end at its highest level since late December.
Tech shares erased early gains, with the Philadelphia Semiconductor Index (SOX) fading to a 0.2% loss after earlier rising to a record intraday high.
Peterson noted shares of many semiconductor companies are well into technically overbought territory, which often can lead to sharp pullbacks, though the timing of such a move is difficult to pinpoint. He cited unusually elevated Relative Strength Index (RSI) readings, at 90-plus, for two AI darlings: Arm Holdings (ARM) and Super Micro Computer (SMCI).
Stocks on the move
The following companies had stock price moves driven by analyst ratings, quarterly results, or other news:
- Big Lots (BIG) sank 28% after Loop Capital (LOOP) downgraded the discount retailer to "sell" from "hold," saying the company has lost customer relevance.
- Hershey (HSY) fell 0.9% after Morgan Stanley (MS) downgraded the chocolate company to "underweight" from "equal weight," citing weak consumer demand and high cocoa prices squeezing margins.
- Lowe’s (LOW) added 3.4% after JPMorgan (JPM) raised the home improvement retailer to "overweight" from "neutral," citing beliefs expected interest rate cuts by the Federal Reserve will lower mortgage rates.
- Rivian Automotive (RIVN) lost 2.1% after Barclays (BCS) lowered the electric vehicle (EV) company to "equal weight" from "overweight," citing a slowdown in the EV market.
- Teva Pharmaceutical Industries (TEVA) gained 7.5% after Piper Sandler (PIPR) raised the stock to "overweight" from "neutral," saying the company's brand portfolio makes it well-positioned to improve earnings multiples.
The earnings pace remains heavy this week, with around 650 companies expected to report results, according to Nasdaq®. In addition to Coca-Cola, Tuesday's calendar includes Airbnb (ABNB), Marriott International (MAR), MGM Resorts International (MGM), Restaurant Brands International (QSR), and Shopify (SHOP).
With the market still near all-time highs, investors are grappling with a few key questions, Peterson added, including how long the rally in stocks will continue.
"From a bullish perspective, the U.S. economy is stronger than expected, the investing community seems to be okay with a more patient Fed, and the AI secular growth story is being validated through corporate earnings," Peterson said.
"From a bearish perspective, valuation is historically high, and we're near-term overbought. I don't know when we'll get a profit-taking pullback, but I wouldn't be surprised if volatility, either higher or lower, will pick up," he added. "What could challenge this outlook? It's possible we consolidate recent gains by moving sideways instead of moving to the downside."
Seeking clues to Fed moves
Investors will scrutinize this week's CPI and PPI reports for clues to the Fed's next interest rate policy moves, and the Retail Sales report will offer further guidance on whether last year's robust consumer spending carried forward into 2024.
The January CPI report is expected to show continued easing price pressures. Analysts expect monthly core CPI to have risen 0.3%, up slightly from the revised 0.2% the Bureau of Labor Statistics (BLS) reported in December. The bureau also expects a slight improvement to 0.2% for headline CPI from 0.3% in December, according to Trading Economics. Core CPI strips out volatile food and energy prices.
Consensus for year-over-year core January CPI is 3.7%, down from 3.9% in December. Headline annual CPI is seen rising 3% versus the prior 3.4%.
Investors see little chance of the Fed lowering its benchmark funds rate in March, with May or June now seen as a more likely time frame. But any surprises in the inflation numbers could compel investors to alter expectations for the timing and magnitude of any Fed rate cuts this year.
"The good news is that inflation is falling," said Kathy Jones, Schwab's chief fixed income strategist. "Our expectation continues to be that the Fed will initiate rate cuts mid-year (probably at the May or June meeting) and then cut by 25 basis points three to four times in the second half of the year. The market is aligning around that view."
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