Looking and smelling better

To begin today’s column, we will direct readers back to yesterday’s column in which we queried if the major indices were capable of passing the smell test. In Tuesday’s trade, they were not. They passed the eye test at the index level because the mega-cap stocks exhibited relative strength, but with market internals negative at the NYSE and Nasdaq, and the equal-weighted S&P 500 declining 0.9%, they clearly did not pass the smell test.

It wasn’t like a rotten egg smell. Rather, it was more like a sweaty smell following a long run. From what we can gather at the moment, the broader market is looking and smelling better today even if it isn’t exactly coming up roses.

Currently, the S&P 500 futures are up 18 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 94 points and are trading 0.7% above fair value, and the Dow Jones Industrial Average futures are up 76 points and are trading 0.2% above fair value.

The positive leaning has been influenced by an inclination to buy on weakness. It has also been influenced by a positive response to earnings reports from Toll Brothers (TOL), Campbell Soup (CPB), and SentinelOne (S), Avis Budget (CAR) announcing a $10.00 per share special dividend, Mastercard (MA) announcing a dividend increase and new $11 billion share repurchase program, and some economic data this morning that was in-line with the soft landing view.

Specifically, private-sector employment increased by 103,000 jobs in November (Briefing.com consensus 127,000), according to ADP, following a downwardly revised 106,000 (from 113,000) in October. The 5.6% pay increase for job-stayers in November was also the slowest pace of increase since September 2021.

The key takeaway from the report is that job growth and wage gains both moderated in the private sector, which is what the Fed will like to see in its battle to tame inflation with higher interest rates.

Another feather in the Fed’s inflation-fighting cap is the revised Q3 Productivity Report, which showed an upward revision to 5.2% (Briefing.com consensus 4.8%) from 4.7% that was paired with a downward revision for unit labor costs to -1.2% (Briefing.com consensus -0.8%) from -0.8%.

The key takeaway from the report is the connection between rising productivity and falling unit labor costs. Each is headed in the right direction for the Fed’s purposes, which means interest rates should continue to move in the right direction for the market’s purposes.

The final report this morning was the October Trade Balance Report. It showed a widening in the deficit to -$64.3 billion (Briefing.com consensus -$64.4 billion) from an upwardly revised -$61.2 billion (from -$61.5 billion) in September. The widening was the result of exports being $2.6 billion less than September exports and imports being $0.5 billion more than September imports.

The key takeaway from the report is the different paths taken by exports and imports, as that fits with a narrative that underscores weaker activity abroad versus what has been seen in the U.S.

The Treasury market apparently liked what it saw in today’s data. The 2-yr note yield, at 4.60% in front of the releases, is at 4.57% now, up one basis point from yesterday. The 10-yr note yield, at 4.18% in front of the reports, is at 4.15% now, down two basis points from yesterday and down roughly 85 basis points from its peak in late October.

The sharp move lower in rates is essentially why everything has been coming up roses for the stock market since late October.

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Originally Posted December 6, 2023 – Looking and smelling better