Contending with Mixed Signals

The stock market had it all going on yesterday in a bit of a surprise rally that was slow to develop at first but which gained momentum as the session progressed. Stocks of all sizes participated in the advance; value and growth stocks were on the same winning page; and there was a pro-cyclical orientation that generated some good vibes for market participants.

The basis for the rally, which saw the Russell 2000 gain 2.2% and the S&P 500 advance 1.2%, was attributed largely to a belief that a debt ceiling deal will get reached before any default, the robust rebound action in the regional bank stocks, and a soft landing/no landing outlook that was driven by the market’s attention to the Atlanta Fed’s GDPNow model estimate for Q2 real GDP growth being revised to 2.9% from 2.6%.

This move followed on the heels of large declines registered in Tuesday’s trade, which also came as a bit of a surprise to market participants who have been accustomed to seeing the market adhere to some tight trading ranges.

Alas, the rebound seen yesterday was larger than the sell-off seen Tuesday, so the major indices enter today notably higher from where they started the week. However, knowing how wishy-washy the trading action has been for many weeks now, we’ll refrain from saying they are sitting comfortably higher.

That’s owed in part to the realization that market participants continue to contend with a lot of mixed signals that make it difficult to have a lot of conviction on both the buy side and the sell side. Some of today’s news illustrates this point.

• Walmart (WMT) posted better than expected fiscal Q1 results while acknowledging that it has seen its sales mix negatively affected by a shift from general merchandise to grocery and health and wellness. In other words, Walmart is seeing its shoppers focus more on consumer staples than discretionary items.
• Japan’s Nikkei was up 1.6% and flirting with a multi-decade high even though Japan’s April import and export activity was weaker than expected.
• The May Philadelphia Fed Index improved to -10.4 (Briefing.com consensus -16.0) from -31.3 in April. That was a better trend than what seen earlier this week for the Empire State Manufacturing Survey, yet it bears pointing out that a number below 0.0 is still indicative of a contraction in manufacturing activity in the region.
• Initial jobless claims for the week ending May 13 decreased by 22,000 to 242,000 (Briefing.com consensus 259,000) while continuing jobless claims for the week ending May 6 decreased by 8,000 to 1.799 million.
  • The key takeaway from the report is that initial claims are at levels that are much closer to signaling tightness in the labor market, which means the Fed is apt to stick to its tighter policy for longer.

Of course, a labor market running on the tighter side of things will continue to run interference for a hard-landing economic outcome happening sooner rather than later, if at all.

That’s the silver lining of this report — or maybe we should call it a grey lining since it will keep the market guessing about the Fed’s monetary policy stance and the specter of the Fed overtightening. On a related note, Dallas Fed President Logan (FOMC voter) said today, according to CNBC, that the current data doesn’t yet support pausing the Fed’s rate hikes.

The 2-yr note yield is up nine basis points to 4.25% and the 10-yr note yield is up five basis points to 3.63%.

Currently, the S&P 500 futures are down five points and are trading 0.1% below fair value, the Nasdaq 100 futures are up two points and are trading roughly in-line with fair value, and the Dow Jones Industrial Average futures are down 86 points and are trading 0.2% below fair value.

That’s a pathway to a relatively mixed start for the cash market and perhaps some more wishy-washy trading action.

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Originally Posted May 18, 2023 – Contending with mixed signals