Holiday Rally?

Bitcoin Stalls will it Fail?

KR Opinion

This is the final report for this week and takes on particular significance due to Thursday's holiday closure, necessitating a comprehensive analysis of market expectations through the end of the week. Wednesday brings a substantial slate of economic data, including PCE prices, GDP figures, durable orders, and weekly unemployment claims. Initial claims are expected at 217,000 while continuing claims maintain their recent upward trend.

Despite yesterday's FOMC release, considerable speculation persists regarding potential underlying weakness in labor markets. However, I don't anticipate significant labor market deterioration at present. Instead, the Federal Reserve appears to be completing its two-year interest rate normalization strategy.

It's important to note that we're not entering an accommodative or loosening phase, but rather witnessing the final stages of normalization. A key objective appears to be facilitating yield curve steepening, which would benefit the entire banking sector, from small regional institutions to major banks.

The performance of small and mid-cap asset classes deserves particular attention. While these sectors have demonstrated impressive strength over the past month, substantial fundamental work remains necessary for longer-term success. These indices have experienced prolonged underperformance, suggesting significant potential for catch-up growth. However, fundamental catalysts for such growth may not materialize until the second or third quarter of 2025. Current positive sentiment toward these sectors appears more decorative than substantive, with underlying challenges persisting.

As we approach the week's end, the barrage of economic data is expected to trend positively overall, likely supporting continued market advancement through Wednesday's session. Friday's trading is expected to echo this pattern, albeit with notably lower volume. Holiday-shortened weeks can occasionally produce unusual market behavior in thin trading conditions. Nevertheless, the overall market configuration appears likely to maintain an accommodative pattern, preserving the underlying bid and market firmness as we complete November's final week.

The technical patterns suggest we're entering a period where market sentiment remains constructive despite potential holiday-related volatility. This environment, combined with the ongoing process of interest rate normalization and yield curve adjustment, creates a complex but generally supportive backdrop for market activity through the remainder of the month.

The current market structure, particularly the interplay between large-cap stability and small/mid-cap potential, presents an interesting dynamic as we approach year-end. While immediate sentiment remains positive, the longer-term success of this market phase will depend heavily on the realization of fundamental improvements, particularly in the smaller capitalization segments of the market.

Looking back on Tuesday’s Action

Today, the stock market displayed mixed performance with varying results across major indices amid predominantly negative market sentiment. Trading activity revealed broader weakness, with declining stocks outnumbering advancing ones by a 2-to-1 margin at the NYSE and 3-to-2 at the Nasdaq.

Market sentiment was initially dampened by President-elect Trump's announcement of planned first-day tariffs, including a 10% levy on Chinese imports and 25% on goods from Mexico and Canada. These measures are reportedly contingent upon addressing migrant flows and fentanyl trafficking concerns. The announcement sparked immediate worries about inflationary pressures.

The bond market's initial reaction saw yields climb, with the 10-year Treasury reaching 4.32% and the 2-year touching 4.29%. However, these moves came despite significant weak economic data, including a 17.3% month-over-month decline in October's new home sales and a notable drop in November's Consumer Confidence. Particularly noteworthy was the 12-month inflation expectations reading of 4.9% - the lowest since March 2020, suggesting a positive trend in inflation expectations despite remaining elevated.

As the session progressed, bond markets stabilized, with yields retreating from their intraday highs. The 10-year Treasury settled at 4.30%, up four basis points, while the 2-year yield closed at 4.25%, down two basis points. Bond traders also absorbed the FOMC Minutes from the November 6-7 meeting, which contained no surprises, and responded positively to a well-received $70 billion 5-year note auction.

Despite the negative breadth in the broader market, major indices showed resilience. The S&P 500 and Nasdaq Composite gained 0.6%, while the Dow Jones Industrial Average advanced 0.3%, with the DJIA and S&P 500 reaching new intraday records. However, smaller capitalization stocks faced pressure, with the Russell 2000 declining 0.7% and the S&P Mid Cap 400 falling 0.4%, though both indices maintain impressive month-to-date gains of 10.4% and 9.0%, respectively.

Individual stock movements were highlighted by Amgen's 4.8% decline to $280.01 following disappointing results from its MariTide weight-loss drug trial. The retail sector saw notable movement after earnings reports, with significant declines in Best Buy (-4.9% to $88.48), Kohl's (-17.0% to $15.22), Abercrombie & Fitch (-5.1% to $146.62), and Dick's Sporting Goods (-1.4% to $212.22).

The day's trading pattern suggests that while immediate reactions to policy announcements can create volatility, the market's underlying strength remains intact, particularly in larger-cap segments, even as smaller-cap stocks take a breather from their recent strong performance.

Nasdaq Composite: +27.7%

S&P 500: +26.4%

S&P Midcap 400: +21.4%

Russell 2000: +19.6%

Dow Jones Industrial Average: +19.0%

Reviewing Tuesday’s economic data

The September FHFA Housing Price Index showed a 0.7% increase, with the prior month revised upward to 0.4% from 0.3%. The September S&P Case-Shiller Home Price Index came in at 4.6%, slightly below KR Forecast consensus of 4.7%, and down from the prior reading of 5.2%.

November Consumer Confidence reached 111.7, below the KR Forecast consensus of 113.0, though the prior month was revised higher to 109.6 from 108.7. Notably, consumers' assessment of the present situation improved significantly, particularly regarding labor market conditions. This positive view of job security and employment opportunities correlates with sustained consumer spending on discretionary items.

October New Home Sales disappointed significantly at 610K, well below KR Forecast consensus of 718K and the prior month's 738K. This sharp decline reflects the impact of rising mortgage rates following September's Fed rate adjustment, with additional weakness in the South attributed to hurricane effects in the nation's largest new home sales region.

Wednesday brings a comprehensive economic calendar due to this week's holiday:

Early morning releases (7:00 ET):

- Weekly MBA Mortgage Index (previous 1.7%)

Morning releases (8:30 ET):

- October Personal Income (KR Forecast consensus 0.3%)

- Personal Spending (KR Forecast consensus 0.2%)

- PCE Prices (KR Forecast consensus 0.2%)

- Core PCE Prices (KR Forecast consensus 0.3%)

- Q3 GDP second estimate (KR Forecast consensus 2.8%)

- Q3 GDP Deflator second estimate (KR Forecast consensus 1.8%)

- October Durable Orders (KR Forecast consensus 0.4%)

- Durable Orders ex-transportation (KR Forecast consensus 0.3%)

- October advance goods trade balance (previous -$108.2 billion)

- Advance Retail and Wholesale Inventories (previous 0.8% and -0.1%, respectively)

- Weekly Initial Claims (KR Forecast consensus 217,000)

- Continuing Claims (previous 1.908 million)

Mid-morning and afternoon releases:

- October Pending Home Sales at 10:00 ET (KR Forecast consensus -1.5%)

- Weekly crude oil inventories at 10:30 ET (previous +0.545 million)

- Weekly natural gas inventories at 12:00 ET (previous -3 bcf)

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