Stocks Rally to Record Highs on Optimism about U.S. Economic Outlook

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed up +1.23%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.05%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.95%.

On Friday, stocks posted moderate gains, with the S&P 500, the Dow Jones Industrials, and the Nasdaq 100 posting all-time highs. Stocks rallied to record highs Friday on optimism about the U.S. economic outlook.  Also, Friday’s rally in chip stocks for a second day boosted technology stocks and the overall market after Taiwan Semiconductor Manufacturing Co gave an upbeat outlook for this year, bolstering hopes for a recovery in chip sales. 

Friday’s U.S. economic news was mixed after existing home sales fell to a 13-year low and Jan consumer sentiment climbed to a 2-1/2 year high.  However, as measured by the University of Michigan, U.S. inflation expectations retreated this month, bolstering hopes for the Fed to engineer a soft landing of the economy. 

An easing of political risks supported stocks after Congress passed a continuing resolution late Thursday night to fund the government into March and avoid a shutdown on Saturday.  The interim measure will fund some U.S. agencies through March 1 and others through March 8. 

On the negative side for stocks was higher bond yields as the 10-year T-note yield climbed to a 5-week high of 4.196%.  Also, iRobot plunged more than -25% after Bloomberg reported the European Union’s antitrust watchdog is planning to block Amazon.com’s planned acquisition of the company. 

The University of Michigan’s U.S. Jan consumer sentiment index rose +9.1 to a 2-1/2 year high of 78.8, stronger than expectations of 70.1.

The University of Michigan’s U.S. Jan 1-year inflation expectations unexpectedly fell -0.2 points to a 3-year low of 2.9% versus expectations of no change at 3.1%.  Also, the Jan 5-10 year inflation expectations indicator unexpectedly fell -0.1 to 2.8%, better than expectations of an increase to 3.0%.

U.S. Dec existing home sales unexpectedly fell -1.0% m/m to a 13-year low of 3.78 million versus expectations of a +0.3% m/m increase to 3.83 million.

Friday’s comments from San Francisco Fed President Daly were slightly hawkish when she said it's "premature" to think that interest rate cuts by the Fed "are around the corner" and that she needs to see more evidence that inflation is on a consistent trajectory back to 2% before easing policy.

The markets are discounting the chances for a -25 bp rate cut at 3% at the next FOMC meeting on Jan 30-31 and 48% for that same -25 bp rate cut for the following meeting on March 19-20.

U.S. and European government bond yields Friday were mixed. The 10-year T-note yield rose to a 5-week high of 4.196% and finished up +0.2 bp at 4.144%.  The 10-year German bund yield climbed to a 1-1/2 month high of 2.357% but fell back and finished down -0.8 bp at 2.342%.  The 10-year UK gilt yield fell -0.1 bp at 3.929%.   

German Dec PPI fell -1.2% m/m and -8.6% y/y, weaker than expectations of -0.4% m/m and -8.0% y/y.

Japan Dec national CPI eased to +2.6% y/y from +2.8% y/y in Nov, the smallest increase in 1-1/2 years.  Dec national CPI ex-fresh food and energy eased to +3.7% y/y from +3.8% y/y in Nov, the smallest increase in 10 months.

Overseas stock markets on Friday settled mixed.  The Euro Stoxx 50 closed down -0.09%. China’s Shanghai Composite Index closed down -0.47%.  Japan’s Nikkei Stock Index closed up +1.40%.

Today’s stock movers…

Chip stocks rallied for a second day Friday after Taiwan Semiconductor Manufacturing Co said it expects a return to solid growth this quarter.  As a result, Advanced Micro Devices (AMD) closed up more than +7% to lead gainers in the S&P 500 and Nasdaq 100.  Also, Broadcom (AVGO) and Lam Research (LRCX) closed up more than +5%.  In addition,  Applied Materials (AMAT), Qualcomm (QCOM), Globalfoundries (GFS), KLA Corp (KLAC), Marvell Technology (MRVL), and Analog Devices (ADI) closed up more than +4%.  Finally, Nvidia (NVDA), Micron Technology (MU), and NXP Semiconductors (NXPI) closed up more than +3%.

Travelers (TRV) closed up more than +6% to lead gainers in the Dow Jones Industrials after reporting Q4 net premiums written of $9.99 billion, above the consensus of $9.93 billion. 

Texas Instruments (TXN) closed up more than +4% after UBS upgraded the stock to buy from neutral with a price target of $195.

Truist Financial (TFC) closed up more than +4% as analysts raised their price targets on the stock by an average of 17% since it reported quarterly earnings results Thursday. 

Huntington Bancshares (HBAN) closed up more than +3% after reporting Q4 total deposits of $151.23 billion, above the consensus of $149.30 billion.

Builders FirstSource (BLDR) closed up more than +3% after Oppenheimer said the stock is its top pick in the sector with an outperform rating and a price target of $220. 

Wayfair (W) closed up more than +10% after cutting 1,650 employees, or about 13% of its global workforce.

Schlumberger (SLB) closed up more than +2% after reporting Q4 revenue of $8.99 billion, stronger than the consensus of $8.94 billion.

State Street (STT) closed up more than +2% after reporting Q4 adjusted EPS of $2.04, above the consensus of $1.84.

iRobot (IRBT) closed down more than -25% after Bloomberg reported that the European Union’s antitrust watchdog plans to block Amazon.com’s planned acquisition of the company. 

Health insurance stocks tumbled for a second day Friday after Humana cut guidance on its 2023 adjusted earnings outlook.  Molina Healthcare (MOH) closed down more than -4% to lead losers in the S&P 500.  Also, Humana (HUM) and Centene (CNC) closed down more than -2%.  In addition, UnitedHealth Group (UNH) closed down more than -2% to lead losers in the Dow Jones Industrials.  Finally, Cigna Group (CI) closed down by more than -2%, and Elevance Health (ELV) closed down by more than -1%. 

Delta Air Lines (DAL) closed down more than -2% after it said it would cancel all flights to Tel Aviv through April 30.  United Airlines Holdings (UAL) also closed down more than -2% on the news, and American Airlines Group (AAL) closed down more than -1%.

PPG Industries (PPG) closed down more than -2% after forecasting Q1 adjusted EPS of $1.80-$1.87, weaker than the consensus of $1.97. 

Duolingo (DUOL) closed down more than -2% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $160.

Cummins (CMI) closed down more than -1% after Bank of America Global Research downgraded the stock to underperform from neutral.

Across the markets…

March 10-year T-notes (ZNH24) on Friday closed down -2.5 ticks, and the 10-year T-note yield rose by +0.2 bp to 4.144%.  Mar T-notes Friday fell to a 5-week low, and the 10-year T-note yield rose to a 5-week high of 4.196%.  Strength in stocks Friday reduced the safe-haven demand for T-notes after the S&P 500, Dow Jones Industrials and the Nasdaq 100 posted all-time highs.  T-notes fell to their lows after Friday’s University of Michigan’s U.S. Jan consumer sentiment index rose more than expected to a 2-1/2 year high.

However, T-notes recovered from their worst levels after U.S. Dec existing home sales unexpectedly fell to a 13-year low.  Also, a decline in the University of Michigan U.S. Jan inflation expectations indicator was dovish for Fed policy and sparked some short covering in T-notes.

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