November 14, 2024 | Momentum Factor

MARKETS

S&P 500: Down -10 points to 5975, VIX: 13.84

Asia: Japan -0.48%, China -1.73%, Hong Kong -1.96%

Europe: Euro Stoxx 50 +1.97%, FTSE +0.51%, DAX +1.37

FX: USD (DXY) up 0.01%, EUR down 0.01%, GBP down 0.03%, JPY down 0.30%, CNY up 0.09%

Energy: WTI Crude up 0.41% to $68.71, Brent up 0.40% to $72.55

Cross markets: Terminal rate unch at 4.64, Implied rate cuts 2-years from terminal up ~7bp at 81bp, 2/10 yield spread +14bp

Treasuries: 2-year yields down ~2bp at 4.267%, 10-year yields down ~5bp at 4.406%, 30-year yields down ~7bp at 4.567%

WHAT WE'RE THINKING

Snapshot: US equities are mostly lower with the S&P 500 (SPX) and Nasdaq 100 (NDX) on track for small weekly declines.  Semis have a bid after ASML expressed optimism on the outlook at this morning’s analyst meeting and Foxconn reported EPS upside thanks to continued strength in AI servers.  There’s also some profit taking in software names after the software/semi ratio delivered a +14.5% return over the last 5 days. Rate sensitive groups outperform with regional banks and homebuilders the main beneficiaries of today’s pullback in bond yields. DIS is higher after earnings, while TPR is the best performing stock in the SPX after abandoning its bid for CPRI and increasing its buyback.  Industrials underperform as defense contractors unwind some geopolitical risk premium on reports suggesting a more likely Israel/Lebanon cease fire plan based on US election results. Ukraine sovereign bonds also tick higher. Treasury yields are lower with curve flattening after the recent backup ran out of steam yesterday.  FX trends are quiet with the Dollar Index unchanged. Gold, copper and WTI crude are little changed despite an IEA report forecasting a >1Mbpd oversupply in ’25 driven by weaker China demand.

• October headline and core PPI met expectations on a MoM basis but YoY rates accelerated for both measures. Headline PPI increased to +2.3% from +1.9%, while the core rate came in at +3.1%, up from 2.9% in September (more below).  
• Weekly jobless claims came in below expectations, while continuing claims remained near the cycle high.  
• Tomorrow brings retail sales that should give the market a stronger sense of consumer trends.  
• Fed Governor Kugler highlighted disinflation trends and a more balanced labor market, while adding that a pause would be appropriate if inflation reaccelerates. And Richmond Fed President Barkin said uncertainty about inflation is one of the reasons for the Fed to be gradual.
• Fed Chair Powell is scheduled to speak today at noon PST and NY Fed President Williams will be speaking at the close.  
• Overseas data is focused on cooling Australia labor momentum and higher India wholesale prices with the RBI chief warning about a potential revival in global inflation.
• CSCO trades lower after a strong EPS print meets a high bar. Other earnings-driven laggards include JD and NICE, while shares of AAP, BZH, DDS, HI, NTES and SONO trade higher after reporting.  AMAT is the earnings highlight for this afternoon.  

Bond yields: The post-election information vacuum accounts for the recent backup in bond yields as markets wait for incremental clarity on the composition of a widely expected tax bill.  Current yields reflect the uncertainty discount plus some degree of widening deficits, faster nominal GDP growth and higher inflation.  While there’s no accurate way to measure the impact of incoming policies, it's clear that 10-year bond yields have overshot fair value valuation models based on recent growth data, policy expectations and inflation breakeven yields.  Ten-year yields are currently ~25-30bp above implied fair value.

Momentum: Semis and AI-related themes still dominate the momentum factor in equity markets, but it’s very close to flipping in favor of cyclical/value baskets. Momentum is the only dynamic equity factor that's based on 12-month rolling relative performance. The Russell 2000 (RTY)/Nasdaq 100 (NDX) performance ratio we referenced yesterday is an attempt to measure the potential shift in real time.  Cyclical/value groups have outperformed into and out of election results, but qualification for the momentum factor has yet to materialize.  Positioning in the momentum factor (currently includes semis and AI-themes) is in the 95th percentile, which makes any potential shift a more significant event. The RTY/NDX ratio currently sits at 0.112 with 0.116 the ‘bar to clear’ in our opinion.   

FACT OF THE DAY

The word cereal comes from the Roman goddess Ceres, given her association with edible grains.

JSC IN THE MEDIA

The Close on Bloomberg:  Andrew discusses AMDs downbeat earnings report and its challenges gaining meaningful market share in AI training. He also highlights a potential opportunity for AMD and others when the majority of AI workloads transition from the training to inferencing. Watch Now

American Express Earnings: Andrew discusses AXP as a relative safe haven and fully-valued stock, while shifting attention to the opportunity in regional banks. Watch Now

Markets react as tensions rise in the Middle East: Andrew comments on recent events in the context of a market that is richly valued and therefore more sensitive to shocks of all kinds. Read on Reuters

See more of JSC in the Media.

THIS DAY IN HISTORY

November 14, 1851: A classic of American literature, Moby Dick, is published. The story of Captain Ahab and his quest to catch a giant whale was originally a big flop, forcing author Herman Melville to quit writing completely and work as a customs inspector in New York. By the 1920s, 30 years after his death, much of his work was rediscovered, especially Moby Dick, and his final novel (Billy Budd) was published 33 years after his death. In 1962, Peter Ustinov (below right) directed and portrayed Captain Vere in the critically acclaimed film adaptation of Billy Budd – back when Hollywood made movies that weren’t exclusively based on Marvel characters.

CATALYST CALENDAR

Tomorrow: 1) US Empire Manufacturing Index for November; 2) US retail sales for October; 3) US import/export prices for October; 4) US industrial & manufacturing production for October and: 5) earnings before the open: BABA.

Next week: G20 Leader’s Summit in Brazil Monday and Tuesday. Earnings highlights: 1) Tuesday am: LOW, MDT, WMT. 2) Tuesday pm: KEYS; 3) Wednesday am: TGT, TJX; 4) Wednesday pm: NVDA, PANW, SNOW; 5) Thursday am: DE; 6) Thursday pm: GAP, INT, NTAP, ROST.

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.