When Good News Is Just…Good News
As a contrarian investor, I always try to read between the headlines and bet against the conventional wisdom. In the perverse logic of Wall Street, good news can be bad news, and vice versa.
But sometimes, as Dr. Freud once said, a cigar is just a cigar. Investors have witnessed a spate of good news this week. Let’s just enjoy it.
In a week marked by a series of positive developments, the financial landscape has been reshaped, propelling the S&P 500 to a three-month high and sparking a rebound in the bond market.
The ripple effects of lower-than-expected consumer prices, coupled with encouraging retail sales figures and a favorable political outcome on Capitol Hill, have contributed to renewed optimism among investors.
The week started with a broad market rally triggered by a lower-than-expected consumer price index (CPI) reading for October. This upward momentum was sustained as producer prices also exhibited signs of cooling and retail sales outperformed expectations. Notably, small-cap stocks have been on the rise, a sign of economic optimism.
Contributing to bullish sentiment was approval of a spending bill by the U.S. House, aimed at averting a government shutdown. This bill, which is anticipated to pass in the Senate, removed a near-term uncertainty that had been looming over the markets. That said, the new House Speaker, Mike Johnson (R-LA), had to reach across the aisle and garner Democratic votes to get the bill passed, which in turn has angered the GOP’s far-right. The Johnson Death Watch has commenced.
Meanwhile, Asian equity markets have gotten a boost from better-than-expected retail sales and industrial data in the region, further enhancing global investor confidence.
The big inflection point has been the decline in government bond yields. The benchmark 10-year U.S. Treasury yield has substantially retreated from the worrisome height of 5% reached last month to close at 4.44% on Thursday, below its 50-day moving average (see chart):
Despite elevated interest rates, the American consumer remains in a mood to spend, albeit less so on discretionary items. U.S. retail sales for October demonstrated a milder decline than anticipated (-0.1%), with prior months revised higher. The dip was primarily attributed to lower gasoline sales resulting from a decline in prices at the pump.
However, sales excluding gasoline, autos, building materials, and food services rose by 0.2% month-over-month following an upward revised 0.7% gain. Resilient consumer spending is expected to continue supporting overall growth in the final quarter of the year, as the holiday seasonal effect kicks in.
The unexpected decline in consumer and producer prices reinforces the disinflation trend, providing the Federal Reserve with room to potentially conclude its tightening campaign. These economic indicators collectively paint a picture of sustained economic expansion.
The S&P 500 index continues to hover above its 50- and 200-day moving averages. Moving averages identify the trend in the movement of a stock or index to determine support and resistance levels.
The New York Stock Exchange Advance/Decline line (NYAD) also hovers above it 50- and 200-day moving averages. The NYAD shows how many stocks are advancing versus declining in any given period on the New York Stock Exchange. A rising NYAD is bullish, because it denotes improving market breadth.
The main U.S. stock market indices on Thursday took a breather and closed mixed, as follows:
- DJIA: -0.13%
- S&P 500: +0.12%
- NASDAQ: +0.07%
- Russell 2000: -1.52%
The trends for economic growth, corporate earnings, and interest rates appear to be moving in the right direction, providing a positive backdrop for investors as they set their sights on 2024.
However, despite the stock rally and signs of economic strength, maybe you’re still spooked by market volatility. For market-thumping gains with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.
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John Persinos is the editorial director of Investing Daily.