Stock Futures Gain on Strong Global Data, Hopes for Ending 3-Week Losing Streak

(Friday market open) It’s the first Friday of the month and there’s no jobs report, so will Wall Street make any noise? Market participants may feel lost today without the usual monthly payrolls data to kick things off, but they’ll get their fix next week.

Meanwhile, the question is whether major indexes can build on yesterday’s turnaround rally driven in part by fresh hopes for a less-aggressive Federal Reserve. Early on, the answer appeared to be yes, but stay mindful that Treasury yields remain near four-month highs and could block any pre-weekend market enthusiasm.

Early numbers clicked in the right direction as stock index futures were on pace to break a three-week losing streak and yields eased following improved overseas business data. Volatility also relaxed, often a sign that stocks could have a decent runway for gains.

Just in

Overnight, there was more positive China reopening news with a better-than expected services PMI number. Hong Kong’s manufacturing PMI also rose, as did Japan’s services PMI.

On the other side of the world, European services data also were up from the prior month. The U.S. February services PMI is due just after today’s open (more below).

Morning rush

• The 10-year Treasury note yield (TNX) declined 5 basis points to 4.02%.
• The U.S. Dollar Index ($DXY) fell slightly to 104.83.
• The Cboe Volatility Index® (VIX) futures fell to 19.57.
• WTI Crude Oil (/CL) traded lower at $77.8 per barrel.

Eye on the Fed

After stocks rose Thursday following what some investors saw as dovish comments from Atlanta Federal Reserve President Raphael Bostic (see more below), Fed Governor Christopher Waller reiterated there’s still lots of work to do. Waller said “hot” data could force the Fed to raise rates higher than the 5.1% to 5.4% peak range projected back in December, Reuters reported. He also called into question progress the Fed’s made in its inflation fight, pointing to the “excessively” strong labor market and continued pricing pressure.

The Fed’s battle may not be pushing down prices but continues to take a toll on real estate. Construction spending fell again in January and has now retreated three of the last four months. Housing-related stocks mostly trade near seven-week lows, and the 30-year mortgage rate again climbed above 7% late this week. The S&P Real Estate Select Sector Index ($IXRE) is among the worst-performing sectors over the last month.

Stocks in spotlight

Broadcom (AVGO):Another day, another positive earnings report from a major info tech company. This time, it was chipmaker AVGO seeing shares gain ground in premarket trading, based mainly on exceeding analysts’ guidance estimates for the fiscal Q2 by about $100 million. Perhaps more significantly, AVGO cited “continued strength in infrastructure demand,” something not every chip company has observed lately. AVGO’s quarterly results met its previous aggressive guidance, giving the performance some extra credibility. Shares rose about 1% in premarket trading.

Shares of Costco (COST) steered the other direction, sliding as quarterly revenue came up short of Wall Street’s expectations. Earnings per share (EPS) were in line with analysts’ forecasts, but growth in same-store sales came up shy.

What to watch

Right after the open comes the Institute for Supply Management (ISM) Services Purchasing Managers’ Index (PMI). The services sector is where much of the recent growth has been, and analysts expect that to show up in today’s report.

The consensus for headline services PMI is 54.5%, according to research firm Briefing.com. That’s above the 50 level that signifies expansion. Services is the largest segment of the U.S. economy. Any sign of a pullback in February’s report would likely be welcomed by Fed-sensitive stock sectors.

We’re heading into a big jobs week. Tuesday brings the January Job Openings and Labor Turnover Survey (JOLTS), and the big kahuna is next Friday’s February Nonfarm Payrolls report. The January payrolls report, with its unexpected and market-unfriendly increase of 517,000 positions, arguably set up the February slump. The 10-year Treasury yield closed at 3.396% the day before that report and as of this morning was just above 4%.

Recent JOLTS reports delivered upside surprises even as the Fed tried to cool down the hot labor market. With JOLTS, watch how many people are leaving their jobs voluntarily—a high number here could indicate employees still feel confident they’ll find new positions. However, when people start hunkering  down where they are, that’s generally a sign of a tightening labor market. Two private labor surveys released last week showed the number of job openings falling, so we’ll see if JOLTS finally starts to mirror that contraction.

Market minutes

Here’s how the major indexes performed Thursday:

• The Dow Jones Industrial Average® ($DJI) climbed 341 points, or 1.05%, to 33,003.
• The Nasdaq Composite® ($COMP) rose 0.73% to 11,462.
• The Russell 2000®(RUT) increased 0.22% to 1,902.
• The S&P 500® index (SPX) gained 29 points, or 0.76%, to 3,981.

You can’t have it both ways, except for some days when you can. Thursday was one of those days. Stocks turned around early losses as investors contemplated somewhat dovish words from the Fed’s Bostic, even as Treasury yields climbed to new four-month highs.

• Bostic’s remarks about possibly pausing rates around the 5.1% level into 2024 should be taken with an asterisk or two. First, he’s not a voting member this year on the Federal Open Market Committee (FOMC). Second, his comments came a day after hawkish ones from Minneapolis Fed President Neel Kashkari  hurt Wall Street’s mood Wednesday. There were also those hawkish words from Fed Governor Christopher Waller later Thursday. Also remember Bostic remains open to raising rates higher, if the data call for it.
• Market bulls appear eager to jump back in on the flimsiest of Fed hopes, judging from Thursday’s rally. That said, hopes for a Fed pause and $3 will buy you a cup of coffee.
• Since the rally hinged on rate pause hopes, it’s not surprising rate-sensitive stocks and sectors saw the best rebounds Thursday afternoon. Semiconductor stocks were among the leaders, including Advanced Micro Devices (AMD), Nvidia (NVDA), and Intel (INTC). Other leaders were Salesforce (CRM) and Kroger (KR) after both firms posted solid earnings reports. The Nasdaq-100® (NDX) was a prime beneficiary of the tech gains.
• From a sector standpoint, it was a curious one-two punch as utilities and info tech topped the scoreboard. Utilities would probably benefit if yields fell. Info tech got lifted by CRM and the semiconductors. Financials and consumer discretionary were the only sectors in the red Thursday.
• The SPX closed almost at the 50-day moving average (MA) of 3,982. That was after it rebounded from an early plunge below the 200-day MA of 3,940. The reversal of that early setback followed by a close nearly at the 50-day MA is technically positive, though spillover buying isn’t assured. Without a major catalyst, the SPX may keep playing ping-pong in that narrow range between the moving averages. Meanwhile, the $DJI clawed back above 33,000, thanks mainly to CRM, but remains slightly lower year to date.

The price you pay: Worried about spending too much? Whether it’s for groceries or a home, we all want to avoid overspending. The same is true for investments, though valuation metrics on stocks look more attractive than they were a year ago, according to Charles Schwab research. However, that doesn’t necessarily mean we’re on the verge of a rally. History shows that valuations don’t provide clear guidance on future returns, according to Schwab Chief Investment Strategist Liz Ann Sonders and Schwab Senior Investment Strategist Kevin Gordon.

Talking technicals: The $COMP at one point on Thursday fell below February’s intraday low of 11,334, which represented a resistance point in mid-January and mid-November. Even before that, the $COMP looked technically weak, sliding under its 200-day MA of 11,403 during Wednesday’s session. It then bounced back to close well above that Thursday. The 50-day MA is still well below the market at 11,211.

CHART OF THE DAY: VOLATILITY LOSING EDGE. Despite the recent drop in major stock indexes like the Nasdaq 100 (NDX—purple line), the Cboe Volatility Index (VIX—candlesticks) continues to retreat, falling below 20 on Thursday. Data sources: Cboe and Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Punishment and reward: This week provided hints of what Wall Street values in these times. It appears big spending is out of fashion with investors who appreciate a company that can strategically cut costs. Consider the two behemoths that had events this week and how investors reacted—Salesforce (CRM) reported earnings, and Tesla (TSLA) held its investor day. CRM climbed sharply after the company touted a muscular cash flow and management’s dedication to cutting costs right down to real estate. Judging from CRM’s press release and call, they might even be raising prices in the company cafeteria. TSLA, on the other hand, painted a picture of vast expenditures designed to ultimately make it the biggest automobile company in the world, and shares slid nearly 6% Thursday. Big spending (the company is partway into a $175 billion investment plan) without a lot of clarity around timelines or specifics may have hurt the stock.

Sign of the times: The contrast in CRM’s and TSLA’s stock performances this week might’ve also reflected a broader sentiment related to the overall economy and rates. History shows that in times of rising inflation and higher rates, company multiples come under pressure. A company that can find ways to rein in expenses at such times might have a better chance of maintaining a healthy margin, risking less punishment on the price-earnings (P/E) metric. As the Fed continues raising rates, it wouldn’t be surprising to see more investors gravitate toward companies that aren’t highly leveraged and can manage their balance sheets. For investors, that may mean a turn to more-established firms with experienced management teams as well as a low net cash flow to debt ratio. Having long-term vision is great, but when there’s a storm, everyone wants an umbrella.

Green shoots: It’s a frustrating time for anyone seeking positive catalysts. Obviously, some good inflation news would help, but even that might be seen as a head fake. What appeared to be inflation-fighting progress late last year froze in January. If you’re still seeking positives, here are a couple. The recent downward turn in the Dow Jones Transportation Average ($DJT) and the RUT—both often seen as leading indicators for the broader market—flattened over the last week. The RUT recently traded up more than 2% from its late-February low. As T. Rowe Price said in a note late last year, smaller companies may be more “resilient” in a high-rate environment, partly because they tend to enjoy better pricing power, and small caps tend to lead recoveries after periods of economic recession. Transports are another handy barometer for economic growth. While the $DJT is well off its early February high, it still trades above levels from last fall. If transports slam the brakes, it might be bad sign for the economy. But perhaps RUT and $DJT can improve the mood.

Calendar

March 6: January Factory Orders

March 7: January Wholesale Inventories and expected earnings from Dick’s Sporting Goods (DKS)

March 8: January JOLTS Job Openings, ADP Employment, Fed Beige Book, and expected earnings from Campbell Soup (CPB)

March 9: Initial and Continuing Jobless Claims and expected earnings from JD.com (JD)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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