February 22, 2024 | New Levels for SPX

MARKETS

S&P 500: Up +103 points to 5085, VIX: 14.26

Asia: Japan +2.19%, China +1.27%, Hong Kong +1.45%

Europe: Euro Stoxx 50 +1.67%, FTSE +0.21%, DAX +1.54% FX: USD (DXY) up 0.05%, EUR down 0.01%, GBP down 0.08%, JPY down 0.10%, CNY up 0.05%

Energy: WTI Crude up 0.09% to $77.97, Brent up 0.01% to $83.04

Cross markets: Terminal rate unch at 5.33%, Implied rate cuts 2-years from terminal up ~18bp at 184bp, 5/10 yield spread -1bp

Treasuries: 2-year yields up ~2.2bp at 4.688%, 10-year yields down ~1.2bp at 4.307%, 30-year yields down ~2.5bp at 4.452%

   WHAT WE'RE THINKING

***Inside Markets will not be published tomorrow February 23.  The next edition will be available on Monday, February 26***

Snapshot: US equities are higher with Tech leading after NVDA reported strong revenue and EPS upside. The outperformance from NVDA’s data center business gives AI-levered semi and software stocks a lift after a brief consolidation. Shares of SNPS also outperform after an earnings beat (better cost control) with positive AI commentary. Travel stocks are higher after RCL increased guidance (just weeks after its initial forecast) and homebuilders rally after suppliers IBP/BLDR post solid results. Defensive groups become a source of funds with weakness in Consumer Staples also linked to disappointing results from KDP, Danone and Nestle in Europe. Treasury yields are mixed with curve flattening as the 10-year runs into resistance levels near 4.33%. The Dollar Index is now higher after early weakness. Gold is little changed, base metals and crude are mostly higher, while US natural gas gives back some of yesterday’s advance.  

• US flash PMIs for February were mixed, with manufacturing ticking up to 51.5 from January’s 50.7 and services ticking down to 51.3 from 52.5. Inflation readthroughs were encouraging as input prices eased and selling prices rose at their slowest pace in 3.5 years.  
• Weekly jobless claims came in below consensus again with continuing claims also light of the forecast.  
• January existing home sales increased MoM and came in ahead of consensus.  
• A busy day of Fedspeak starts with Vice Chair Jefferson who was cautiously optimistic on inflation but cautioned against early easing due to resilient consumer spending. Harker, Cook, Kashkari and Waller are scheduled to speak later today.  
• There were no major surprises in yesterday’s release of FOMC meeting minutes, although some note dovish implications from advanced discussions on slowing the pace of QT.  It was also reassuring to read that the committee still considers rates having peaked, despite a sharp increase in January BLS wage growth.  
• Eurozone flash PMIs also came in mixed with manufacturing sliding deeper into contraction at 46.1 from 46.6, while services improved to 50 from 48.4 in January. Inflation readthroughs in Europe were less encouraging with input prices and selling prices accelerating back to levels from last May.  
• The list of earnings-related outperformers also includes BROS, CAKE, DOCN, IRM, MOS, NICE, NTR and W, while shares of APA, DRVN, ETSY, FIVN, LCID, NEM, NOVA, RIVN and RUN trade lower after reporting.  Earnings highlights after the close: BKNG, BMRN, INTU, PODD and SQ. 

SPX: The SPX is currently trading above the mid-month closing high of 5030.  From a technical perspective only, a sustained close above 5030 makes the swing objective near 5220 the new resistance level, while short-term support sits at the downside gap near 4905.  The rally since November is more persistent than expected, but narrow leadership also makes it more fragile.  We’re encouraged by today’s strength in the equal-weight S&P 500 (ETF symbol RSP now $161.46) with a new high above ~$165 putting leadership concerns on the back burner.  The small-cap Russell 2000 (RTY) is the missing piece with a sustained close above ~2070 potentially leading to a period of mean reversion in terms of relative performance.   

RTY: Last year’s higher rate environment resulted in the widest underperformance spread in history for the RTY relative to the SPX.  Generally, the best time to own small cap stocks is just after a recession and prior to a cyclical recovery.  There have been six recessions since the RTY was created and the post-recession recovery resulted in 38 percentage points of outperformance vs. the SPX over the ensuing 12 months.  We haven’t had a recession, but a ‘no landing’ scenario could trigger a significant catchup trade in favor of small cap stocks.  The fundamental setup for small cap outperformance is nowhere to be found at the moment.  Real bond yields remain highly restrictive, which means the economy should be ‘late cycle’ at best.  We don’t expect the RTY will be able to sustain a break above ~2070, but know what to do if it happens.

Again…we’re actively repositioning client accounts as these stories progress and markets evolve.  Please send me a note if you’d like to hear more detail, see historical performance or discuss becoming a client at Jackson Square Capital.  –Andrew Book a call

FACT OF THE DAY

A quarter cup serving of maple syrup contains more calcium than the same amount of milk and more potassium than a banana. It’s also a good source of magnesium, phosphorus, zinc and iron. 

WHAT WE'RE DOING

The Road Ahead for the Fed: Speaking with Oliver Renick, Andrew notes there is a favorable outlook for equities as long as the macro environment remains benign. The two discuss the road ahead for the Fed, as well as how inflation is affecting markets and when to own small cap stocks. Watch Now

What do Advisors see for 2024? Speaking as one of five featured advisors on Barron’s Advisor Q&A, Andrew explores why we’d see a pull-back to start the year and predicts small-cap stocks will outperform large-caps for the year. Read More on Barron’s

When does bad news become bad again? A meaningful slowdown in job creation over the coming months would likely flip the ‘bad-news-is-good’ for equities script.  Pricing in an economic slowdown or recession would weigh on deep cyclical and small cap stock valuations, making for an attractive entry point. Read on CNBC

See more of JSC in the Media.

THIS DAY IN HISTORY

February 22, 1888: John Reid demonstrates golf in a cow pasture in Yonkers, New York. Reid gave his friends the appeal of golf as a higher class sport than the popular sports football and baseball, adding a dinner with ‘particular significance’ known as the 19th hole.

CATALYST CALENDAR

Tomorrow: 1) Singapore’s CPI for January; 2) ECB inflation expectations for January; 3) Earnings before the open: BLMN, GTN, WBD

Next week: 1) CPIs from France/Germany/Spain for February Thursday; 2) US PCE for January Thursday; 3) Eurozone CPI for February Friday; 4) US manufacturing ISM for February Friday.  Earnings highlights: 1) Monday am: DPZ, FIS; 2) Monday pm: WDAY, ZM; 3) Tuesday am: AMT, AZO, LOW, M, NCLH; 4) Tuesday pm: A, BMBL, CAVA, DVN, EBAY, FSLR, SPLK, TKO; 5) Wednesday am: AAP, BIDU, TJX, VTRS; 6) Wednesday pm: CRM, HPQ, NTNX, OKTA, PARA, PSTG, SNOW; 7) Thursday am: BBY; 8) Thursday pm: ADSK, DELL, HPE, VEEV, ZS

Jackson Square Capital produces Inside Markets. We also offer financial planning and investment management services. Learn more here and catch up on our recent media appearances.

Investment Advisory Services offered through Jackson Square Capital, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.