Stocks chopped in a wide range this past week. A Monday rally in anticipation of an end to the government shutdown gave way to a sharp Thursday sell-off and high volatility on Friday. Investors continue to reassess tech valuations as the odds of a December rate cut from the Fed diminish.1 With the shutdown now over, official government data will restart, but only gradually. Investors will still need to navigate a fog of uncertainty for a bit longer while focusing on risk positioning.
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Market Moves
Weekly Market Snapshot:
- S&P 500: +0.1% – weakness in tech and AI stocks gets offset by strong gains in healthcare & staples as investors rotate within equities.
- Nasdaq 100: -0.2% – investors rotate out of expensive tech stocks with the odds of a December rate cut continuing to shrink.
- Russell 2000: -1.8% – money has been moving into small-cap ETFs this month, but performance has yet to follow.
- VIX: 19.8 – volatility levels climb into the “exercise caution” area as tech valuations get repriced and the market prepares to reintegrate government data into their outlooks.
- Gold: +2.1% – precious metals capped a volatile week with a sharp decline on Friday.
- 10-Year Treasury Yield: 4.15% – yields are stuck in a tug of war; a lack of Fed action wants to pull them higher but broad risk-off sentiment pressures them lower.
Drivers:
Liquidity is a key driver of equity returns. The Fed’s announcement that it will end quantitative tightening (QT) starting in December will help, but questions surrounding how much it might actually cut rates over the next couple quarters will counteract that.2 Right now, the market is dealing with the reality of not getting as much support as it would like and that is causing investors to rethink their risk appetites. Valuations tend to contract in these scenarios, so it’s not surprising that we’re seeing tech and growth stocks start to sell off.
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Economic Highlights
A couple of the notable themes that stood out this week:
- After 43 days, the government shutdown finally ended, although it will take some time for a full return to normal.3 Government data releases will probably be a slow trickle and some backlogged reports, such as employment data, may never be fully released. It gives the Fed a tougher job in deciding what to do with interest rates since they’re unlikely to have the full picture by their meeting on December 17th and 18th.
- According to the Fed Funds futures market, the odds of a December rate cut have gone from 95% one month ago to just 44% today. Cleveland Fed President Beth Hammack and St. Louis Fed President Alberto Musalem both expressed skepticism about the need for further rate cuts, helping to stifle the positive momentum for stocks that had been building since last week.4/5
- The government didn’t issue its monthly retail sales report last week, but the National Retail Federation did.6 It said that sales jumped by 0.6% in October compared to the prior month and are up 5% year-over-year. While this may look positive in a vacuum, credit card debt is also rising, suggesting consumers are buying with borrowed money.
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The Week Ahead
A few themes to watch next week:
- Corporate earnings take center stage this week. NVIDIA reports after the bell on Wednesday, but we’ll get a good look at how the retail sector is doing from Home Depot, Target and Walmart reports. Holiday spending forecasts have been fairly tepid this year and insights from these big box retailers should let us know if consumers are reaching the end of their ropes.
- The Fed will release the minutes from its October meeting on Wednesday. With dissension building inside the central bank, investors will watch closely for clues about whether another rate cut is coming next month.
- Even though the government shutdown has ended, we’re unlikely to see much data from the government this week. With Thanksgiving coming the following week, the street may need to wait a bit longer to catch up on the latest data.
In Summary
Investor sentiment has begun wavering. The markets are concerned they won’t get the Fed rate cuts they were hoping for and that’s ignited a defensive rotation within equities. Valuations remain something of a concern, but it’s not the primary driver of stock performance right now.
The government shutdown has ended, bringing some relief, but attention now shifts to the economic data delayed over the past two months.
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