Market Insights

Stocks just exploded higher on hopes that the Federal Reserve is done hiking interest rates.

The S&P 500 rose 5.9 percent between Friday, October 27, and Friday, November 3. It was the biggest weekly gain since last November. About 94 percent of the index’s members advanced, along with every major sector.

A flood of economic news last week suggested inflation is easing and interest rates will fall. First, the Treasury Department announced plans to issue less debt and to focus on shorter-term maturities. That helped bring down longer-term bond yields that influence mortgage rates.

Next, the Labor Department reported an unexpected drop in employment costs during the third quarter. Productivity rose more than anticipated. Those facts argue against the kind of wage/price spiral that entrenched inflation during the 1970s.

Up-to-date jobs numbers were weak. Payroll reports from both ADP and the government missed estimates. Official readings for the previous two months were revised sharply lower. In addition, unemployment rose more than forecast and wages rose less than forecast. Separately, initial jobless claims climbed past estimates to their highest level in seven weeks.

Manufacturing and service data from the Institute for Supply Management trailed estimates. New orders and employment fell as delivery times shortened. That can indicate more slack in the economy and help lower inflation.

When Bad News Is Good

Such disappointing economic numbers may sound bearish. But investors viewed them bullishly because they could make policymakers less likely to hike interest rates again. That could remove the biggest headwind since early last year, when the Fed’s war against inflation pushed stocks into a bear market.

“Should we hike more?” Chairman Jerome Powell rhetorically asked in his press conference last week. “It’s fair to say that’s the question we’re asking.”

It marked a change from previous meetings, when Powell indicated the Fed was more likely to tighten further. He also added that wage gains were consistent with his 2 percent inflation target — effectively removing another argument for higher interest rates.

“For the first year or so of our tightening cycle, the risk was all on the side of not doing enough,” he said last Wednesday. “We’ve come far enough that the risks have gotten more two-sided.”

Expectations for another rate hike have now collapsed. CME’s FedWatch Tool shows the market placing only a 5 percent probability of an increase next month, down from 39 percent in early October. By next June, odds now favor a cut of 25-50 basis points.

Housing Jumps

Housing stocks jumped the most since early 2020 as the expectations shifted. They were the top-performing group last week.

Banks, whose asset values have been hammered by the higher rates, also surged.

Real estate investment trusts were the best-performing sector overall and had their biggest weekly gain since April 2020. Technology and consumer discretionaries also rallied.

Small caps, retailers and airlines also rose more than the broader S&P 500.

Energy was the worst performer as crude oil fell to its lowest level in more than two months. The drop took shape as unrest in the Middle East remained confined to Gaza.

Consumer staples, frequently viewed as a safe haven, also lagged.

Apple and Oversold Bounces

Last week was full of earnings reports, led by Apple (AAPL). The smart phone giant inched past estimates, but investors worried about weakness in China. Is it losing market share to Huawei’s Mate 60 Pro?

Advanced Micro Devices (AMD) and Qualcomm (QCOM) climbed after their numbers. AMD had weak guidance, but investors focused on its longer-term opportunities in Artificial Intelligence.

The S&P 500’s biggest gainers were mostly companies that fell sharply in previous months and rebounded after reporting decent results. Media company Paramount (PARA) led the bounce after profitability improved at its streaming-video business. Generac (GNRC) also beat estimates. Both entered the week negative on the year.

Paycom Software (PAYC) fell the most after a product change cannibalized its core products. The 34 percent selloff was PAYC’s biggest drop since it went public in 2014, according to TradeStation data.

Onsemi (ON) also plunged after weak demand for electric vehicles hurt semiconductor orders.

Charting the Market

Investors seemed to begin last week highly concerned about the Fed and unrest in the Middle East. (The American Association of Individual Investors had the lowest “bullish” reading since May and the highest “bearish” reading since December.) That seemed to translate into cash on the sidelines, explaining the sharp relief rally when worst-case scenarios didn’t play out.

The rebound followed three straight negative months, the S&P 500’s longest losing streak since the pandemic in early 2020. It also occurred near a long-term trendline that started in October 2011 as the index neared the start of its current secular bull run.

The index is now above its 50-day moving average for the first time since mid-September.

It also reclaimed 4335, the peak from August 2022. This level became support last June and August, followed by volatile chopping in September and August. Remaining above this potentially key point could make chart watchers think buyers are retaking control of the market.

The next support they may eye is roughly 4220, near the low from early October.

The 10-year Treasury note yield and the U.S. dollar index both fell to their lowest levels in over a month. Further downside in either could reflect a belief that the Fed is done hiking and support risk appetite.

The Week Ahead

This week is much less eventful, with few economic reports and fewer earnings. Some Fed officials will speak.

Nothing is today, but John Williams of the New York Fed and Lori Logan of the Dallas Fed speak tomorrow. EBay (EBAY) and Occidental Petroleum (OXY) announce results.

Crude-oil inventories are on Wednesday morning. Walt Disney (DIS) reports earnings after the closing bell.

Thursday brings initial jobless claims.

Next week is busier, with key inflation data and retail sales.