Market Snapshot
| Dow | 38905.66 | -137.66 | (-0.35%) | | Nasdaq | 16128.53 | -49.24 | (-0.30%) | | SP 500 | 5150.48 | -14.83 | (-0.29%) | | 10-yr Note | -30/32 | 4.30 |
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| | NYSE | Adv 586 | Dec 2161 | Vol 1.1 bln | | Nasdaq | Adv 1084 | Dec 3126 | Vol 5.4 bln |
Industry Watch
| Strong: Energy, Communication Services |
| | Weak: Real Estate, Utilities, Health Care, Financials, Consumer Staples, Materials, Health Care |
Moving the Market
-- Strength in some mega cap names providing a measure of support for broader market
-- Selling activity related to the hotter-than-expected February PPI, and some normal consolidation activity
-- Treasury yields climbing in response to PPI report
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Closing Summary
14-Mar-24 16:30 ET
Dow -137.66 at 38905.66, Nasdaq -49.24 at 16128.53, S&P -14.83 at 5150.48
[BRIEFING.COM] It was a downbeat day for the stock market. The S&P 500 (-0.3%), Nasdaq Composite (-0.3%), and Dow Jones Industrial Average (-0.4%) closed off their session lows thanks to move higher in the last 30 minutes of trading, albeit still logging broad based declines. The Russell 2000 underperformed the broader market, sinking 2.0%.
The main focus was price action in the Treasury market, which pushed yields toward their highs from February. The 2-yr note yield rose seven basis points to 4.69% and the 10-yr note yield settled 11 basis points higher at 4.30%. This was largely in response to the February Producer Price Index report, which was hotter than expected.
Other data this morning also contributed to the selling, including a February retail sales report that was a bit weaker than expected but still up nicely versus the prior month, and some initial and continuing jobless claims data that reflected ongoing strength in the labor market.
Downside moves were relatively modest despite a growing sense among some participants that stocks are due for a pullback. The Invesco S&P 500 declined 0.9% and only one of the 11 S&P 500 sectors fell more than 0.8%.
The rate-sensitive real estate sector (-1.6%) was the worst performer followed by the utilities (-0.8%) sector. Meanwhile, only two sectors finished higher today. The energy sector jumped 1.1%, benefitting from positive movement in WTI crude oil futures ($81.23/bbl, +1.49, +1.9%) and natural gas futures ($1.74/mmbtu, +0.08, +4.8%).
Gains in some heavily-weighted names provided a measure of support to the broader market, but it wasn't enough to offset the broad declines elsewhere. Apple (AAPL 173.00, +1.87, +1.1%), Microsoft (MSFT 425.22, +10.12, +2.4%), Amazon.com (AMZN 178.75, +2.19, +1.2%), and Alphabet (GOOG 144.34, +3.57, +2.5%) were influential winners in that respect.
- S&P 500: +8.0% YTD
- Nasdaq Composite: +7.4% YTD
- S&P Midcap 400: +5.2% YTD
- Dow Jones Industrial Average: +3.2% YTD
- Russell 2000: +0.2% YTD
Reviewing today's economic data:
- February PPI 0.6% (Briefing.com consensus 0.3%); Prior 0.3%; February Core PPI 0.3% (Briefing.com consensus 0.2%); Prior 0.5%
- The key takeaway from the report is that goods inflation drove the increase; moreover, the PPI uptick will not assuage concerns about PCE inflation remaining sticky, which in turn means the Fed might embrace being stickier for longer with its current fed funds rate.
- February Retail Sales 0.6% (Briefing.com consensus 0.7%); Prior was revised to -1.1% from -0.8%; February Retail Sales ex-auto 0.3% (Briefing.com consensus 0.5%); Prior was revised to -0.8% from -0.6%
- The key takeaway from the report is the sales rebound itself, which will quiet some of the concerns about the January downturn, and help the market maintain its soft landing outlook.
- Weekly Initial Claims 209K (Briefing.com consensus 218K); Prior was revised to 210K from 217K; Weekly Continuing Claims 1.811 mln; Prior was revised to 1.794 mln from 1.906 mln
- The key takeaway from the report is that it is suggestive of a labor market that, overall, remains in good shape given the low level of initial claims -- a leading indicator -- and the much improved continuing jobless claims number. (Note: this week's report reflects the annual revision to the weekly unemployment claims seasonal adjustment factors from 2019 forward.)
- January Business Inventories 0.0% (Briefing.com consensus 0.3%); Prior was revised to 0.3% from 0.4%
Friday's economic calendar features:
- 8:30 ET: February Import Prices (prior 0.8%), Import Prices ex-oil (prior 0.7%), Export Prices (prior 0.8%), Export Prices ex-agriculture (prior 0.9%), and March Empire State Manufacturing survey (Briefing.com consensus -8.0; prior -2.4)
- 9:15 ET: February Industrial Production (Briefing.com consensus 0.0%; prior -0.1%), and Capacity Utilization (Briefing.com consensus 78.4%; prior 78.5%)
- 10:00 ET: Preliminary March University of Michigan Consumer Sentiment (Briefing.com consensus 77.3; prior 76.9)
Stocks turn lower with no specific catalyst
14-Mar-24 15:35 ET
Dow -311.06 at 38732.26, Nasdaq -131.80 at 16045.97, S&P -40.52 at 5124.79
[BRIEFING.COM] The stock market is moving lower ahead of the close with no specific catalyst to account for the move. The Invesco S&P 500 Equal Weight ETF (RSP) is down 1.4%.
Treasuries settled with losses in response to the hotter than expected February PPI. The 2-yr note yield rose seven basis points to 4.69% and the 10-yr note yield settled 11 basis points higher at 4.30%.
Adobe (ADBE), Ulta Beauty (ULTA), PagerDuty (PD), and others are reporting earnings after today's close.
Small and mid cap stocks lag broader market
14-Mar-24 15:05 ET
Dow -220.56 at 38822.76, Nasdaq -81.54 at 16096.23, S&P -27.35 at 5137.96
[BRIEFING.COM] The major indices are little changed over the last half hour.
Small and mid cap stocks continue to lag their larger peers. The Russell 2000 is down 1.9% and the S&P Mid Cap 400 is down 1.3%.
Separately, the 10-yr note yield is up ten basis points to 4.29%.
Enphase Energy dips alongside solar peers; S&P 500 in second place in afternoon action
14-Mar-24 14:30 ET
Dow -125.51 at 38917.81, Nasdaq -18.12 at 16159.65, S&P -13.29 at 5152.02
[BRIEFING.COM] The S&P 500 (-0.26%) is now in second place, holding near the middle of today's range.
Elsewhere, S&P 500 constituents Enphase Energy (ENPH 110.98, -7.19, -6.08%), V.F. Corp (VFC 14.67, -0.83, -5.35%), and Warner Bros. Discovery (WBD 8.49, -0.36, -4.07%) host some of the steepest losses in the average. ENPH slides after peer CSIQ's results and guidance as well as FTCI's Q4 earnings miss, while VFC and WBD dip despite a dearth of corporate news.
Meanwhile, West Pharma (WST 396.34, +10.59, +2.75%) is near the top of today's standings.
Gold finishes lower on Thursday, pressured by familiar foes
14-Mar-24 14:00 ET
Dow -141.97 at 38901.35, Nasdaq -34.89 at 16142.88, S&P -16.28 at 5149.03
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.22%) is the shallowest lagging index, having led the bounce higher over the past half hour.
Gold futures settled $13.30 lower (-0.6%) to $2,167.50/oz, pressured mostly by higher treasury yields and a stronger greenback.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $103.36.
UiPath turns negative on the year after initial gains following JanQ results reverse course (PATH)
Even after delivering beats on its top and bottom lines in Q4 (Jan) and projecting uplifting FY25 revenue growth, UiPath (PATH -6%) is heading downhill today. Potentially frustrating investors is the unevenness embedded in the robotic process automation software developer's FY25 outlook. PATH anticipates a speed bump in Q1 (Apr), forecasting revs below consensus, reflecting a consistent seasonal pattern that tends to be weighted to its fourth quarter. Also, even as Generative AI continues to be implemented across enterprises' operations, PATH's programs, which enable actionable AI insights, are not driving outsized growth.
This shows up in PATH's FY25 outlook. The company anticipates a slowdown in revenue growth this year, projecting $1.555-1.560 bln, a 19% jump yr/yr at the midpoint compared to a +24% improvement in FY24. Similarly, PATH's FY25 ARR forecast of $1.725-1.730 bln translates to 18% growth yr/yr versus a 22% uptick exiting FY24.
AI not positively impacting revenue may be linked to customers remaining in the experimentation phase of adopting Gen AI. However, PATH remained excited about C-level executives prioritizing not just their digital transformations but also their AI transformations. PATH is also heavily investing in new AI capabilities, anticipating accelerated customer productivity following the latest version of its Autopilot software, powered by Gen AI.
Meanwhile, macroeconomic challenges persist, increasing scrutiny over new deals and capping IT budgets. This is particularly true for the lower end of the market, an immaterial portion of its overall business. Still, PATH's outlook incorporates a dynamic economic backdrop, which can trigger additional wary investors.
- There were still highlights from Q4 worth revealing. For starters, PATH delivered its first quarter of GAAP profitability. Meanwhile, when adjusting for non-recurring items, the company continued improving its profitability, expanding its bottom line by 47% yr/yr to $0.22 per share.
- Customer expansion was healthy, boasting a 26% pop yr/yr in customers with $1.0 mln or more in ARR, while customers with $5.0 mln or more in ARR grew by 50%. As a result, PATH was well-positioned to deliver accelerating revenue growth of 31.1% to $405.25 mln, crushing its $381-386 mln forecast.
- PATH's partnership with SAP SE (SAP) continues progressing well. Management was happy with the partnership's upward momentum and pipeline generation across all geographies.
PATH kicked off today's trading session in the green, underscoring decent investor approval over its Q4 results. However, those initial gains quickly reversed course as investors digested a few underwhelming trends, sending shares negative for the year. There was still much to like from PATH's Q4 report. AI is still in an experimentation phase, which may not produce outstanding gains in the near term. However, as customers continue embedding PATH's Gen AI features into their workflows, over a longer timeframe, AI may be the kindling needed to reignite top-line growth.
Lennar's Q1 results have a couple cracks in the foundation as home sales prices slip (LEN)
Expectations were through the roof ahead of Lennar's (LEN) Q1 earnings report, as illustrated by the stock's run to all-time highs during yesterday's session, as participants anticipated that a strong new housing market would fuel another blowout performance. The homebuilder has been on a roll, exceeding EPS and revenue estimates in each of the past eight quarters, but that streak came to an end last night as LEN fell short on the top-line.
- As expected, demand was strong as new orders jumped by 28% to 18,176, surpassing LEN's guidance of 17,500-18,000. However, that demand was aided by significant price cuts and incentives in order to mitigate the impact of higher mortgage rates.
- More specifically, LEN's average home selling price in Q1 declined by over 8% yr/yr to $411K. While LEN is benefitting from lower construction costs, those gains are being offset by this decline in home selling prices, which pushed gross margin on home sales lower by 250 bps qtr/qtr to 21.8%.
- Unlike luxury homebuilder Toll Brothers (TOL), which posted impressive Q1 results on February 21, LEN must rely on these incentives to help keep demand at these robust levels. Peers D.R. Horton (DHI) and KB Home (KBH) are in a similar situation. On the other hand, TOL's wealthier customer base is better equipped to handle the higher mortgage rates, explaining why that company posted superior quarterly results.
- The good news, though, is that LEN is predicting a strong spring selling season that's less promotional. For Q2, the company forecasted new orders of 20,900-21,300, equating to yr/yr growth of 18% at the midpoint. Average home selling prices are also expected to improve to $420,000-$425,000.
- From a broader, longer-term perspective, the bullish story remains the same. LEN is positioned to capitalize on the chronic undersupply of housing, especially as high mortgage rates prevent current homeowners from selling their existing homes. Favorable demographics are also in its corner as younger generations look to buy homes as their families grow.
The bottom line is that there was little room for error heading into the Q1 report with the stock rallying by 12% on a year-to-date basis to hit record highs. Therefore, the stock is succumbing to a sell-the-news reaction, driven by the top-line miss and drop in average home selling prices. Looking ahead, though, a strong spring season should fuel robust Q2 results for LEN.
Dollar General trades lower following Q4 earnings, but it was better than peer Dollar Tree (DG)
It was definitely a tale of two dollar store chains. Yesterday, Dollar Tree (DLTR) sold off on earnings and weak guidance. However, today Dollar General (DG -6%) is trading lower after it reported report Q4 (Jan) earnings results this morning. DG reported a nice beat on EPS and revs. Similar to DLTR, Dollar General also guided Q1 (Apr) EPS below analyst expectations. However, FY25 revenue guidance was better than expected.
- Coming into this report, DG had missed on EPS in three of the past five quarters. So we were a bit nervous and did not know what to expect. As is turned out, DG reported its first double-digit EPS beat in the past 11 quarters. We think investors were pleasantly surprised to see this, especially after its peer DLTR reported a big EPS yesterday.
- Same store comps is a metric we closely monitor. Comps in Q4 increased +0.7%, driven by growth of nearly +4% in customer traffic, which was positive in all three months. That was partially offset by a decline in average transaction size. Comp growth was driven entirely by its consumables category and was partially offset by declines in the home, seasonal, and apparel categories.
- DG said on the call that customers are feeling the impact of the last 2 years of inflation which is driving customers to make trade-offs in the store. Specifically, DG is seeing continued pressure on sales in discretionary categories, as well as accelerated share growth and penetration in private brand sales. The comp guidance for the new fiscal year was pretty good at +2.0-2.7%. DG expects Q1 comps to be +1.5-2.0%, a decent improvement from Q4.
- Margins took a bit of a hit with gross margin falling to 29.5% in Q4 from 30.9% a year ago. DG cited increased shrink and inventory markdowns, lower inventory markups, and a greater proportion of sales coming from the consumables category, which generally carry lower margins. We were surprised to see such a big EPS beat given the margin compression. It appears analysts were bracing for even worse margins.
- This was an important quarter, not just because it was the holiday quarter. It was also the first full quarter with Todd Vasos back at CEO. DG was able to lure its former CEO out of retirement to take his old job back, effective Oct 2023. Mr. Vasos was CEO from June 2015 to November 2022 when DG was posting strong results. However, DG struggled for much of 2023. Mr. Vasos wants DG to focus on getting back to the basics in its stores, in its supply chain and within its merchandising. And he wants a greater emphasis on customer service. DG is also looking to reduce SKUs that have become less productive.
Overall, we think this was a pretty good first full quarter for the returning CEO, especially considering the weak results/guidance we saw from Dollar Tree yesterday. The highlights were the big EPS beat and good comp guidance in Q1. Times are tough right now for the dollar stores because their core customer is lower income, and they are feeling the inflation pinch more than other income categories. We like the direction Mr. Vasos wants to take Dollar General, but it will face macro headwinds in 2024.
Dick's Sporting Goods knocks it out of the park; delivers solid Q4 results and FY25 guidance (DKS)
Dick's Sporting Goods (DKS +11%) once again knocked it out of the park in Q4 (Jan), clearing analyst earnings and sales forecasts and issuing solid FY25 (Jan) guidance. The sporting goods retailer also surprised investors with a 10% increase in its quarterly dividend. As a result, investors are piling into the stock today despite already embarking on an +85% run since late October, sending DKS to fresh all-time highs.
DKS's comeback story is impressive. After failing to clear the hurdles presented in Q2 (Jul), management immediately went to work to uplift its ailing margins. The company streamlined its cost structure, optimizing its outdoor specialty business and aligning its resources with its long-term strategies. These actions resulted in a swift return to margin growth, leading to a standing ovation from the market.
- Margin growth continued in Q4. Adjusted operating margins ticked around 130 bps higher yr/yr to 11%, supported by a 120 bp improvement in merchandise margins. As a result, DKS registered its second straight double-digit earnings beat, expanding its bottom line by 31% or 25% on a 13-week comparable basis.
- Comp growth accelerated sequentially in Q4 to +2.8%, largely due to inflationary pricing as transactions were flat. Year-end inventory levels did edge 1% higher yr/yr. Still, management liked its inventory position, pointing to an encouraging trend with its clearance penetration ending FY24 at the lowest it has ever been.
- Assisting the solid comp growth was further market share capture. DKS added nearly 7.0 mln new athletes (customers) during FY24, reaching record highs. DKS's comprehensive store remodeling initiative likely played a significant role in alluring more shoppers into its stores. The company opened 12 House of Sport locations -- massive 100,000 square foot complexes with field houses and running tracks -- last year with plans to open 8 more in 2024. At the same time, DKS opened 11 next-gen mini House of Sport locations (50,000 square feet) with plans for 16 more this year.
- With $800 mln in planned CapEx for FY25, a roughly 36% jump yr/yr as DKS turns to bigger store formats to attract customers, bucking a broader retail trend to go smaller, the company is confident in sustained growth for the year. Management projected comps of +1-2% on top of a +5.3% jump in FY24. Meanwhile, DKS will remain active in streamlining operations, assisting its moderately uplifting FY25 EPS forecast of $12.85-13.25, a 1% bump yr/yr at the midpoint.
In a physical retail environment where companies look to bolster their online presence, DKS is taking an alternative route, adding square footage and transforming its locations into shopping experiences. We have remarked several times since DKS launched its store revamping game plan that this was a solid move, especially given its sports product assortment, which is better tried out in person. With DKS balancing its ambitious investments with cost-saving actions to maintain healthy margins, we continue to like the stock for the long term.
Lastly, keep an eye on peers Hibbett (HIBB) and Academy Sports + Outdoors (ASO), which report JanQ results on March 15 and 21, respectively. If their results lag, it would add further credibility to DKS's larger store formats.
3M tacking on more gains today on rising hopes of a more robust turnaround (MMM)
For 3M (MMM) shareholders, there has been little to feel good about over the past few years as shares have been cut in half since the middle of 2021 due to the company's persistent litigation troubles and its flailing growth. However, the past two days have provided a rare ray of light for the stock with shares jumping by about 8.5%, instigated by yesterday's announcement that the company will welcome William Brown as its new CEO, starting on May 1.
- That leadership transition news, which has sparked hopes that MMM's prolonged turnaround effort will finally translate into stronger growth, was followed up by some reassuring commentary from current CEO Mike Roman during this morning's JP Morgan Industrials conference. Specifically, Mr. Roman, who will become Executive Chairman when Mr. Brown takes the helm as CEO, commented that Q1 is playing out about as expected, but with some pockets of strength in the automotive aftermarket business and in electronics, particularly in Asia and China.
- That's encouraging because it indicates a continuation of momentum coming out of Q4 when the Transportation & Electronics segment swung to positive growth of +2.7%, following declines of 1.8% and 2.4% in the preceding two quarters. The jump to positive growth was fueled by a stabilization in the consumer electronics end market, which was roughly flat in Q4.
- Mr. Roman still characterized the industrial end market as mixed overall, but his upbeat commentary revolving around a recovery in the electronics markets, coupled with a reaffirm of FY24 revenue guidance, is providing some reassurance. Essentially, he took some risk off the table as it relates to Q1 earnings.
- On that note, Mr. Roman also nudged MMM's FY24 EPS guidance higher by $0.05/share to $2.05-$2.20. This is related to an $8.4 bln debt financing in late February in which the soon-to-be healthcare spinoff, called Solventum (SOLV), will keep $600 mln with the remainder going to MMM. The $0.05/share is due to interest on the SOLV portion of the debt. On the topic of Solventum, Mr. Roman stated that MMM plans to retain a 19.9% stake, which it intends to monetize in the first five years.
- There's plenty of moving parts around MMM and its turnaround has remained stuck in neutral, as evidenced by eight consecutive quarters of yr/yr revenue declines. However, the fact that the company is bringing in an outside in William Brown, who previously served as CEO of defense contractor L3Harris (LHX), shows that the company is ready to shake things up.
- MMM has made good progress in terms of resolving its litigation issues, especially for the Combat Arms lawsuit, so a main focus now for investors is for MMM to generate stronger growth. To do so, Mr. Brown may ramp up R&D spending to reignite MMM's innovation engine, or he may turn to acquisitions to jumpstart growth.
The main takeaway is that the sour sentiment hanging over MMM is finally showing some signs of brightening. Incoming CEO William Brown has his work cut out for him, but most of MMM's markets have stabilized, or even improved, such as consumer electronics. Mr. Brown's task will be to turn that stabilization into positive growth. If he can do that, then a battered MMM could see an elusive sustained rally.
The Big Picture
Last Updated: 14-Mar-24 15:29 ET | Archive
Lots of loose ends to deal with
In approximately two weeks, the first quarter of 2024 will come to an end. Per usual, there have been a share of surprises for the stock market -- some good, some bad, and some that are indeterminate.
- AI chip leader NVIDIA (NVDA) has gained as much as 97%. That's good.
- EV leader Tesla (TSLA) has dropped as much as 35%. That's bad.
- Inflation has come down a bit, but it has a way to go to reach the Fed's 2% target. That's indeterminate.
There are a lot of loose ends out there on the geopolitical, economic, monetary policy, fiscal policy, and election fronts. By default, that means there are loose ends out there, too, for the stock market. Nonetheless, the stock market has been running with a sense of ease so far in 2024.
The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all set new record highs. Small-cap, mid-cap, and large-cap indices are all higher for the year, albeit in varying degrees. Growth stocks are up, but so are value stocks.
In brief, the stock market has been governed by a bullish bias so far in 2024 amid the surprises and the ongoing loose ends, more of which can be expected in coming months. What that means for the stock market's performance over the coming months will depend on which way the surprises break and how those loose ends get tied up -- or don't.
No Threat Yet
Arguably, the biggest surprise so far in 2024 has been the shift in the market's rate cut outlook. Carrying that idea a bit further, the biggest surprise is that the stock market has run to record highs even though the market has adjusted its thinking to expect three rate cuts before the end of the year instead of the six rate cuts expected when 2024 began.
Although there has been a downshift in rate cut expectations, we suspect the stock market hasn't downshifted because it hasn't felt a threat to the earnings outlook.
On the whole, economic data has come in with a soft landing/no landing glow to it. Accordingly, analysts have not been given a data-based reason to cut their full-year earnings outlook in any meaningful way. When the year began, the consensus FY24 S&P 500 EPS estimate was $243.32. Today, it sits at $242.79, according to FactSet, which is 11.1% above FY23 earnings versus 11.4% when the year began.
The forward 12-month EPS estimate, meanwhile, has climbed to $249.31 from $243.19 at the end of 2023. The corresponding P/E multiple is 20.7x. That is a 17% premium to the 10-year average.
In other words, there has been multiple expansion with the price of the market-cap weighted S&P 500 rising at a faster rate than the earnings estimate. As of this writing, the market-cap weighted S&P 500 is up 8.0% for the year. It is pricey from a valuation standpoint, which is its own restrictive factor as market participants concern themselves with paying too much for earnings growth that might not be realized.
That is a key reason why it is important for earnings estimates to keep going up, because a market (or an individual stock) trading at a premium valuation is at risk of a stronger dislocation if negative surprises appear that upend the earnings growth outlook.
The valuation constraint for the equal-weighted S&P 500 is a lot less demanding. It trades at 16.8x forward 12-month earnings versus a 10-yr average of 16.4x. The discount to the market-cap weighted S&P 500 underscores the outsized influence of the mega-cap stocks on the market-cap weighted S&P 500.
Bull Market Behavior
Notwithstanding the valuation gap, the stock market has been seeing some welcome rotation into other corners of the market. Granted the communication services (+12.2%) and information technology (+12.0%) sectors have paced year-to-date gains for the market, but the first half of March has seen the energy, materials, utilities, and consumer staples sectors exhibit relative strength. The same goes for the Russell 3000 Value Index versus the Russell 3000 Growth Index.
The rotation has occurred as some of the so-called Magnificent 7 stocks have faltered, namely Apple (AAPL) and Tesla (TSLA). This is actually a good sign. It is the type of behavior one would expect to see in a bull market.
Former leadership stocks breaking down could be construed as an ominous trend for the broader market, but thus far the earnings results and outlooks from other mega-cap stocks have enabled investors to excuse shortcomings elsewhere as an isolated situation. Therefore, it would appear that stocks elsewhere are benefiting at the expense of a rotation away from the likes of Apple and Tesla, although it would be remiss not to add that NVIDIA and the semiconductor stocks have been among those beneficiaries on a momentum trade that has been of great benefit to the market.
In any case, the look and feel of the gains so far in 2024 still has a mega-cap/growth stock edge to it, but it is not devoid of participation from other parts of the market. That, again, can be attributed to the resilient economy, which is fostering some renewed attention on value stocks and/or stocks outside the information technology sector.
Eye on Inflation
Where there is plenty of attention is on the inflation story. It is much improved, but the Federal Reserve is looking for more (as are consumers).
The PCE Price Index, which is the Fed's preferred inflation gauge, was up 2.4% year-over-year in January versus 2.6% in December. The core-PCE Price Index, which excludes food and energy, and which is what the Fed feels it has some control over with its policy actions, was up 2.8% year-over-year in January versus 2.9% in December.
The Fed's inflation target is 2.0%, so these readings remain above target, but are headed in the right direction. The Fed has noted as much, but still wants to have more confidence that inflation is moving back to 2.0% on a sustainable basis. Notably, Fed Chair Powell said in his semiannual monetary policy testimony that the Fed doesn't necessarily need to see better data in coming months, only more of the same data it has seen recently to feel inflation is on track to its 2% target.
The market thinks the Fed will get that, which is another reason stocks have remained in favor on the comforting thought that the Fed will soon start dialing back its restrictive policy. The prevailing expectation is that the first rate cut will come at the June FOMC meeting. The CME FedWatch Tool shows a 59.9% probability of the first cut in June, but that is down from 73.6% only a week ago as some sticky CPI and PPI data for February have tempered things a bit.
Thus far, the market has managed the idea of seeing fewer rate cuts this year reasonably well. A risk in this regard would be even fewer rate cuts or no rate cuts at all if the inflation data heat up and move away from the 2.0% target, possibly even causing the Fed to raise rates again.
Rates Rising
The Treasury market has been a bit more skittish to begin the year than the stock market has been. That's because (1) it has recalibrated for fewer rate cuts and (2) recent inflation data hasn't been as encouraging as expected.
The 2-yr note yield, which began the year at 4.25% and is more sensitive to changes in the fed funds rate, has risen to 4.69%. The 10-yr note yield, which began the year at 3.88% and is more sensitive to inflation, has risen to 4.30%. That move has also stymied the improvement that had been seen in mortgage rates, which has continued to pressure the housing market.
Higher interest rates can be a headwind for the stock market, yet the move since the start of the year has been tolerated because the momentum that has powered stocks like NVIDIA, and other assets like bitcoin, has been hard to compete with, relative to much lower returns offered by Treasuries, for investors aiming for, and achieving, much higher rates of return.
It may take risk-free rates closer to 5.00% to cause some real pullback waves in the stock market.
What It All Means
It was a fast start to the year for many of the mega-cap stocks, which in turn made for a fast start for the market-cap weighted S&P 500 and Nasdaq Composite. Naturally, there are now a lot of calls that suggest the market is due for a consolidation period or correction (generally defined as a 10% pullback from a high).
The churning we have been seeing in the market more recently is part of a consolidation process, but a corrective move at the index level has yet to unfold.
Still, the market has come a long way in a short time, so it is unreasonable to think it will keep running at the pace it has been. The valuation for the market-cap weighted S&P 500 is stretched, but for the equal-weighted S&P 500 it is still in relatively attractive form.
There could be great reward chasing after the momentum stocks, but there is an inherently larger degree of risk in doing so at this point if the crowd looks elsewhere, interest rates keep rising, or growth disappoints.
To be sure, no one knows what surprises lurk around the corner, but right in front of investors is an equal-weighted opportunity to stay invested with a lower risk profile as loose ends get tied up.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: The next installment of The Big Picture will be posted the week of April 1)
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