Markets Rebound: Stocks Approaching New Highs

The market’s performance in the past week could serve as a prime example of Newton’s third law that “for every action there is an equal and opposite reaction.” Following the previous week’s slide of nearly 4.25% in the S&P 500, last week brought us a furious rally of over 4.0% to the upside, fully erasing the previous week’s decline. Now, the S&P 500 finds itself back trading in the range around 5620, where it traded for a few weeks in mid to late August. As last week’s inflation reports came in, CPI showed that headline YoY CPI fell more than expected while MoM Core CPI was a little higher than expected. This report showed a bit of a mixed picture for investors specifically regarding inflation. But, it clearly shows inflation is in a downward trajectory, and since CPI did not plummet, this suggests some macroeconomic strength and despite some slowing in the labor market, the consumer is still remaining resilient and able to spend. This interpretation will be tested in the coming week with the Retail Sales report on deck. Yet, this along with some late week reporting that the Fed is seriously weighing a larger cut at this week’s meeting provided fuel for the market’s breakout to the upside. Taking a look at the market internals as of the close on Friday, they appear quite strong. Currently, 73% of S&P 500 stocks are now trading above their 200-Day moving average. Additionally on Friday, more than 80% of NYSE listed stocks posted a gain. Unsurprisingly, the NYSE Advance Decline Index finished the week at a new all-time high, capping a week which featured numerous new highs. Each of these are strong indicators of good breadth and broad participation to the upside in the market. Now that the S&P 500 again finds itself trading in the range around 5620, it is in need of a catalyst to help it break through to the upside. It is our opinion that this catalyst will come in the form of the imminent rate cut decision from the Fed. The Fed has telegraphed that a rate cutting cycle is going to begin and once investors gain clarity on the size of the first cut, we anticipate that while perhaps not immediately, that the market will trade to new highs shortly thereafter.

Key Events to Watch this Week

FOMC Meeting (Fed Rate Decision)
U.S. Retail Sales
Q2 Earnings from FDX

On the back of last week’s powerful market rally, we expect trading will likely be fairly muted to begin the upcoming week as investors anticipate what will no doubt be the biggest event of the week, the Fed’s rate decision. On Wednesday the FOMC committee will wrap up their meeting and release their policy decision. The Fed has already telegraphed that they plan to reduce rates at this week’s meeting. However, investors are largely split about the size of the cut. Late last week, Fed Funds Futures odds shifted markedly toward a 50 basis point cut, now placing the probability between a 25 or 50 point cut at roughly 50/50. As investors await the Fed’s decision on Wednesday, there is one report to watch out for on Tuesday that is a crucial piece of macroeconomic data. On Tuesday, the August U.S. Retail Sales report will be published, and it is sure to garner plenty of attention as it is a strong indicator about the current health of the U.S. consumer. Since Retail Sales is a measure of what consumers are actually doing rather than just how they feel, this data could be another key factor in the Fed’s decision for either a smaller or larger cut at this week’s meeting to kick off this rate cutting cycle. In addition to these events, even though we are essentially done with Q2 earnings, there is one company’s results I’ll be watching out for. On Thursday after the market closes, FedEx Corp. is set to post their latest results. FDX’s earnings in the grand scheme are not all that important to the overall earnings of the S&P 500. However, a major transport company like FDX, they can be a good leading indicator of the economy’s trajectory. If FDX’s earnings report and guidance shows either strength or weakness, this will likely be interpreted by investors as a signal on what to expect in the months to come regarding the macroeconomic environment which is a pivotal part of the ‘Soft-Landing’ narrative being able to play out.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,