Broader market holds its own as mega-cap stocks lag in front of FOMC decision

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Chief Market Analyst

Microsoft (MSFT)Alphabet (GOOG), and Adv. Micro Devices (AMD) reported their quarterly results after yesterday’s close. MSFT is down 0.5%; GOOG is down 5.6%; and AMD is down 4.6%.

The losses in those stocks aren’t because the results and/or guidance was bad. The losses in those stocks are because expectations were sky high, evidenced by the huge gains the stocks had logged ahead of their reports, and they have fallen prone to a sell-the-good, but not super-duper good news.

Not surprisingly, their backtracking has led to backtracking in other leadership stocks. The Magnificent 7 cohort (which many have reduced to Magnificent 6 given Tesla’s struggles) is down across the board. Tesla, however, is moving on its own news, shedding 2.7% after a judge ruled against Elon Musk’s $56 billion compensation package.

The encouraging note is that the broader market isn’t coming unglued because of the weakness in those leadership stocks. On the contrary, it is sticking together reasonably well.

Currently, the S&P 500 futures are down 27 points and are trading only 0.5% below fair value, the Nasdaq 100 futures are down 185 points and are trading 1.0% below fair value, and the Dow Jones Industrial Average futures are up 47 points and are trading 0.2% above fair value.

What can be gleaned from these indications is that there is money rotating away from mega-cap stocks and into other areas of the market. The resilience of the broader market is also another indication that the weakness in the mega-cap stocks is largely a sell-the-news response.

If it was more than that (i.e., an angst-ridden shift in growth trends because of unmistakable economic weakness), then the selling efforts would be more pronounced and broad based.

It is fair to say that growth is slowing, only not to the degree many expected at this point following the Fed’s tightening cycle. Fittingly, the FOMC meets today and will issue a new policy directive at 2:00 p.m. ET. That directive is expected to show a unanimous vote to leave the target rate unchanged at 5.25-5.50%, but it is also expected to show a tweak in the language to reflect a neutral bias (versus a tightening bias) that sets the stage for an eventual rate cut.

What “eventual” means is the market’s best guess right now. The CME FedWatch Tool shows a 51.5% probability of the first 25-basis points cut at the March meeting and an 88.3% probability of the first cut at the May FOMC meeting.

Market participants, therefore, will be listening closely to what Fed Chair Powell says at his press conference. The market’s case for a rate cut happening sooner rather than later was not helped yesterday by the December JOLTS – Job Openings  and January Consumer Confidence Index reports. It was helped today, however, by the January ADP Employment Change and Q4 Employment Cost Index reports.

Briefly, ADP said private-sector employment increased by 107,000 in January ( consensus 140,000) following a downwardly revised 158,000 (from 164,000) in December. Year-over-year pay gains for job-stayers slipped to 5.2% from 5.4% in December while the 7.2% increase for job-changers was the smallest annual gain since May 2021.

The Q4 Employment Cost Index, meanwhile, was up 0.9% ( consensus 1.0%), seasonally adjusted, for the three-month period ending in December 2023. That was the smallest gain since the second quarter of 2021. Wages and salaries were up 0.9% and benefit costs increased 0.7%.

The key takeaway from the report, which Fed Chair Powell keeps a close eye on, is that it shows disinflation in employment costs, offering another signal after the core-PCE Price Index for December that inflation trends are moving in the right direction.

The Treasury Department also signaled today what direction its borrowing needs will take in the February to April quarter.

Treasury plans to increase the auction sizes of the 2- and 5-year by $3 billion per month, the 3-year by $2 billion per month, and the 7-year by $1 billion per month. As a result, the auction sizes of the 2-, 3-, 5-, and 7-year will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively, by the end of April 2024.

Treasury plans to increase both the new issue and the reopening auction size of the 10-year note by $2 billion and the 30-year bond by $1 billion.

The good news for the Treasury market we suppose is that, based on current projected borrowing needs, Treasury does not anticipate needing to make any further increases in nominal coupon or FRN auction sizes, beyond those being announced today, for at least the next several quarters. The 2-yr note yield is down seven basis points to 4.29% and the 10-yr note yield is down five basis points to 4.01%.

This is one more piece of news on what has been an absolutely huge news day — and the day is only just getting started.

Other items certain to draw some added interest include Boeing’s (BA) better-than-expected earnings report, Wal-Mart (WMT) announcing a 3-for-1 stock split, Allen Media Group making a $30 billion offer, including debt and equity, for Paramount Global (PARA), according to Reuters, and China’s Manufacturing PMI checking in at 49.2 for January, marking the fourth straight reading below 50.0 that is indicative of contraction.

Originally Posted January 31, 2024 – Broader market holds its own as mega-cap stocks lag in front of FOMC decision

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