Would it surprise anyone to learn that there is a positive bias in the equity futures market? It shouldn’t at this point considering the S&P 500 has soared 15.5% from its low on October 27 while the Nasdaq Composite, Dow Jones Industrial Average, and Russell 2000 have surged 18.8%, 15.4%, and 21.4%, respectively, from their October lows.
That is a full head of buying steam in those results, and while things have slowed a bit in more recent sessions, the tide of momentum has not turned in any decisive way at all.
Currently, the S&P 500 futures are up seven points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 16 points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 59 points and are trading 0.2% above fair value.
The steam engine has been fueled by diving market rates, rising rate-cut expectations, and a steady view that the economy will enjoy a soft landing in spite of the Fed’s prior rate hikes.
Some catalytic trading elements have included short-covering activity, seasonality, repositioning from underweight exposure to equities, and a fear of missing out on further gains.
No matter the cause, the run since late October has been truly extraordinary and yet another reminder that trying to time the market is the most challenging of undertakings.
The bid this morning isn’t a robust one, but once again, the key consideration after the run the stock market has had is that the move to sell is even less pronounced.
Some support factors include a drop in the 10-yr note yield to 3.90%, some stronger-than-expected housing data for November, modest gains in most of the mega-cap stocks, and plain old momentum.
The Bank of Japan (BOJ) has had a hand in pushing rates lower. It effectively encouraged an interest rate differential trade with a unanimous vote to leave its policy rate unchanged at -0.10%. The BOJ also indicated it will be sticking with its negative interest rate policy. The yen has weakened sharply against the dollar in response. USD/JPY +1.1% to 144.29, having traded as high as 144.96 earlier.
Separately, one could make the case that the housing starts and building permits data for November supported the soft landing view (or maybe no landing view).
Total housing starts increased 14.8% month-over-month to a seasonally adjusted annual rate of 1.560 million units (Briefing.com consensus 1.360 million) while building permits decreased 2.5% month-over-month to a seasonally adjusted annual rate of 1.460 million, as expected.
The key takeaway from the report is that single-unit activity was on the plus side, up a robust 18.0% for starts and up a more modest 0.7% for permits. Those are welcome indications for a housing market constrained by a low inventory of existing homes for sale.
There was some knee-jerk selling in the Treasury market following the report, but that inclination has settled down.
A question on the mind of many market participants is, where will the S&P 500 settle 2023? It closed yesterday at 4,740.56, leaving it within striking distance of its prior record-high close of 4,796.56 seen on January 3, 2022.
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Originally Posted December 19, 2023 – Steam engine keeps chugging along
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