Markets Surge in Spite of Losses in Big Tech Names
The stock markets rocketed last week with the Dow (+5.7%), NASDAQ (+2.2%) and S&P 500 (+4.0%). With one day left in October, we have had a strong month but a swift divergence between the Dow (gaining almost 15%) and the NASDAQ (gaining “only” about 5%). Meanwhile, taxable bonds gained more than 1%, but tax-free municipal bonds continued to slip, losing more than 0.5%.
Last week’s surge in the stock markets seemingly didn’t have a fundamental foundation to it. We are amid corporate earnings season, and earnings have been far from spectacular. Some economists believe the market rally may be because investors were relieved that forward-looking guidance wasn’t worse. The top tech-related stocks got hit hard last week, as Microsoft, Google, Amazon, and Meta (formerly Facebook) got hammered with losses of 3%, 5%, 13%, and 24%, respectively. Those big losses contributed to the divergence between the Dow and NASDAQ performance for the week.
There were lots of macroeconomic data reported last week. Preliminary PMIs for the US and Eurozone showed that both regions are in a contractionary period, and their trends are moving further negative. Consumer confidence fell more sharply than expected last week and the Consumer Expectations Index remained below a key number of 80 – a reading typically associated with a recession. US third quarter GDP was reported at a surprisingly high value of +2.6%, reversing the prior two quarters of negative growth. While the GDP number appears good, the underlying data shows a continued economic slowdown. Also last week, the 10-year and 3-month Treasury yields inverted, which has historically been an even more timely recession predictor.
As you can see, last week’s (and month’s) market rally doesn’t seem to have much foundation to it, albeit they are nice to see. According to John Hancock Investment’s Chief Investment Officer (CIO), “… risk assets have yet to price in an economic recession. In our view, this is an opportune time to further prune back risk exposure in portfolios as markets appear disconnected from the macro backdrop”. In short, there seems to be concern that these market rallies may be unjustified. This week, all eyes will be on the Fed, as they are likely to raise interest rates by 0.75% on Wednesday, but economists will be listening more closely to the Fed’s comments for future rate hikes.
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