{"id":42509,"date":"2023-11-05T17:56:25","date_gmt":"2023-11-05T17:56:25","guid":{"rendered":"https:\/\/innodebt.com\/markets\/the-dow-ripped-higher-last-week-why-doubters-dont-believe-in-this-rebound\/"},"modified":"2023-11-05T17:56:27","modified_gmt":"2023-11-05T17:56:27","slug":"the-dow-ripped-higher-last-week-why-doubters-dont-believe-in-this-rebound","status":"publish","type":"post","link":"https:\/\/innodebt.com\/?p=42509","title":{"rendered":"The Dow ripped higher last week. Why doubters \u2018don\u2019t believe in this rebound\u2019."},"content":{"rendered":"
The U.S. stock market just put in its best week of 2023 as Treasury yields tumbled, stoking hopes for an early \u201cSanta rally\u201d to end the year. Scrooges say there\u2019s still plenty that stands in the way.<\/p>\n
\u201cI don\u2019t believe in this rebound and I don\u2019t think we get a year-end rally,\u201d said Jason Hsu, chief investment officer at Rayliant, in a phone interview.<\/p>\n
\n
See<\/strong>: Dow scores best week since October 2022 as stocks rise after soft jobs report<\/p>\n
Doubters contend early signs of a cooling labor market, which is currently reinforcing market expectations the Federal Reserve is finished hiking rates, remains likely to curdle into a full-blown slowdown that crimps consumer spending and whacks corporate earnings in coming quarters.<\/p>\n
Bulls counter that the consumer is holding up well coming off remarkably strong third-quarter gross domestic product growth that defied economists\u2019 predictions the U.S. would be in recession by now. Consumer spending has remained robust, rising\u00a0by 4% from July to September.<\/p>\n
Consumer credit is where bearish investors see trouble brewing. \u201cData suggests the consumer is tapped out in terms of credit,\u201d Hsu said.<\/p>\n
Consumers, previously flush from pandemic stimulus payments, have been increasingly reliant on credit cards to fuel spending. Revolving credit as a share of personal spending sits below pre-COVID levels, but the trend is \u201cconcerning,\u201d said Michael Reid, U.S. economist at RBC Capital Markets, in a note.<\/p>\n
Key Words: <\/strong>Target CEO says consumers are cutting back \u2014 even on food spending<\/p>\n
Personal interest payments as a percentage of disposable income hit 2.7% in September and will continue to rise as federal student loan payments resume, Reid said. As monthly interest payments rise, consumers will need to further dip into savings to maintain current spending levels (see charts below).<\/p>\n
<\/p>\n
<\/p>\n<\/p>\n<\/figure><\/div>\n
\u201cWith little room for savings to fall further, the current path is not sustainable,\u201d Reid said.<\/p>\n
Economists will be watching the Fed\u2019s Nov. 7 consumer credit report for September.<\/p>\n
See:<\/strong> Spending like crazy? Struggling between paydays? Consumers are sending mixed signals ahead of the holidays<\/p>\n
The bulk of third-quarter earnings reporting season is now in the rearview mirror. Downbeat investors focused on weak guidance around the potential for a slower economy. <\/p>\n
And during the month of October, analysts lowered earnings-per-share estimates for the fourth quarter by a larger margin than average, according to John Butters, senior earnings analyst at FactSet.<\/p>\n
Bottom-up fourth-quarter earnings-per-share estimates fell by 3.9% between Sept. 30 and Oct. 31, he said. Analysts typically lower the bar during the first month of a quarter, but not so aggressively. Butters noted that the average fall in earnings estimates in the first month of a quarter has averaged 1.9% over the last 5 years and 1.8% over the past 10 years. <\/p>\n
A hurting consumer likely means disappointment is in store on the earnings front in coming quarters, Hsu said, even as executives attempt to guide investors toward a \u201chard landing.\u201d<\/p>\n
So what propelled stocks to a stellar week? Just as a rapid runup in long-term Treasury yields were the primary culprit behind the stock market\u2019s slide off its 2023 high set in late July, a sharp retreat by yields this past week gave equities room to snap back.<\/p>\n
After briefly trading above 5% for the first time since 2007 last week, the 10-year Treasury yield \n BX:TMUBMUSD10Y \n dropped 28.9 basis points this week for its biggest weekly decline since the period that ended on March 17. <\/p>\n
It was one positive catalyst after another for bond bulls this past week. The U.S. Treasury on Tuesday set plans for less debt issuance on the long end of the yield curve than anticipated and jobs data, particularly the Friday jobs report, showed some signs a robust jobs market may be showing some early signs of cooling.<\/p>\n
The big event came Wednesday, when the Fed, as expected, left rates unchanged and Chair Jerome Powell was seen leaving the door open to another rate hike, but not committing to one. That led investors to largely declare the Fed is done raising rates \u2014 a supposition some investors contend stands a significant chance of being proven premature.<\/p>\n
It was a backdrop that allowed stocks to score a big bounce a week after the S&P 500 \n SPX \n and Nasdaq Composite \n COMP \n had suffered corrections \u2014 a decline of 10% from their 2023 highs. The Dow Jones Industrial Average \n DJIA \n jumped 5.1% last week, its biggest such advance since the week ended Oct. 28, 2022. The S&P 500 \n SPX \n rose 5.5% and the Nasdaq advanced 6.6% \u2014 their biggest weekly rises since last November.<\/p>\n
Previously jittery bulls now see a clear path for a year-end rally. <\/p>\n
November and December have been the best two-month period on the calendar from a historical perspective with an average gain of 3% and positive performance 75% of the time, noted Mark Hackett, chief of investment research at Nationwide, in a note.<\/p>\n
Also, the market\u2019s \u201crelief rally\u201d had \u201csome notable echoes of the market bottom of a year ago, with extreme weakness in momentum and sentiment indicators,\u201d Hackett wrote. \u201cThe resilient macro backdrop, strong seasonality, and improved valuations should provide tailwinds into year-end.\u201d<\/p>\n
Technical analysts said the market\u2019s bounce, particularly Thursday\u2019s 1.9% advance by the S&P 500, helped cheer up the charts. The bounce also came as markets had become significantly oversold and bearish sentiment extreme, which can be contrarian catalysts for a rebound.<\/p>\n
However, there\u2019s still more work to be done to throw off the gloom, said Adam Turnquist, chief technical analyst for LPL Financial, in a Friday note.<\/p>\n
<\/p>\n
<\/p>\n<\/p>\n<\/figure><\/div>\n
Thursday\u2019s rally pushed the S&P 500 back above its closely watched 200-day moving average at 4,248. That\u2019s a \u201cstep in the right direction,\u201d but a close above 4,400 is needed for the index to reverse the emerging downtrend, Turnquist said, noting that market breadth remained underwhelming, with less than half the stock in the S&P 500 trading above their 200-day moving average.<\/p>\n<\/p><\/div>\n