(Monday market open) Corporate earnings and inflation data dominated the news cycle recently, but this week Wall Street takes a spring break trip to Washington, D.C., for congressional testimony by Fed Chairman Jerome Powell and another possible shutdown showdown.
"There's never a dull moment in D.C.," said Michael Townsend, managing director, legislative and regulatory affairs at Schwab.
Major U.S. indexes mostly slipped before Monday's open after many finished Friday at new record highs, lifted by the sizzling semiconductor market. Weakness in Apple (AAPL) appeared to weigh on the S&P 500® index (SPX) early Monday, though strength in Nvidia (NVDA) is countering that. And in late-breaking news, CNBC reported this morning that JetBlue (JBLU) and Spirit Airlines (SAVE) terminated their $3.8 billion merger agreement.
As investors brace for Powell's testimony to House and Senate committees Wednesday and Thursday and count down the days until Friday's February jobs report, fixed income trading is far better aligned with Fed projections. For a while earlier this year, the market predicted as many as seven rate cuts in 2024 despite the Fed projecting just three.
"The Treasury market has fully now adjusted to the idea of what the Fed has been signaling in the dot plot," said Kathy Jones, chief fixed income strategist at Schwab. "And that is that yields will probably stay where they are until the second half of the year. The market's pricing in three rate cuts, which is consistent with the last dot plot from the Fed."
Friday's jobs report and February's inflation data later this month could potentially influence the updated "dot plot" due March 20. The quarterly dot plot is how Fed policymakers map their future interest rate expectations.. The closely watched 10-year Treasury note yield ticked up to 4.20% early Monday, but that's below last week's peaks.
Back on Wall Street, the retail sector keeps reporting. Target (TGT) gets the shopping cart rolling again tomorrow.
Between everything happening in Washington, big-box earnings, and the jobs report, don't be surprised if volatility climbs this week, potentially causing larger daily swings in the major indexes. Also, the explosive rally in semiconductor stocks last week has the sector trading well above its long-term average, meaning a profit-taking pullback can't be ruled out at some point.
Futures based on the SPX fell 0.14% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) slipped 0.4%, and futures based on the Nasdaq-100® (NDX) rose 0.04%.
Bitcoin climbed above $66,000 this morning, not far below the $69,000 reached in November 2021.
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- The 10-year U.S. Treasury Yield (TNX) rose two basis points to 4.20%.
- The U.S. Dollar Index ($DXY) is steady at 103.87, hugging its 200-day moving average.
- The Cboe Volatility Index® (VIX) climbed slightly to 13.51.
- WTI Crude Oil (/CL) slid 0.7% to $79.40 per barrel after OPEC announced this weekend it would extend current production cuts until mid-year.
What to watch
Week ahead: Once again, investors face a backloaded data schedule as they return to work. This week, it's the countdown to Friday's February jobs report.
Analysts expect February jobs growth of 200,000, down from January's surprisingly robust 353,000, Trading Economics said. A 200,000 tally would potentially bring some relief after consecutive jobs reports triggered fears of an overly hot economy and potential wage-generated inflation.
A drop in job openings last year sparked hopes that the gap between workers and employers might be narrowing, but recent reports saw openings swell again. Analysts expect Wednesday's JOLTS data to show another hefty headline figure of 8.89 million in January, Trading Economics said.
Tuesday's January Factory Orders data provides another look at the less resilient U.S. manufacturing economy. Analysts expect a 2.9% monthly decline following December's 0.2% gain, according to Trading Economics. The report comes after Friday's February ISM Manufacturing Index remained in contraction for the 16th consecutive month and missed the Briefing.com consensus estimate.
Tomorrow also features ISM Non-Manufacturing PMI, and services is where a lot of the recent inflation has been showing up. This could be another touchpoint.
Wild week in Washington: There was no shutdown thanks to last-minute negotiations in Congress, but Washington isn't out of the woods yet. Tomorrow is "Super Tuesday" in the presidential primaries, Powell testifies to Congress Wednesday and Thursday, and President Biden delivers his State of the Union speech Thursday. "There's also a new shutdown deadline on Friday," warned Schwab's Townsend.
Stimulus update: The Financial Times reported Monday that China's President Xi Jinping is resisting pressure to increase stimulus efforts. China's economy has been struggling, bogged down by weakness in the real estate market. Still, most Asian stock indexes rose earlier Monday. Also overseas, investors brace for Thursday's European Central Bank (ECB) rate decision.
Stocks in spotlight
Retail rolls on: The days ahead bring earnings from Target, Costco (COST), and Foot Locker (FL). Target earnings tomorrow come after a strong showing from Walmart (WMT), though last week's soft consumer sentiment and confidence reports raised eyebrows about future demand.
Target climbed double digits when it reported in November and beat analysts' expectations. However, comparable sales declined year over year, and Target guided for a mid-single digit decline in comparable sales during the holiday quarter. The company aggressively promoted its holiday sales, and tomorrow investors might learn how that went. Shares are up about 9% year to date, outpacing 7.7% gains for the SPX over that timeframe.
Pulling back, the big question entering the new year was whether earnings and profit margins could keep up with stock multiple expansions. Well, 73% of S&P 500 companies reported a Q4 positive earnings per share (EPS) surprise and 64% of S&P 500 companies reported a positive revenue surprise. Information technology led the way with 88% of companies reporting earnings above estimates. The current SPX valuation is high, but investors are looking past this, as of now.
Besides retail earnings, watch for semiconductor and enterprise software company Broadcom's (AVGO) quarterly results scheduled this Thursday. That could put AI back in focus after Nvidia's solid earnings late last month.
Breadth check: Toward the end of last week, 66% of S&P 500 stocks traded above their 50-day moving averages. The comparable figures were 46% for the Nasdaq Composite® ($COMP) and 51% for the small-cap Russell 2000® (RUT). Those are below 80% or better levels back in December for most indexes.
The RUT saw strong momentum last week with advancers outnumbering decliners by two-to-one. Small caps remain below their late 2021 highs, and the RUT is now the only major U.S. index not to record a new all-time high this year.
Stocks on the move early Monday include:
- Shares of Super Micro Computer (SMCI) jumped 15% ahead of the opening bell after S&P Dow Jones Indices said the company's shares would be added to the SPX later this month.
- Apple (AAPL), which is lower year to date, fell another 1% ahead of Monday's open after being fined more than 1.8 billion euros by the European Commission, which called Apple's app store rules for music streamers "abusive," CNBC reported. Apple denied consumer harm. Apple's market capitalization of nearly $2.8 trillion means its shares can have a large impact on the market cap weighted SPX. Shares are down more than 3% year to date.
- Shares of Viking Therapeutics (VKTX) rose 8% in premarket trading after CNBC reported that the biotech seeking to join the weight-loss drug space may become a takeover target.
- Macy's (M) shares soared 15% in premarket trading after investors Arkhouse Management and Brigade Capital raised their offer price to $24 per share for the remaining stake they don't own to take the company private, Reuters reported.
Friday in review:
Chipmaker strength drove a 4.3% advance in the Philadelphia Semiconductor Index (SOX), which ended at a record high Friday. The Nasdaq-100, which includes the Nasdaq's largest non-financial companies, also ended at a record high. Small-cap shares finished the week strong. The Russell 2000 rose 1.1% to settle at a 23-month high and notched a 3% gain for the week, a major turnaround after it lagged the other indexes for months. The SPX is up 16 of the last 18 weeks.
Banks were among the weakest performers as concerns over regional lenders flared up, underscored by another nosedive in shares of troubled New York Community Bancorp (NYCB).
"It seems to me that the money is being drawn toward the areas within technology that are perceived to be the highest-quality growth, and apparently that's chip stocks," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
"Given the firm breakout to fresh all-time highs in the SOX on Thursday/Friday, which didn't seem to have any specific catalysts outside of a strong earnings report from Dell (DELL), this conveys that the investors' appetite for growth is still strong. If this persists this week it may suggest that the rally is kicking into another gear, which may be accompanied by higher volatility (either up or down)," Peterson added.
Eye on the Fed
Early today, futures trading pegged chances at 97% of the Federal Open Market Committee (FOMC) leaving rates unchanged at the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 26% chance the funds rate will be lower than now after the Fed's May meeting. Chances rise to 70% of at least one cut by June and 89% by July. Those probabilities are little changed from Friday, though last week featured some unexpectedly soft U.S. economic data.
Melt up: Last week's record highs for major U.S. indexes mean stocks appear overbought, but the near-term path might remain higher. Read Schwab's Weekly Traders Outlook for more thoughts on how to approach the market in coming days and what might have the most influence on daily trading.
Ideas to mull as you trade or invest
Earnings outlook: Analysts remain optimistic about 2024 earnings, according to the latest update from research firm FactSet, but it’s a fluid situation. For now, they expect 11% year-over-year EPS growth for the full year of 2024, FactSet said, though projected Q1 EPS growth is a pedestrian 3.6%. The following quarters (two through four) see earnings growth expectations generally accelerate until they reach double digits by Q4. One thing to remember is that many of these projections probably got made when most of the market expected the Fed to dramatically cut interest rates this year. If that gets pushed back or if the Fed cuts less than expected, there could be a potential impact on earnings growth. It might be interesting to follow analysts' average 2024 EPS outlook once the Fed meets March 19–20 and releases its updated projections just ahead of Q1 earnings season.
Talking technicals: We still appear to be in a sideways to slightly lower consolidation period. "Let’s take a step back and remind ourselves that the SPX is up essentially 25% from the October 27 low, and this type of a move without a healthy 3% to 5% correction (sans maybe the first week of 2024) isn’t necessarily 'healthy' price action," said Schwab's Peterson. "Technically, in regard to the sustainability of a trend, the bulls would probably like to see more of a stairstep uptrend (two steps up, one step down, etc.) which allows for healthy profit taking and better entry points for a new shareholder base."
Sectors rated: Schwab has released its monthly Schwab Sector Views, the firm's six-to-12-month outlook for stock sectors representing broad swaths of the economy. Financials, energy, and materials are rated outperform, while real estate and consumer discretionary get underperform ratings. The other sectors are rated market perform. For the full breakdown and analysis, read the Sector Views post.
March 5: January Factory Orders, ISM Non-Manufacturing PMI, and expected earnings from Target (TGT), Ross Stores (ROST), and CrowdStrike (CRWD).
March 6: January Wholesale Inventories, January Job Openings and Labor Turnover Survey (JOLTS), and expected earnings from Campbell Soup (CPB), Foot Locker (FL), and Victoria's Secret (VSCO).
March 7: Q4 Productivity, January Trade Balance, and expected earnings from Broadcom (AVGO) and Costco (COST).
March 8: February Nonfarm Payrolls.
March 11: No major earnings or data.