August 16, 2024

Special comment – the next edition of the Daily Market Notes will appear on Monday, August 26th.

In another astounding upside day (which seems to be repeating itself lately), the market jumped to its fourth best session of the year and its sixth straight gain as the S&P is now back to within 2.2% of its all-time high after briefly falling close to 10% below it.

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The Dow gained 554 to 40,563 led by the usual ones such as BA, CAT, CRM, HD and V. In addition, earnings from neutral CSCO and stronger WMT helped as well.

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The S&P did better as it usually does on these kinds of higher days with an 88 point advance to 5543 on strength in many of the large technology stocks and financials as well. The Nasdaq did the best on the huge strength in the technology leaders once again for 402 points to 17,594.

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Even the recently sluggish Russell 2000 Index of smaller stocks finally joined the recent upside party with a 51 point gain to 2135 on some buying in smaller stocks and the VIX continued its unprecedented collapse and is now back to 15.23 and those who could not wait to buy it at 66 must be wondering – what did we do wrong?, as it fell to levels not seen since the higher days of early July.

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Data released today showed that the U.S. economy is holding up better than expected with particular credit going to the country’s shoppers.

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Treasury yields also leaped in the bond market following the encouraging economic reports. One said U.S. shoppers increased their spending at retailers last month by much more than economists expected, while another said fewer U.S. workers applied for unemployment benefits. The July retail sales report came in at 0.1% while ex-autos it gained 0.4%. Weekly jobless claims eased back again to 227,000.

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That dud of a jobs report last month raised worries the U.S. economy could buckle under the weight of high interest rates from the Federal Reserve and it contributed to turmoil in stock markets worldwide. But Thursday’s reports hint a perfect landing may still be possible, one where the Fed slows the economy’s growth by just enough through higher rates to stifle inflation but not so much that it causes a recession.

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Inflation has also been improving since it topped 9% two summers ago, punctuated by reports earlier this week on prices at both the consumer and wholesale levels. That has cleared the way for the Federal Reserve to soon deliver the cuts to interest rates that investors want to see.

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WMT added to the optimism after it delivered a bigger profit than analysts expected, and its shares climbed 6%. The retail giant also raised its forecast for sales for the full year, indicating U.S. shoppers can keep spending. Such spending by U.S. consumers makes up the bulk of the economy.

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It was just one of several big companies to join the parade of businesses topping analysts’ expectations for second-quarter profit.

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DE also gained 6% higher after the seller of backhoes, dozers and other equipment reported higher profit and revenue than expected. That was despite what it called challenging conditions across the agricultural and construction sectors globally.

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CSCO’s profit and revenue for the latest quarter squeaked past analysts’ forecasts, and its stock jumped 7% after the maker of networking equipment also said it would eliminate thousands of jobs as it shifts to faster-growing areas of technology like artificial intelligence.

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Another big winner was ULTA which rose by 11% to help lead the market after Warren Buffett’s Berkshire Hathaway revealed it has built an ownership stake in the retailer. It had come down by 200 points recently.

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In the bond market, the 10-year Treasury yield clambered up to 3.91% from 3.84% late Wednesday following the strong economic data.

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The two-year Treasury yield, which more closely follows expectations for action by the Federal Reserve, jumped to 4.09% from 3.96% late Wednesday.

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Traders still widely expect the Federal Reserve to cut its main interest rate at its next meeting in September, which would be the first such cut since the 2020 COVID crash.

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The Fed has been clear about the tightrope it began walking when it started hiking rates sharply in March 2022: Being too aggressive would choke the economy, but going too soft would give inflation more oxygen and hurt everyone.

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The signals of a resilient U.S. economy helped drive smaller stocks in particular on Thursday. Smaller companies can be more beholden to the strength of the U.S. economy than huge multinationals, and the Russell 2000 index of smaller stocks rose 2.5% to help lead the market.

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Smaller stocks have been even jumpier than the rest of the market, rising more than the S&P when data indicate the U.S. economy is doing well and interest rates are about to come down, but tumbling more sharply when pessimism rises.

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In stock markets abroad, indexes also rose in much of Asia and Europe.

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Japan’s Nikkei 225 rose 0.8% after data showed its economy returned to growth during the spring. The U.K. economy also grew during the latest quarter, a welcome signal following a rough run, and the FTSE 100 rose 0.8% in London.

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Earnings for the second-quarter come to an end this week with the following: yesterday – Dow components CSCO and WMT higher in addition to LITE, BABA, TPR, DE; today – AMAT lower.

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Economic reports will have: yesterday – weekly jobless claims slipped again to 227,000, July retail sales rose by 0.1% and ex-autos were higher by 0.4%, July industrial production fell by 0.6% due to a shortfall in utilities output, July import prices were up by 0.1% and ex-petroleum were higher by 0.2% while export prices were up by 0.7% and up by 1.4% year over year; today – July housing starts and mid-month July U. of Michigan Consumer Sentiment Survey.