Markets Blog
David Matzko, LPL Research
Weekly Market Performance for the week of February 5, 2024. Highlights for the week include record-setting gains for equities and a major market milestone reached on the S&P 500. Earnings have improved through the fourth quarter reporting season as the average earnings surprise increased to 4%. The economic calendar was light and headlined by a four-month high in the Institute of Supply Management (ISM) Services Index. Crude oil prices rebounded amid escalating geopolitical tensions in the Middle East, while Treasury yields rose across the curve despite solid auction demand.
Index Performance
U.S. and International Equities
Markets Higher: Equities had a solid showing as markets moved higher for a fifth straight week. The S&P 500 Index notched more new highs and surpassed the 5,000-point milestone. Investors have looked past the Federal Reserve’s (Fed) pivot pause and focused on better-than-anticipated economic data and earnings
Earnings season has turned from messy to solid now that nearly 60% of S&P 500 constituents have reported. After a tepid start, the average earnings surprise has risen to nearly 4%, closer to the 6 – 7% long-term average and up 1.3 points just this week. Excluding financials, the average upside earnings surprise so far is impressively over 6%. LPL Research estimates that S&P 500 earnings will grow about 5%, reflecting the typical amount of upside, supported by the economy’s continued resilience, with a little help from currency adjustments.
According to the most recent American Association of Individual Investors (AAII) survey, investor sentiment remains staunchly bullish as the percent of bulls approaches 50%. This compares to neutral and bearish investor sentiment of 28% and 22%, respectively.
Fixed Income Higher: The Bloomberg Aggregate Bond Index lost ground amid a hawkish Fed narrative and resilient economic data. High yield bonds finished slightly higher, benefitting from their equity market sensitivity, however, they outperformed the benchmark aggregate.
There has been a major concern that foreign buying of U.S. Treasuries was waning to the point of wondering how the U.S. was going to pay for mounting debt obligations without the contribution from global buyers.
Demand from global central banks, long-time buyers of Treasury notes, has been declining for a variety of reasons, including China’s transition away from the dollar. China, at one point, held approximately $1.3 trillion of Treasuries, and was the largest foreign buyer and holder of U.S. notes. Today, they own less than $800 billion. Japan, the largest foreign owner of Treasuries, has also been fairly quiet in terms of purchases, but hedging costs began to dent the rationale for being active bidders.
This week’s record 10-year auction saw foreign buying, “Indirect Bidders,” outpacing domestic buyers, “Direct Bidders,” as foreign buyers were responsible for 70.1% of overall demand. This was the largest foreign purchase since February 2023. It’s concerning why domestic interest in the auction was weak, and why foreign interest was particularly strong. One theory is that international investors are more concerned about geopolitical risk and stocking up on Treasuries, which are still the most important risk-off refuge.
Commodities Mostly Lower: Energy prices advanced as natural gas prices pulled back amid supply surplus concerns. West Texas Intermediate gained given Middle East tensions as hope for a ceasefire in the Israel-Hamas conflict dims. Gold lost ground, continuing to struggle to break through key resistance near $2,075 as a stronger dollar and increasing bond yields pressured the yellow metal.
Economic Weekly Roundup
ISM Services Report: The composite increased to over 53 in January from over 50 in December as values above 50 imply growth. New orders, a leading indicator of future activity, picked up in January despite geopolitical pressures. In addition, the prices paid index rose above 60 for the first time in 11 months.
Market participants may be concerned about potential price pressures as purchasing managers reported a big uptick in prices paid, mostly reflecting the increase in shipping costs. However, we believe this uptick should be temporary. Investors should expect prices to revert if geopolitical conditions in the Red Sea improve. The World Container Index has already declined in February after reaching a high near the end of January.
India — a Bright Spot: Earlier this week, investors received a look at India’s economy through the S&P Global Purchasing Managers' Index (PMI), which covers both the services economy as well as manufacturing and construction. Business sentiment was quite strong in January, suggesting this emerging market is an outlier within emerging markets.
Excluding China, India has the heaviest weight in emerging markets, making up roughly 18% of the MSCI Emerging Markets Index. India’s PMI rose to 61.2 in January, the strongest reading since July. In contrast, PMIs for Germany, France, and the Eurozone, as an aggregate, are all below 50, indicating shrinking business activity. LPL Research still favors domestic over emerging markets, but India’s economic growth remains noteworthy.
Weekly Employment Report: Both continuing and initial claims came in below analysts’ expectations and the prior week’s reading. LPL Research believes the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the lagged effects of tighter monetary policy.
Week Ahead
The following economic data is slated for the week ahead:
Monday: Treasury budget (Jan)
Tuesday: January Consumer Price Index, NFIB Small Business Index (Jan), hourly earnings (Jan), average workweek (Jan)
Thursday: Initial and continuing claims, export/import price index (Jan), retail sales (Jan), capacity utilization (Jan), industrial production (Jan), manufacturing production (Jan), business inventories (Dec), NAHB Housing Market Index (Feb)
Friday: Building permits (Jan), housing starts (Jan), Producer Price Index (Jan), Michigan sentiment (Feb)
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