(Bloomberg) — Stocks have lost steam following a fierce post-election rally that prompted calls for a brief respite amid signs of buyer fatigue.
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Stocks are down from near all-time highs, and the S&P 500 is close to technically overbought levels. This follows a surge this year that saw the benchmark gauge rise 25%. Several measures highlight traders’ strong optimism, including the latest figures from the American Association of Individual Investors, which showed a surge in bullish sentiment last week.
Matt Maley of Miller Tabak + Co said: “We are seeing signs that the stock market is becoming increasingly ‘tired.’ We may see a bit of a decline soon. That’s actually a normal and healthy situation.”
Ahead of Jerome Powell’s speech on Thursday, traders took a close look at economic data. U.S. producer prices rose in October, partly driven by gains in portfolio management and other categories reflected in the Federal Reserve’s preferred inflation measure. The unemployment benefit application rate fell to its lowest level since May.
“The question we have is whether Powell’s dovish stance will reset the tone for higher long-term interest rates. To that question alone our answer is ‘not now’,” said Andrew Brenner of NatAlliance Securities. “But he will continue to support Fed easing in the near term, and even that will have limited effect.”
The S&P 500 index fell to about 5,970. The Nasdaq 100 fell 0.3%. The Dow Jones Industrial Average fell 0.3%. Nvidia Corp. posted technical gains, but Cisco Systems Inc. fell on a conservative full-year outlook. Walt Disney Co. rose 7% on higher profits.
The 10-year Treasury yield fell 5 basis points to 4.41%. The Bloomberg Dollar Spot Index faltered.
Stocks have lost steam following a strong post-election rally that reflected optimism that President-elect Donald Trump’s agenda will support business growth.
This bullish momentum remains intact, with investors still reluctant to sell, but caution is advised, according to Fawad Razaqzada of City Index and Forex.com. He pointed out that the S&P 500 is clearly overbought on several indicators, a sign that a correction or consolidation may be needed.
“Full-scale selling is unlikely to occur unless the index first breaks through several support levels, but current conditions suggest that the S&P 500 may decline moderately,” Razakzada added. “For experienced traders, a short-term decline may present a buying opportunity, but there are no clear signs of a trend reversal yet.”
With excitement over a Republican White House and congressional landslide victory, the S&P 500 could reach 6,100 before the end of the year, but breaking above that level in the near term could be difficult, according to Morgan Stanley’s Mike Wilson.
Wilson said in an interview with Bloomberg TV that the market could come under pressure from expectations of a backup in benchmark borrowing rates or less aggressive monetary easing from the Federal Reserve, adding that the decline would probably be seen as a buying opportunity.
U.S. stock benchmarks are likely to rise by the end of the year, according to UBS Group AG strategists including Maxwell Grinacoff. A market crash is possible, but not the base case.
With Commodity Trading Advisor funds already at their largest long positions, marginal upside from options dealers’ sell gamma positioning, and Trump re-electing well priced, this is the more likely scenario for the market to go higher, they noted.
The stock market has largely ignored the rise in bond yields as economic growth continues, but it’s still worth noting.
The more likely the Federal Reserve will cut interest rates in December, the more likely it is that the already strong economy will strengthen further, according to Dennis DeBusschere of 22V Research. He added that economic data would need to remain consistent with a growth rate of around 2.5% (or lower) for the 10-year yield to remain at its current level.
“While we expect 10-year yields to remain at current levels, we expect growth above 2.5% to push yields higher and potentially push them past 4.55%,” DeBusschere said. “This level of yield will be a headwind for small caps, debt risk names and other riskier factors.”
Indeed, Trump’s victory in the US election has pushed the Russell 2000 index of small companies back to levels last seen three years ago, but the excesses in interest rates remain an obstacle.
Morgan Stanley’s Wilson said this week that the main risk to small-cap stocks now, which wasn’t there in 2016, is the negative correlation between markets and interest rates, which there was a positive correlation eight years ago when Trump first took the White House. The Russell 2000 index is up 60% during Trump’s first term, but still lags the S&P 500 and Nasdaq 100 indexes.
“This means that in today’s late-cycle environment, the adverse sensitivity of these groups to interest rate increases is greater than it has been over that period,” he warned clients in a note. “If interest rates rise further after the election, these groups could be held back from a relative performance perspective.”
According to Andrew Tyler of JPMorgan Chase & Co., the possibility of a return to inflation is being considered, but the prospect of another round of inflation in December ahead of the next Federal Reserve meeting is likely to dampen the mood for risk even as U.S. data heats up further. It’s unlikely to get derailed.
Several policymakers in comments this week called for a cautious approach to further interest rate cuts given the strong economy, continuing inflation concerns and widespread uncertainty.
Richmond Federal Reserve President Tom Barkin said the central bank had made “significant progress” but stressed officials could not declare victory. Federal Reserve President Adriana Kugler said policymakers should focus on both the central bank’s inflation and employment targets.
“It seems appropriate for Powell to adopt a cautious tone and to delay production cuts until early 2025, given the strength of the data on the real side and the need to bring inflation back to target levels,” Evercore’s Krishna Guha said. .
Guha’s base case has the Fed cutting interest rates in December, followed by three cuts in quarterly cycles (March, June, and September) in 2025, followed by a pause at the end of 2025.
Swap traders see a roughly 80% chance that the Federal Reserve will cut interest rates again next month.
Company Highlights:
Shares of Hims & Hers Health Inc. fell the most in its five-year history after Amazon.com Inc. said it would begin marketing an anti-hair loss drug, a critical component of the telemedicine company’s business.
Meta Platforms Inc. was fined 798 million euros ($841 million) by European Union regulators for linking its Facebook Marketplace service to the wider social network. This is the first fine for an EU antitrust violation by a U.S. tech giant.
ASML Holding NV, a Dutch manufacturer of advanced chipmaking machines critical to global supply chains, reaffirmed its long-term profit outlook as it capitalizes on booming demand for artificial intelligence-driven semiconductors.
Ford Motor Co. has agreed to a $165 million civil penalty to settle claims that the company failed to timely recall cars with defective rearview cameras. This is the second largest fine ever issued by the National Highway Traffic Safety Administration.
Merck & Co. has licensed an experimental cancer antibody from a privately held Chinese company in a deal worth $588 million upfront and $2.7 billion in milestone payments.
General Mills Inc., known for cereal brands like Cheerios, has acquired the North American operations of Whitebridge Pet Brands for $1.45 billion in its fifth acquisition in the pet food sector since 2018.
Capri Holdings Ltd and Tapestry Inc. scrapped their $8.5 billion merger plan after a court order froze the U.S. fashion companies’ proposed combination amid opposition from antitrust regulators.
JD.com Inc.’s quarterly sales rose 5.1%, a modest expansion that suggests Chinese consumers are spending cautiously again as the country attempts to stimulate the economy.
Key events this week:
China Retail Sales, Industrial Production, Friday
U.S. Retail Sales, Imperial Manufacturing, Industrial Production, Friday
The main movements in the market are:
stock
The S&P 500 was down 0.3% as of 12:02 p.m. New York time.
The Nasdaq 100 index fell 0.3%.
The Dow Jones Industrial Average fell 0.3%.
The Stoxx Europe 600 index rose 1.1%.
MSCI World Index fell 0.2%
call
The Bloomberg Dollar Spot Index was little changed.
The euro was little changed at $1.0560.
The British pound was little changed at $1.2703.
The Japanese yen fell 0.3% to 155.98 per dollar.
cryptocurrency
Bitcoin rose 0.4% to $88,961.39.
Ethereum rose 0.2% to $3,161.25.
bond
The 10-year Treasury yield fell 5 basis points to 4.41%.
German 10-year government bond yields fell 5 basis points to 2.34%.
The UK 10-year government bond yield fell 4 basis points to 4.48%.
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This article was produced with help from Bloomberg Automation.
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