What is Driving the Recent Stock Market Rally (Weekly Cheat Sheet)

The stock market’s recent trajectory has been a tapestry of ups and downs, with the S&P 500 scaling new peaks and various sectors exhibiting divergent performances. Notably, the S&P 500 soared to a 52-week zenith, nearly touching the 4,600 mark.

However, the story is more nuanced when dissecting sector-specific movements and the overarching economic indicators.

Insights from the Stock Market’s Recent Movements

  • S&P 500’s Peak Performance: The S&P 500 recently reached a notable high, flirting with the 4,600 level. This milestone reflects a strong overall market trend despite the mixed fortunes of individual sectors.
  • Sector-Specific Trends: The real estate sector led the pack with a significant 4.6% surge, closely followed by the materials sector, which climbed by 2.6%, and industrials, which increased by 2.1%. In contrast, the communication services sector saw a notable decline of 2.5%, and the energy sector dipped slightly by 0.1%.
  • Influential Economic Indicators: The financial landscape was notably shaped by a marked decrease in the 2-yr note yield, which plummeted by 39 basis points to 4.56%, and the 10-yr note yield, which fell by 24 basis points to 4.23%. Additionally, economic data painted a picture of stability, with the Consumer Confidence Index exceeding expectations and the Q3 real GDP being revised upwards to 5.2% from 4.9%.
  • Impact of Earnings Reports: The market responded positively to earnings revelations from key players. Snowflake and Elastic reported better-than-expected results, while Salesforce’s post-earnings performance was particularly strong, contributing to market dynamics.

Bonds: Interest Rates Take a Dip

In the bond market, we saw a significant drop in yields. The 2-year note yield, closely tied to the fed funds rate, plummeted 39 basis points to 4.56%, while the 10-year note yield fell 24 basis points to 4.23%. This decline in yields reflects a growing belief in the possibility of rate cuts in the first half of 2024, a sentiment echoed by the fed funds futures market.

What Is Causing The Stock Rally?

I think five things have mainly caused the recent rally. Here they are:

  1. Divergence in Performance: There has been a significant divergence in stock performance across different sizes, sectors, and styles. This suggests a selective market where certain areas are performing better than others, possibly due to specific economic conditions or market dynamics.
  2. Economic Factors: Strong U.S. economic activity, a robust labor market, and consumer resilience are key drivers. These factors contribute to investor confidence and can lead to increased stock market investments.
  3. Interest Rates and Earnings: The relationship between long-term and short-term bond interest rates, as well as the slow drip of earnings throughout the year, may be creating an environment that frustrates market bears (those who expect the market to decline), thereby supporting a bullish (upward) market trend.
  4. Market Resilience: Despite various challenges and potential risk factors, the market has shown resilience. This could be due to investors’ adaptability and the market’s ability to absorb and react to different economic and global events.
  5. Dovish Fed: The market doesn’t believe that the Fed will continue raising rates and may even lower rates despite the recent comments by Powell. This is the most significant driving force for the recent rally.

What This Means for Investors

  1. Sector Diversification: The varied performance across sectors, with real estate soaring by 4.6% and communication services dipping by 2.5%, underscores the need for investors to diversify their portfolios to mitigate risks and capitalize on growth opportunities.
  2. Economic Indicators as Beacons: The significant shifts in note yields and the positive economic data suggest a cautiously optimistic environment. Investors should closely monitor these indicators, as they are pivotal in shaping market trends and the FED.
  3. Earnings Reports as Market Catalysts: The earnings reports from major corporations are critical market movers. Investors should pay attention to these reports, as they offer valuable insights into the companies’ health and future prospects.

Conclusion

The stock market’s recent phase is a complex yet potentially lucrative arena for investors. The S&P 500’s impressive ascent, coupled with positive economic indicators, paints a hopeful picture. However, the contrasting sector performances and the critical role of interest rates and earnings reports require a watchful eye because the rally could go bust quickly, significantly if the Fed does raise rates.

Commodities & Crypto

Energy: OPEC+ Makes Its Move

Ah, the drama in the energy sector! The spotlight was firmly on OPEC+, as they finally convened on Thursday to set their production targets for 2024. The meeting, originally slated for last week, hit a snag due to some disagreements over production quotas. But, hey, where there’s a will, there’s a way!

  • Saudi Arabia, leading the charge, rallied its allies to agree on new production reduction measures.
  • The cuts are substantial: 1 million barrels for Saudi Arabia, 500,000 for Russia, and significant reductions for Iraq, the United Arab Emirates, and Kuwait, among others.

However, don’t rush to your investment apps just yet! Oil prices barely budged. Why? Well, these cuts are more theoretical than practical, especially for countries already exceeding their quotas. As of now, Brent crude hovers around $81.40, and WTI is at about $76.60.

Metals: Copper and Gold Shine

Moving to metals, copper is having a bit of a moment. It’s inching towards the $8,400 mark, thanks to supply concerns in South America. Panama and Peru, I’m looking at you!

And let’s not forget gold. This precious metal is trading above the $2,000 mark. It’s a big deal, considering this level has been a tough nut to crack throughout the year. With inflation taking a backseat and bond yields relaxing, gold is turning heads again.

Crypto: Bitcoin’s Steady Ascent

In the crypto world, Bitcoin is like that energizer bunny – it keeps going and going! For the seventh consecutive week, it’s been on the rise, jumping from $27,000 to over $38,000. Just this week, it’s up by over 2%. Ether, trailing behind, is up by less than 1%.

Interestingly, the departure of Binance’s CEO didn’t shake Bitcoin’s price, which closed November with an 8% gain. Since the year’s start, it’s up by more than 130%. But there’s still a way to go – it needs an 80% increase to hit its all-time highs of $69,000.

CALENDAR & MOVERS

  • Tuesday, Services PMI (November)
  • Friday, Unemployment Rate (November)
  • Fed Talks
  • Earnings

Friday’s Spotlight: Nonfarm Payrolls

The week culminates with the U.S. jobs report on Friday, a key moment for those keeping a close eye on interest rates. This report is particularly significant as it lands just five days before the Federal Reserve’s meeting on December 13. Here’s what to look out for:

  • Projected Growth: Economists are betting on a rise in payroll growth to 200K in November, up from October’s 150K.
  • Unemployment Rate: The expectation is for the rate to hold steady at 3.9%.

This data could be a game-changer for interest rate trajectories, making it a red-letter event for market watchers.

Early Week Indicators

Before we hit the jobs report, the week will already be in full swing with other key releases:

  • JOLTS and ADP Reports will provide additional context on the employment landscape, setting the stage for Friday’s big reveal.

Corporate Events: A Trio to Watch

Amidst the economic data, several corporate giants are stepping into the spotlight:

  • Shopify (NYSE: SHOP), McDonald’s (NYSE: MCD), and Johnson & Johnson (NYSE: JNJ) are all hosting investor events. Key points to anticipate include updates on guidance and strategy, which could sway market sentiments.

Earnings Extravaganza

The earnings calendar is bustling, featuring a mix of tech, retail, and more. Here’s a breakdown:

Earnings Spotlight

  • Monday, December 4: GitLab (GTLB) and JOANN (JOAN) take the stage.
  • Tuesday, December 5: A diverse lineup with AutoZone (AZO), Box (BOX), Toll Brothers (TOL), MongoDB (NASDAQ: MDB), NIO (NIO), and J. M. Smucker (SJM).
  • Wednesday, December 6: Watch out for Brown-Forman (BF.A), Campbell Soup (CPB), C3.ai (AI), Chewy (CHWY), Sprinklr (CXM), GameStop (GME), and ChargePoint Holdings (CHPT).
  • Thursday, December 7: Closing the week are Broadcom (AVGO), Lululemon (LULU), Dollar General (DG), DocuSign (DOCU), and Guidewire Software (GWRE).

Each of these reports could send ripples across their respective sectors, offering insights into corporate health and consumer trends.

Dividend Declarations

For dividend enthusiasts, several companies are expected to announce increases:

  • Zoetis (ZTS): A jump to $0.43 from $0.375.
  • Mastercard (MA): Rising to $0.63 from $0.57.
  • Stryker (SYK): Increasing to $0.82 from $0.75.
  • Amgen (AMGN): A boost to $2.32 from $2.13.
  • Broadcom (AVGO): Climbing to $5.00 from $4.60.

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