Weekly Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

By recent standards, from a headline perspective, this week has been a bit quieter. Most major economic data was in the rearview and deadlines for tariffs and the debt ceiling are still a few weeks away. To start the week the trading action was pretty boring. Coming out of the long weekend the S&P 500 hit a marginal new all-time high but as we pointed out in last week’s recap there were signs of caution beneath the surface with defensives outperforming and investors moving up the capitalization scale. At the same time investors seemed to keep piling into many of the same stocks which kept hitting new highs every day. That dynamic seemed to hit a bit of a breaking point late in the day on Wednesday and there has been a momentum unwind over the last two days.

The S&P 500 has proven to be very resilient over the last few weeks shrugging off a multitude of headlines from Washington. One of the things we’ve been talking about is the growing level of uncertainty and how that has the potential to stifle economic activity. Outside of the pure unwind of crowded trades that is where some of the concern seems to be emanating from. Last week’s retail sales report was disappointing despite the fact that markets found multiple reasons to rationalize that miss (just like the inflation data).  This morning things turned sharply lower after services PMIs fell into contraction for the first time in over two years and the U of Mich Sentiment was revised lower while the big jump in inflation expectations held steady at 4.3%. This quickly took the S&P 500 just below 6,100. The fact that today is options expiration has likely added to the downside momentum as major indices started to break key strike prices. 

As always seems to be the case in these sorts of selloffs all of the bearish headlines seemed to find their way to the forefront. The one that supercharged the downside today was a report that a new Covid strain was found at the Wuhan Institute. This sent travel related stock sharply lower and put a bid in vaccine makers. A couple of the other headlines were well-known hedge fund manager and owner of the New York Mets having some cautious comments about the state of the economy and markets (isn’t spring training supposed to bring with it some optimism? Maybe he’s having second thoughts about that contract). There was also a report of a $1.5B crytpo-hack at exchange Bybit which seemed to undercut the morning rally in crypto currencies on reports that that SEC would drop its lawsuit against Coinbase. 

The S&P 500 closed the day and week down 1.7% just above its 50d moving average (~6,010), which is still in the upper third of the post-election range. However, the S&P 400 midcap index and the Russell 2k were down >3% reversing all of the post-election gains closing right around their respective 200d moving averages. Last week I highlighted the relative performance of consumer staples relative to consumer discretionary as an early warning sign. There was a big blowout in that indicator this week despite the fact that the largest component, Walmart was down 9% this week (we'll discuss below).  

Back to the big picture. Last week I talked about wanting to see a push to new all-time highs happen with some authority and this week’s action did not qualify as that. This type of gut check selloff as markets hit new all-time highs is not uncommon and can ultimately help gather strength for the ultimate upside resolution (think Wall of Worry). As mentioned above the S&P 500 closed right at it 50d ma the post Mexico/Canada low and 100d ma fall between 5,925 - 5,950. A push back to the bottom of the range would coincide with test of the 200d ma and would be healthy.  When you think about the mounting list of things the market needs to overcome in the coming weeks/months it didn’t necessarily make sense to break out just yet. Investors have been longing for an expansion of breadth and that has in some ways been playing out but not as expected with many global markets outperforming the US this year (see Tables below). 

The equal weight version of the S&P 500 outperformed down only 0.7% highlighting that there is rotational activity within large cap stocks. To highlight some of the momentum unwind if you look at the top performing decile of stocks in the S&P 500 YTD through Wednesday, those stocks are down 3.7% on average over the last two days. Meanwhile the bottom decile was down an average of 0.1%. 

Under the surface only 6 of 11 sectors were lower this week with defensive and yield oriented sectors ending the week modestly higher. Utilities ended higher despite the IPPs and nuclear exposed companies associated with the AI trade getting hit hard. 

Consumer discretionary was the worst performing sector this week. Travel related stocks were the worst performing this week hit by today’s Covid headlines. In addition, cruise operators also moved sharply lower yesterday after Commerce Secretary Lutnick warned the administration would consider changing the tax structure for the industry. Housing related stocks also underperformed after Toll Brother earnings and housing data disappointed the street including a very sharp decline in the expectation for home sales in the next 6 months within the NAHB Housing Market index. 

This seems to be a good time to discuss arguably the most important piece of macro data this week, Walmart’s earnings. The quarterly numbers were slightly ahead of estimates, but guidance came in below expectations with management calling out FX, the VZIO acquisition and the lapping of the leap year as headwinds. The quarterly numbers were solid and commentary about the consumer was cautiously optimistic. Management highlighted a strong holiday season with improvement in discretionary spending and also noted that January was the strongest comp in the US business. I did not get the sense that guidance was meant to signal a shift in the environment and management suggested there was some caution built in given the uncertain environment. Overall, this was a good report, and the stock reaction was more about the very high expectations coming in. To put that in perspective ahead of the report stock was up >50% since the end of Q2 (and was one of the places investors kept piling in, it’s not often you think of a consumer staple stock as momentum). Next week there are multiple major retailers reporting. 

Outside of energy which ended the week higher most other cyclical sectors ended the week down ~2%. I wanted to highlight financials which was the best performing sector YTD a/o Wednesday. Investment banks have been some of the best performing stocks this year with the expectation for a pickup in M&A activity and capital markets. Some of the wind came out of the sails in this group after the administration decided to keep guidelines for merger reviews that were put in place under President Biden. In addition, the after-market activity in some of the recent IPOs is raising some question about the long awaited pick up of issuance. 

Global Markets - mostly lower but to a lesser extent

Commodities - Volatility Continues

I touched on the highlights of this week’s economic data above. Yields were a touch higher for the week coming into today before falling ~8bps across the curve in two equal waves following the PMIs and then the Covid headlines. For the week Treasury yields were down ~5bps. The Fed commentary throughout the week was mixed and continued to point to a Committee that was firmly on hold. One notable development, from within the FOMC Minutes which suggested that QT could be paused or slowed down given the debt ceiling dynamics. In addition, Treasury Secretary Bessent said that the terming out of debt was a long ways off which helped the long end. 

Over the weekend Berkshire earnings will get some attention as will the German elections. Next week looks somewhat similar to this week. The Washington headlines will continue with focus on Ukraine while we'll see if the house tries to move forward with its reconciliation process. The January quarter end earnings will continue with some important retail (HD/TJX) and tech earnings (CRM/NVDA/SNOW/DELL/HPQ). Outside of consumer confidence on Tuesday most of the major economic data comes in the back half of the week with durable/capital orders and GDP revisions on Thursday. On Friday overseas China PMIs and preliminary inflation in the EU will be released. In the US, personal income and spending and PCE will be released. Enjoy the weekend!

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