Recapping the S and P 500’s Best Week Since November: What a Week

Jeff Buchbinder:

Hello everyone and welcome to the latest LPL Market Signals. Jeff Buchbinder here, your host for this week, with my friend and colleague, Dr. Quincy Krosby. Quincy, I'm glad you're with us today because you are going to help us make sense of what's going on with the yen. How are you?

Quincy Krosby:

Good, thank you. Thanks for inviting me. Appreciate it.

Jeff Buchbinder:

Of course, of course. Standing invite, standing invite. So it is April 29, Monday, April 29, 2024, as we're recording this. I'll let you look at these lovely disclosures. And now let's go into the agenda. So here's what we got, best week for stocks last week since November. You know, it didn't feel like a great week on Thursday when we were down on the GDP report, but it ended up being a great week for stocks. We're going to look under the hood of the data last week, mainly the GDP data, which really requires some dissection, we'll call it, to understand it. So we'll do that next. Then we'll talk the yen, followed by a little earnings recap or update. And then a look at the week ahead. It's a big week with the Fed and the jobs report in addition to another barrage of earnings.

Jeff Buchbinder:

I think it's the peak week of earnings in terms of number of companies. Mm-Hmm. <Affirmative> with 175 S&P 500 companies reporting results this week. So, alright. A lot to get to. So we'll start with just last week. I mean, here's the chart of the S&P. We just, you know, took a short trip down to under 5,000 and then right back up again in the 5,100 range. Now it looks like we're a touch as we're recording this anyway, a touch above the 20-day and even the 50-day or right there. So this is a really pivotal spot from a technical perspective. And if we can hold above those levels you know, clearly the uptrend will remain in place. We were up about 2.7% last week to get us back to around 5,100. Now, at least as we're recording this, we're up a quarter point on Monday afternoon.

Jeff Buchbinder:

So here's the intra-market performance. The I mean, it was clearly risk on and growth led. So you see the Nasdaq up over four, while the S&P was up a little under three. And then you see the big growth sectors did really well. We had, you know, well received results from Microsoft, from Alphabet. NVIDIA didn't report earnings, but they certainly liked all the AI hype last week. So we had a big week for tech. And then in the end you have growth coming back, storming back after the previous week, which was a value led week when stocks were down. So we actually got back all that we lost the prior week, the week of April 19, in just a few sessions. So any observations on the sector front Quincy or anything on the regions last week that jumped out at you?

Quincy Krosby:

Well, yeah, I mean it was interesting that financials were able to hold and what we're looking for this week and next week is whether or not financials can continue to hold along with the tech names and growth names. But what we're watching above all else is that on the days that we have a rally, what leads, just as you pointed out, is it going to be consumer staples, is it going to be utilities or will it be the growth names. The only thing that I'm looking at though, to see if it could catch up are the transports. The trucks are not doing well. Rails are doing okay, but we always like to see the transports enjoy a market rally. That that kind of makes you feel good about the economy. But nonetheless, you got the semiconductors coming back and as you said across the board in terms of growth. That's what we want to see.

Jeff Buchbinder:

Yeah, people like to look at the transports because it's kind of an economic barometer, but I think you, oh yeah, you say the same thing about the chips. So, boy, if you look at the chips as an economic barometer this economy is doing very, very well because we had a great week for chips and a great week for tech. The I guess the other point I'll make here, you know, international did fine. The dollar was down a bit last week, but you know, the Chinese tech names have been pretty strong recently. We have a little bit of exposure in one of the portfolios that we run to China as a trade. So for real active traders, you know, China is so hated <laugh> by U.S. investors, generally, and is so cheap that you know, when those things start to move, they can really move.

Jeff Buchbinder:

So you see you know, almost a 9% gain last week in Hong Kong, which is where those big China tech names trade. So that's something to watch on the international front. We, from an asset allocation perspective, though, LPL Research continues to underweight emerging markets, you know, turning to bonds, commodities, currencies, you know, bonds didn't do anything really last week, although high yield is equity sensitive. So it's no surprise that high yield bonds generated some nice gains. The high yield bond index up 0.6%. Otherwise, at least through last week, you know, yields continue to rise as the market continues to price out Fed rate hikes. Now we're at the point where we're not even pricing in, I'm sorry, cuts. We're not even pricing in two full cuts at last check. So really quite a big move in Fed expectations.

Jeff Buchbinder:

So it's natural that bonds would sell off a little bit in that environment. We had oil bounced back a little bit last week. I mean, it's dizzying to follow the geopolitical headlines and try to make sense of oil, but at least today, the headlines, oil is down today, and the headlines are suggesting that maybe Israel and Hamas are getting closer to a ceasefire. We'll have to see. Maybe it's just the lack of bad news today or over the weekend and the markets, you know, kind of getting comfortable with you know, oil production outlook overseas. What do you think, Quincy, what's the latest on the geopolitical front and how does it relate to oil right now?

Quincy Krosby:

Well, I do think it was the headlines, Blinken, Secretary of State, Blinken, lobbying throughout the Middle East you know, in Egypt now, and just trying to get Israel and Hamas to come up with some kind of ceasefire. So that also, I mean, hit oil prices as soon as the headlines look more optimistic.

Jeff Buchbinder:

Yeah, I think that's absolutely right. And there you see the you know, the dollar and the currency column here, the dollar down 0.3% last week. But really on the currency front, everybody wants to talk about the yen. So, we'll get to that in a minute. All right, let's go to the GDP report. So this was last Thursday. The headline was soft Quincy, you know, 1.6% versus expectations closer to two and a half. But if you look under the hood, it was actually a pretty good report. Can you explain?

Quincy Krosby:

Well, absolutely. You know, normally first quarter GDP, the first read, the seasonality associated with it, and we always talk about that. But what you saw was that exports didn't do well, but imports did very well. One of the explanations for the exports, by the way, is that the U.S. was not exporting armament. And simply because of the waiting for approval from Washington D.C., but nonetheless also inventories, which, you know, you'll always talk about buildup in inventories, helping the report, well, we saw a slowing down of inventories, in fact, selling off of inventories that also brought the number down. However, we did see consumer spending holding up, although consumer savings is down, but overall, the expectations or that they probably, if it was a more normal report, you would add about another percent and a half to that 1.6 read, which is interesting, suggesting that when the revision comes, it will be higher.

Quincy Krosby:

And by the way, statistically a revision for Q1 GDP typically is an upward revision. That said, by the time we get to the second read and then the third read on the first quarter, we will be so far looking ahead that it practically won't matter. But again, it was that combination, Jeff, of the 1.6 with the inflation report, that is what got the market worried because the inflation at the headline level was higher compared with a year ago. And if you have higher inflation, weaker economic backdrop, suddenly the headlines are screaming stagflation. And that's what got the market immediately nervous or got the algorithms nervous because it was an instantaneous reaction to the report. Upon further analysis, the market did just what we did. And that is pull back, take a look at the components under that report, and then suddenly it didn't look as horrific. And the whole stagflation argument dissipated a bit, including, I want to mention this in terms of the inflation, we did not, remember we look at headline, we look at core, we look at super core, but also there were no surprises once we drilled down in that inflation report, the number was the same as in February, indicating that inflation is not skyrocketing or leaping higher at this point. So taken together, the market absorbed it and we actually saw yields come down as a result of that.

Jeff Buchbinder:

Yeah, Friday's rally on the core PCE deflator was, you know, partly related to earnings because that was when we got the Microsoft and the Alphabet reactions. But I think it was also just what you said, Quincy, we were up 2.8% year over year on core PCE deflator on Thursday. And then we were the same. That was for March. We did the same in February. I think the market got more comfortable with the inflation trend after that. But the main point I'll show you an inflation slide in a second, but the most important point from the GDP break breakdown, and you know, you said it Quincy, you basically have, you know, more than a point of good news here that's been washed out essentially by trade and inventories. Yes. And so when you look at just consumer spending up two and a half, that's a pretty good number.

Jeff Buchbinder:

Short of expectations, but a pretty good number. And then you had capital investment. Yes. Pretty good number, up. 2.9 and then residential investment, right? That's the top piece of this. For those of you watching the kind of lighter gray shading residential investment that was almost a point by itself, right? So we had a really strong, I mean, we've been talking about home builders, housing construction, favorable low inventory of existing homes and all of that. So, there was you know, a lot of good news here when you know, peel back the onion. So that's good content there, Quincy. How about, so on inflation, you mentioned super core, right? This shows core services ex housing, which I guess is pretty close to super core, right? Actually, I guess it is super core. So, it's this area of inflation that's been the stickiest.

Quincy Krosby:

Yes.

Jeff Buchbinder:

And if you look at the light blue line here, which is core services ex housing, three months annualized, right? That has really jumped. So, you know, I'll start this off and I'll hand it over to you by just saying real time measures of rents. And we've said this the past couple months, it's just taken some time. Real time measures of rents are actually showing cooling, right? And so once that makes its way into the economic data, inflation should come down. We're just having to be more patient than we thought we'd have to be. So that's some good news. It's just, maybe it's a green shoot. What else Quincy, can you tell our listeners to get them comfortable with this inflation picture? Because it looks like, you know, it looks like a spike and it's, you know, the type of sharp move higher that's going to maybe take some time to reverse.

Quincy Krosby:

Well, when we looked at the rents across the country, I, you know, it's varied and we look at rents, for example, in New York City, they're still quite high. And it's where folks can't afford to buy anything, they've got to rent. And that's where landlords are able to keep the new leases actually remaining high. And we see that actually in the Midwest as well. So we need that. But what folks need to understand is that the way the Fed analyzes this, it is not what we pay for our condo or our home. It is what we can rent it out for. It is the owner's equivalency rent, and it is about 33 plus percent of the CPI, the Consumer Price Index. So it has almost a disproportionate effect on the trajectory of inflation. Other central banks don't use that. They don't figure that in. We do. And so our job is to, as we always say, invest and trade with the data we have not the one that we want. And that's how we have to do it. We have to accept it. I have a feeling that many of those at the Fed would like to change that, at least at the margin, change it and not have it as such an important have such an important effect on the trajectory of inflation.

Jeff Buchbinder:

Yeah. You know, rents are long duration, right? Yeah,

Quincy Krosby:

Exactly. Yeah.

Jeff Buchbinder:

You don't, you can change the price of eggs faster than you can change an apartment lease because it just sits there, right? It just sits there for a year. So, there's just a lag. But yeah, that's a good point about the CPI too. I mean, the Fed obviously knows that's, yeah, they're looking at a lot more than just that. But yes, that's the housing piece. We're also seeing weird stuff in insurance oh, right. Rates for insurance and rates for actually financial services, our industry, seem to be doing some weird stuff. So, you know, it's been dangerous to say this is transitory <laugh>, right? This is temporary and it'll just wash out soon. But that's still our view that we're going to start seeing lower inflation numbers soon. We're just going to have to be patient.

Jeff Buchbinder:

It's just going to be a few more months. So and frankly, I would argue that this stock market's been pretty resilient in the face of this, right? Oh, right. I mean, if you've told me that the 10-yield was going to rise 70 basis points this year and that the S&P 500 would still be up seven, 8% I would've thought you were crazy. So you know, that sort of relationship between interest rates and equity valuations has broken apart a little bit. So that's good news. So that's yeah, good discussion there. So next, this is from our Weekly Market Commentary this week, by the way, which you can find on lpl.com. We took a quick look at sediment at the end of this because, you know, it's natural to think, oh my goodness, we just took two more rate cuts out after we had taken a couple out earlier in the year.

Jeff Buchbinder:

You know, investors must be really depressed <laugh>, right? That's a natural thing. And we just got a five and a half percent pullback in April. So it's natural to think, oh my goodness, you know, people must be really scared. And we did, you know, get rid of some bulls and add some bears during that selloff. This is the AAII Bull/Bear survey, the American Association of Individual Investors. It just crossed the neutral line for the first time since last November. So that means we have more bears than we have bulls. But this is still not a bearish sentiment reading. It's just slightly negative. So the point here isn't to say, oh my gosh, buy stock because everybody's negative, right? The point is not to say, no one else is left to sell. The point is just to say we've taken the froth out.

Jeff Buchbinder:

This is not an overly bullish, overly optimistic set of retail investor views. And this survey has been taken since the eighties, actually, I can't remember when in the eighties, but it's been going on a long time. And you know, has a pretty good track record of meaningful signals. And so we'll keep watching this to see how bearish it gets. But if it does get more bearish, we might be looking to add some equities. So next up is the yen Quincy. And I'm hoping you can help me make sense of this. This is a really interesting situation because the, you know, the yen, collapsed is too strong of a word, <laugh> maybe. But the yen sold off really hard overnight and then rallied back. And the only explanation people can come up with is that the Japanese government or BOJ or both intervened. But I haven't seen anything to tell me that they did <laugh>. So how do you make sense of this for investors? Because it looks like Japan equities are holding up, okay. The market's closed today, but futures we're holding up Yeah. okay in the face of all this.

Quincy Krosby:

Well, it is closed today, or it was closes today, it's Japan. But yes it looks like an intervention. Remember the intervention, verbal intervention, the jawboning to this market, to the speculators comes from the finance ministry. The Bank of Japan is the one that actually does the buying, by the way. And in what, when they have to go out and buy. And for the intervention. And very often if it's a big intervention, because we've had $60 billion interventions back in 2022, for example, they will sell Treasuries they are the largest foreign holder of U.S. Treasuries. So very often they will have to sell Treasuries in order to raise the cash for the intervention. But it looks like one. Remember what this is about. First of all, Japan does like to have a weaker yen.

Quincy Krosby:

There are an exporting nation, but they don't want a collapsing yen. There's a difference between having a softer currency versus a currency that is collapsing. So, they have, you know, kept the yen fairly attractive for their exporting companies. However, what has happened is what we call normal economics. The interest rate differential. It sounds so fancy, but all it means is that the central bank, that is the more hawkish, meaning they're going to keep rates higher for longer. Yes. That's the United States Federal Reserve saying that. That pushes our currency higher vis-a-vis the basket of currencies that we normally trade with or trade against. And Japan is in that basket. So the stronger U.S. dollar pushing, pushing down on the yen, and that is exacerbated a weaker yen. But in addition to that, the Bank of Japan, which I hope everyone on this call knows, they finally raised rates.

Quincy Krosby:

Oh yes, they did. But nothing compared with the rest of, say the Eurozone or the United States. So that interest rate differential with a much stronger dollar as the Fed has basically said, sorry about all those rate cuts we kind of promised not going to happen. That made the dollar that much stronger and any of the other currencies weaken as a result of that. The Bank of Japan did nothing to help the yen, nothing. In fact, they did the opposite. They became even more dovish. By being accommodative you know, don't worry, we're not going to raise rates. Maybe to the chagrin of the finance ministry, but nonetheless, the yen just weaken and weaken. And then on top of that, they have speculators coming in, betting one direction or another. So it looks as if they did go in and intervene. We'll see if it's enough.

Quincy Krosby:

But what will really help the Japanese yen is this, that their inflation climbs higher, and the Bank of Japan comes out and said, well, we're thinking really hard about another rate hike. Remember they are looking at an inflation higher, not a cut. That would help the yen gain strength. And then also what would help is if at this Fed meeting this week, the Fed doesn't sound as hawkish as the market actually thinks it's going to be between the statement and Chairman Powell's answers at the press conference. That would soften the dollar and that would then help ease pressure on the Japanese yen. So that, you know, I do want to point something out for everyone, is that the central bankers and the finance ministries, including our Treasury department, discuss this because they don't want currency markets, you know, destabilizing.

Quincy Krosby:

Is that a word, Jeff? Destabilizing? Absolutely. They don't want that. So chairman head of the federal, my goodness, head of the Treasury, Janet Yellen, who used to be Fed chair, she has been in discussion with her counterparts, by the way, in South Korea because they're also worried about their currency, but also obviously in Japan. And I'm sure the Europeans or the various finance ministers in the Eurozone also. They like to say that the central banks don't have anything to do with it, wink wink. But nonetheless, they try to make sure it doesn't catch the currencies off guard that are so important for stabilization. So it looks as if actually the dollar eased a little bit, the yen escalated just a little bit. We'll see how it goes for the rest of the week when the markets open up in Japan.

Jeff Buchbinder:

Yeah, we certainly don't want them to sell a lot of Treasuries here because they can, they can

Quincy Krosby:

<Crosstalk>. No, no, exactly. Exactly. But you know, the other side, if in fact they did need to sell Treasuries, sometimes they do, sometimes they don't. The more Treasuries that they actually sell guess, you know, it's difficult for our markets. They are the largest foreign holder of U.S. Treasuries. And with all the debt that we have, we need our foreign buyers coming in.

Jeff Buchbinder:

Oh, you said it, that is the understated <laugh> phrase of the day here. Boy, do we need that? We need those foreign buyers, no doubt. So, we'll, you know, at this point our base case is that this will remain orderly. Yes. And at the end will stabilize not collapse. But certainly if the Fed can get out of this really sticky place they're in, right? Yes. Where they have you know, still strong growth and a little bit of an acceleration in inflation that they're trying to reverse, if we can get out of that and start hearing more dovish messages from the Fed that will absolutely help Japan. Oh yeah, absolutely. But still like Japan equities relative to the international developed landscape. But, you know, you got to maybe buckle your seatbelt <laugh> a little bit.

Jeff Buchbinder:

So good discussion there, Quincy. Thanks for making sense of all that. It is a complicated story with, you know, currencies being all relative. I'm going to be quick on earnings and then we'll preview the week ahead because it's a really interesting week this week to talk about with the Fed and the jobs report. You know, the most important barometer for me is just what happens to estimates, which is guidance, right? And on that score, this is a win. The S&P 500 earnings have been revised up by about a half a percent since the start of April, right? That's includes earnings season. It's after the first quarter wrapped up. Estimates usually are cut by a couple percent. So to go up a half a percent is a big win, absolutely. So just based on that alone this has been an excellent earnings season.

Jeff Buchbinder:

But then when you look at the big tech names you know, so far, I know people didn't like Meta's investment, right? Over investment, maybe some would say. But the others that have reported the numbers, were excellent estimates have risen. So we're calling that a win. We still have Apple, Amazon, NVIDIA left, but so far so good. I know Tesla sold off too, but I'm sorry, Tesla's numbers weren't that good, but the shares rallied because of their plans for a low cost vehicle. The numbers themselves though didn't look that great. So, it hasn't been a win across the board for the Mag Seven. But you know, overall when you add all the numbers together, they looked good. So that's another win. I don't know, anything Quincy stand out to you in terms of sectors? I mean, I point out here that comm services, energy, and financials have had the best revisions. I mean, you mentioned financials upfront is, you know, performance have been pretty good. Estimates have been inching higher for financials too, which maybe some people haven't noticed. So I think it was a good earnings season there. Anything else stand out to you?

Quincy Krosby:

Well, one of the things that has stood out is the performance of utilities. You would think that utilities would not do well when rates are this high. So you got to ask yourself, what is it about utilities? And it could be that everything we hear, and we heard it, by the way, we heard it from Meta. I don't know if you remember Meta in the conference call said one of the things we're working on is we need more energy. You remember that? We need more electricity for

Jeff Buchbinder:

More power for AI.

Quincy Krosby:

More power for AI. Well, that is across the board. And so electrical grids are being necessary for all of that. They've got to be upgraded they've got to be able to handle all of the demand. Maybe that is why utilities has been actually doing well, next to, in concert with, the growth names. So maybe now it is becoming a, what shall I say, the subcontractor for all of the AI work. But, but what was the

Jeff Buchbinder:

Second derivative play.

Quincy Krosby:

Yeah, derivative play. But what really did stand out, and that's what we're going to pay attention for Apple and for Amazon, is that from Microsoft and also Alphabet, they have started to monetize all of the AI innovation, all of the expenses associated with that. They were able to say, this is what we have, this is what we're doing and it's going to continue. It was extremely helpful for a market that was desperate, absolutely desperate for that kind of guidance. And as you we're going to hear ultimately from the company that provides all of the infrastructure for these companies. Not until, not until the 22nd of May that it will be NVIDIA.

Jeff Buchbinder:

Oh yeah, that's, that's going to be a big one. Yeah, no doubt. So yeah, that's an interesting theme. Need more power for AI and certainly some utilities are benefiting from that. So the week ahead, of course it's the Fed and its jobs. I think, you know, it's going to be hard for the Fed to out hawk the bond market. What are you looking for on the jobs report? Do you think you know, is there the potential there for maybe some good news on the inflation front? What are people going to see on Friday?

Quincy Krosby:

Well, I mean the consensus estimates are still pretty good. I mean, we had just over 300,000 on the last one. So what we're going to pay attention. 250. Are we going to see a revision from last month's report? Why am I mentioning that? Because we have seen a series of revisions downward. So that's going to be important because those folks who watch every nook and cranny of the labor market pay very close attention to that. Wondering if that's some sort of signal suggesting that the cracks are there in the labor market. They just have not, they've been slightly dormant. So they follow that. We're going to watch for that. Also, we're going to watch to see the hours worked. This is very important because many economists have been pointing out, you know, Quincy, this sounds great, 3.8% unemployment, but a lot of folks have been made part-time.

Quincy Krosby:

They've cut back hours. We are going to see how hours worked per week. What we really want to see is a full week of work because that tells you that the economy, the underpinning for this report, is actually strong. You don't want to see the hours work pull back. Although if you see it pull back, maybe it does help you think that perhaps inflation will subside. Nonetheless, that will be important. And again, we'll look for wages. This is crucial. And the reason is quite simple. Yes, it is very nice to see people earn more money, no doubt about it. But when the wages climb higher, companies that are paying those higher wages try to do what they always seem to try to do. And that is take the higher wage cost because it's an input cost, and then pass it along with higher prices. And there you have inflation.

Quincy Krosby:

So we want to see whether or not wages are climbing higher. The market really just doesn't want to see that. So we'll be paying attention to that. And also where the jobs are coming from. You know, which areas in the economy, is it government, is it white-collar workers? Because they tend to earn more. But we're also hearing that many companies are trimming those white-collar workers because they tend to earn obviously more. They're on salary and bonus. So want to see if we're seeing that, where is the work coming from or is it in the service sector? Speaking of, this week is important for one other reason. With the market and Fed that is so focused on inflation and the trajectory of inflation. We have the Institute for Supply Management, ISM manufacturing survey, coming out this week. And also the service sector. This is what the market is going to zero in on. Prices paid. Prices received. We know that they had climbed higher, but we did see another report coming from S&P Global where the prices came down. But the ISM, Institute for Supply Management, purchasing manager reports, are very much followed by markets. And now because of the focus on inflation by the Fed and by everyone who's become an economist who focuses on the markets, that is going to be a headline if it is climbing higher. But also another headline if it is a downward trajectory of those prices. I can't stress that enough.

Jeff Buchbinder:

I can't think of anybody who doesn't want to be an economist ,Quincy. So we'll all try to Good <laugh>, we'll all try to assess that ISM number on Wednesday to see what it's, thank you very much. I like the, ISM because it tells us what's happening with earnings. A little bit of a leading indicator of earnings.

Quincy Krosby:

Oh, it is absolutely

Jeff Buchbinder:

Momentum. So,

Quincy Krosby:

Absolutely.

Jeff Buchbinder:

Yeah. It's not just jobs and Fed and earnings, it is also ISM. So thanks for that look ahead, Quincy. Let's go ahead and wrap there. Thanks as always for joining. Thank you to all of our listeners. Thank you for listening to another edition of LPL Market Signals. We will be back with you next week. Looking forward to it. Take care, everybody.