Week in Review: Much Needed Gains [Oct. 21-22]

The stock market had a strong week delivering much needed gains that saw the S&P 500, Dow, and Nasdaq register returns of 4.7%, 4.9%, and 5.2%, respectively. Price action in the Treasury market was highly influential over price action in the equity market.

Things got off to a good start after Morgan Stanley Strategist Mike Wilson, who has been right this year with his bear market call, said the S&P 500 could get to 4,150 in a technical rally if a recession or earnings capitulation can be avoided. There was also a BofA fund manager survey that showed cash holdings at their highest level since April 2001 (6.3%), acting as a contrarian buying signal.

The stock market rally ran into resistance midweek while market participants digested a slew of new Fed speak.

First, Minneapolis Fed President Kashkari (2023 FOMC voter) said that he could argue for the fed funds rate to go above 4.75% if he doesn’t see any improvement in underlying or core inflation. Then, Philadelphia Fed President Harker (2023 FOMC voter) said he expects the fed funds rate to be well above 4.00% by end of the year. These comments coincided with the 10-yr note yield hitting its highest level since 2008 (4.23%) and the stock market shifting into retreat mode.

On Friday, San Francisco Fed President Daly (not an FOMC voter) said she thinks stepping down on the pace of rate increases will help preserve market structure. Saint Louis Fed President Bullard (FOMC voter) said he hopes to get a deflationary process going in 2023, adding that the job market remains strong, according to Bloomberg. These comments coincided with the 10-yr note yield pulling back to 4.21% and equities shifting back into rally mode. To be fair, the 10-yr note yield still rose 20 basis points this week.

In addition, The Wall Street Journal published an article by Nick Timiraos that indicated the Fed will raise rates by another 75 basis points at the November meeting, but will then possibly consider a smaller increase at the December meeting. Mr. Timiraos is thought by some to be the Fed’s preferred source for leaking insight on what they are thinking about monetary policy in order to gauge the market’s reaction to their thinking.

Notably, the 2-yr note, which is more sensitive to changes in the fed funds rate, did not exhibit the same outsized reaction as the 10-yr note. The 2-yr note yield only rose one basis point this week to 4.51%.

Earnings were generally better than expected this week, which was a nice tailwind for stocks. Bank of America (BAC) and Goldman Sachs (GS) were standouts for financials; AT&T (T) and Verizon (VZ) were standouts for communication services; United Airlines (UAL) and Lockheed Martin (LMT) were standouts for industrials; IBM (IBM) and Lam Research (LRCX) were standouts for information technology.

Meanwhile, Snap (SNAP) and Tesla (TSLA) went against the grain and disappointed with their quarterly results.

For the S&P 500 sectors, energy was the top performer this week with a gain of 8.1%. Information technology came in second place with a gain of 6.5%. On the flip side, utilities (+2.0%) and consumer staples (+2.2%) showed the slimmest gains.

In other news this week, Liz Truss resigned as the UK Prime Minister after roughly six weeks in office. Ouch.

Source: Briefing Investor