November 22, 2024 | Momentum Factor

MARKETS

S&P 500: Up +19 points to 5968, VIX: 15.95

Asia: Japan +0.68%, China -3.06%, Hong Kong -1.89%

Europe: Euro Stoxx 50 +0.70%, FTSE +1.38%, DAX +0.92%

FX: USD (DXY) up 0.60%, EUR down 0.66%, GBP down 0.55%, JPY down 0.15%, CNY down 0.06%

Energy: WTI Crude up 1.18% to $70.93, Brent up 0.96% to $74.94

Cross markets: Terminal rate down ~7bp at 4.58, Implied rate cuts 2-years from terminal down ~6bp at 72bp, 2/10 yield spread +4bp

Treasuries: 2-year yields up ~1bp at 4.362%, 10-year yields down ~2bp at 4.402%, 30-year yields down ~2bp at 4.584%

WHAT WE'RE THINKING

Snapshot: US equities are mostly higher with notable rotation into smaller cap cyclical themes. Overnight earnings are generally well received with ESTC an upside standout after an outsized beat, increased guidance and positive takeaways on AI adoption momentum. The ESTC beat keeps the bullish consumption software theme rolling after yesterday’s strong print from SNOW. Rotation away from mega-cap stocks and DOJ/GOOGL headlines have Comm Services and Tech underperforming for a second session. Health Care lags despite valuation-based Long Only buying in pharma, while Industrials and Financials broadly outperform.  Treasury yields are mixed with curve flattening.  The Dollar Index is higher and on track for an eighth straight week of gains. Gold and WTI crude are higher, while copper ticks lower for a second day.  

• Today’s risk-on tone follows stronger aggregate earnings reports and Goldilocks US macro data.  
• November US flash PMIs came in  stronger-than-expected, while inflation pressures cooled.  Flash services PMI printed its highest reading in 32 months, at 57 and Manufacturing rose to a four-month high of 48.8. Respondents cited improved economic growth and expectations for a more supportive policy environment for the improvement in sentiment. On inflation, the prices received component moderated to its lowest level  since June ‘20. 
• November Michigan Consumer Sentiment slightly missed expectations, falling -1.2 points to 71.8. Long term inflation expectations rose to its highest level since June 2008 at 3.2%, while one year inflation expectations fell to 2.6%.  
• Next week's holiday-shortened calendar still includes a good amount of data with new home sales, Richmond Fed manufacturing, GDP, weekly jobless claims, durable goods orders, PCE inflation, pending home sales and Chicago PMI.  FOMC meeting minutes are also due on Tuesday.  
• Looking further into year-end, major macro catalysts include ISMs (12/2), November Jobs Report (12/6), CPI (12/11), retail sales (12/16) and Fed meeting (12/18).  
• Markets are still waiting for a Treasury Secretary announcement with the latest reports suggesting that Trump may pick Warsh with the understanding that he would become Fed Chair when Powell's term expires (and Bessent would replace him at Treasury after starting at the NEC).
• Global PMIs surprised to the downside with the UK, Germany, France and the overall Eurozone missing consensus.  
• CPRT, GAP, MATW and ROST are previously unmentioned earnings-driven winners, while INTU and NTAP trade lower after underwhelming reports.

Rotation: The Matt Gaetz decision to remove himself from Attorney General consideration yesterday was enough to reinvigorate the cyclical/SMID cap rotation after ~2 weeks of consolidating post-election gains.  Today’s stronger flash PMI data with cooler inflation details adds fuel to the rotation that struggled to gain traction over the summer.  In early July, we noted that the cyclically-sensitive Russell 2000 (RTY) was testing multi-quarter pattern resistance near 2140.  While the RTY was able to clear resistance in the week that followed, we expressed doubt over the sustainability of the move without cross market confirmation from copper prices.  The RTY then broke below ~2140 in early August before testing the July reflex highs on four separate occasions ending in mid-October. The RTY didn’t clear the summer cycle peak until the outcome of the election was known on November 6.  Importantly, copper prices still haven’t confirmed that a durable cyclical recovery is underway because this is a US-only dynamic. It’s possible for the US to undergo a cyclical renaissance without the rest of the world, but the magnitude and duration might be smaller/shorter than it would be otherwise.  

Momentum: Two weeks ago, we discussed the potential for cyclical groups to replace mega-cap Tech in the momentum factor.  Different sectors occupy the momentum factor at different times based on trailing 12 relative performance.  A change of composition in the momentum factor can feed on itself as investors knowingly or unknowingly rotate into what’s working.  We use relative performance ratios between two indices as an early indicator for an imminent change in composition.  In this case, we’re focused on the RTY/SPX performance ratio, which has been building a base since mid-August and now threatening to break out above 0.116.

MID: The S&P Midcap 400 Index looks like the right place to shop for cyclical exposure in Financials, Industrials and software levered to SMBs.  

FACT OF THE DAY

Gorillas purr, just like cats. You should get one.

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 22, 1900: The first Mercedes car is taken for its inaugural drive in Cannstatt, Germany. The owner of the first Mercedes, Emil Jellinek, was so confident that the light and sleek automobile could win races that he bought 36 of them. In exchange for this extraordinary patronage, the company agreed to name its new machine after Jellinek’s 11-year-old daughter, Mercedes. Here she is more than a decade and dozens of photo ops later.  

CATALYST CALENDAR

Next week: 1) US PCE for October Wednesday; 2) Japan Tokyo CPI for November Thursday; 3) Eurozone CPI for November Friday; 4) China NBS PMIs for November Friday; Earnings highlights: 1) Monday am: BBWI; 2) Monday pm: A, ZM; 3) Tuesday am: ADI, ANF, BBY, DKS, KSS, M, SJM; 4) Tuesday pm: ADSK, CRWD, DELL, GES, HPQ, JWN, URBN, WDAY.    

 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.