May 16, 2024

Well, well, well – and how many times did investors over the years sell out of these main indices because of a bearish situation, only to find out that guess what – they all ended higher than ever before yesterday. It sort of reminds one of the situation here the Dow ended “Black Monday” October 19, 1987 at 1,800 and never closed lower than that on its way to almost 40,000 at the present time. So this begs the question of why does a person ever sell on these bearish patterns when one knows that over time these indices do tend to reach record highs?

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So the Dow gained 349 points to a best-ever 39,908 led by large gains in AMGN, CRM, GS, HD and MSFT. The S&P did even better with a strong 61 point advance to its highest close of 5308 led by its three largest components which are MSFT, AAPL and newly energized NVDA ahead of its earnings report next Wednesday, in addition to homebuilders, financials and energy.

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The Nasdaq added to its record gains from the day before to a new high of 231 up to 16,742 led by those large tech issues while the Russell 2000 Index of small stocks also ended better than ever at 2109 for a 22 point advance.

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So it was not surprising that the VIX dropped all the way down right to support levels of 12.45 and if it breaks below that area, the market could continue to make another leg higher, all the way down to a 10 VIX, which is as low as it is going to get and that should finally stop equities on the upside.

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Relief came from the bond market, where Treasury yields eased to release some of the pressure on the stock market. The moves resulted from strengthening expectations among traders that the Federal Reserve may indeed cut its main interest rate this year.

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Stocks that tend to benefit the most from lower interest rates helped lead the market. Homebuilders were strong on hopes that cuts by the Fed could lead to easier mortgage rates, with the main ones in that area gaining around 5%.

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Real-estate stocks in the S&P climbed 1.7%, while stocks of electricity companies and other utilities rose 1.4%. The dividends they pay look better to investors when bonds are paying less in interest.

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All of the optimism came from the April C.P.I. report which showed a gain of 3.4% year over year which is not great but it was down from the prior month’s advance of 3.4%. The month over month gain was 0.5%. The details of this report will be the subject of the Weekly Market Comments released early next week.

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Perhaps more importantly, the slowdown was a relief after reports for the C.P.I. earlier this year had consistently come in worse than expected. That string of disappointing data had washed out forecasts for the Federal Reserve to lower its main interest rate soon.

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The federal funds rate is sitting at its highest level in more than two decades, and a cut would help investment prices and remove some of the downward pressure on the economy.

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A separate report showed no growth in spending at U.S. retailers in April from March. It was a weaker showing than the 0.4% growth economists expected.

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Slowing growth in retail sales could be seen as a positive for markets, because it could reduce the upward pressure on inflation. But a stalling out also raises worries about cracks forming in U.S. consumer spending, which has been one of the main pillars keeping the economy out of a recession. Pressure has grown particularly on lower-income households.

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That could threaten one of the main hopes that has rallied the U.S. stock market toward its records, namely that the Federal Reserve can pull off the balancing act of slowing the economy enough through high interest rates to stamp out high inflation but not so much that it causes a bad recession.

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A separate report showed that the New York Fed Empire Manufacturing Survey fell by -15 which was interpreted at least yesterday as the old “bad news is good news” scenario.

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On the losing end were the old meme-stocks which had a bit of a revival the prior two days, with GME and AMC reversing as the latter sank 20% after it said it will issue nearly 23.3 million shares of its stock to wipe out $163.9 million in debt.

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In the bond market, the yield on the 10-year Treasury eased to 4.34% from 4.45% late Tuesday. The two-year yield, which moves more closely with expectation for Fed action, sank to 4.72% to from 4.82%. Traders are now forecasting a nearly 95% probability that the Fed cuts its main interest rate at least once this year, according to data from CME Group. That is up from just below 90% a day before. In stock markets abroad, Shanghai’s fell 0.8% after China’s central bank left a key lending rate unchanged. Indexes were mixed elsewhere in Asia and modestly higher in Europe.

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First-quarter earnings season is winding down with the following reporting this week: Dow components CSCO and WMT higher while BIDU, DE are lower; tonight - AMAT, TTWO, UAA.

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Economic reports will be important with: yesterday – April C.P.I. was ahead by 0.5% and 3.4% year over year and these were slightly lower than expected, April retail sales were unchanged and NY State Empire May Manufacturing Survey was down 15; today - weekly jobless claims were virtually unchanged at 222K, April housing starts fell to 1.36 million, May Philadelphia Fed Manufacturing Index rose to 4.5, April import prices rose by 0.9%, export prices rose by 1%; April industrial production and capacity utilization; Friday –April L.E.I.