November 11, 2024
Good morning,
The stock market seemed to cheer Donald Trump’s victory last week. The bond market did not. On Wednesday, the S&P 500 Index (SPX) surged +2.5%, the best day after the election since at least 1928. Long-term Treasury’s dropped -2.3% in price, the 10th worst day after an election. On the week, the SPX gained +4.66%, and non-U.S. indices were up a little more than half that (worse in local currency terms vs. dollar strength). The continuation of the rally last week is no reason to change the near-term bullish outlook, but it is time to put the champagne down and watch for further warning signs following last week’s market message.
As mentioned before, the stock market entered the election in a strong technical position – a sequence of higher highs confirmed by highs in breadth measures (Advance/Decline Measure) and trend measures (percent of stocks above their moving average lines). In a “trust but verify” analytical framework, confirmation by breadth and trend measures are the verification data points. Divergences (non-confirmations) are warning signs.
Last week’s new highs in the major indices were not confirmed by new highs in breadth or trend measurements. The culprit was rotation. At the asset class level, bonds got crushed as mentioned. Within equities, the rotation was from defensives to cyclicals. At the sector level, Financials, Industrials, Consumer Discretionary, and Energy returns were also their best post-election returns since sector data began in 1972. Defensive sectors suffered. Consumer Staples’ 1.6% plunge was the second-worst day after the election performance for the sector. Utilities’ 1.0% drop ranked ninth out of 14. Peaks in breadth and trend measures (August unless new highs are recorded in the weeks ahead) normally lead the peak in a bull market by months. This aligns well with a healthy short-term tape into year end.
In sum, last week, the post-election rally was positive but has been more of a rotation amid expectations of faster economic growth and higher inflation. From a technical perspective, the risk is that the rotation turns into divergences, especially if bond yields continue to rise.
This week we still have some important Q3 earnings reports (~90% of the SPX has reported so far) and we’ll also get the October Consumer Price Index (CPI) and Producer Price Index (PPI) inflation reports on Wednesday and Thursday, respectively.
Be well,
Mike
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