Finance

S&P 500 spikes in last 20 minutes of US trading: markets round

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1 month ago

May 31, 2024

S&P 500 spikes in last 20 minutes of US trading: markets round

(Bloomberg) — A renewed bout of volatility gripped U.S. stocks in late May, with dip buying pushing the market higher amid a rotation between technology and other industries.

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In a late-day comeback, the S&P 500 rose nearly 1% on Friday for its best month since February. The gauge had fallen almost as much earlier in the session, dragged down by mega caps. Investors betting that tech giants will continue to ride the gains could be in for a rough ride as other sectors start to catch up, according to strategists at Bank of America Corp. – who said the outperformance of value over growth as market breadth improves could be the next “pain trade.”

“From leaders to losers… for now,” says Dan Wantrobski of Janney Montgomery Scott. “We are seeing disruptions to initial support in some leadership areas. On net, we still expect a bumpy ride for US equities as we enter June.”

Meanwhile, government bonds posted gains at the end of their best month in 2024 as the main price gauge for personal consumption spending met expectations, while posting the smallest gain this year. In addition, expenses fell unexpectedly. For a data-dependent Federal Reserve, the report was seen by traders as “not that bad,” “somewhat constructive” and “marginally dovish.”

“While we don’t necessarily want to see a weakening consumer outlook, softening retail spending should help fuel the fire for lower rates in the second half of 2024,” said Bret Kenwell of eToro. “We’re not there yet, but the inflation reports were a constructive first step.”

The S&P 500 briefly broke below 5,200 but closed above that level – as every major group except technology advanced. The Dow Jones Industrial Average of blue chips rose 1.5% – the highest level since November. The Nasdaq 100 ended flat after falling nearly 2% Friday. The tech-heavy metric recorded its best month in 2024.

The US ten-year yield fell by five basis points to 4.4985%. The dollar was little changed on Friday, but posted its first monthly loss since December.

Matt Maley of Miller Tabak says that when there is some “rotation” in the stock market, it is usually seen as a positive development. However, since the rotation between technology and everything else has gone both ways over the past two weeks, he sees this as a negative development.

“In other words, the kind of ‘rotation’ we have seen recently could be seen as ‘churning,’ he said. “This in itself is not negative, but if it comes after a nice rally it usually indicates that the advance gets tired. So it is often followed by some kind of relapse, even if it is only a mild relapse.”

Technology stocks now appear to be overextended, indicating a correction may be in store, according to Fawad Razaqzada of City Index and Forex.com.

“After months of substantial gains and with no new bullish catalysts, a correction would not be surprising,” he said.

Hedge funds’ exposure to U.S. tech giants hit a record high after Nvidia Corp.’s rattling earnings report. this month, according to a recent report from the prime brokerage Goldman Sachs Group Inc.

The so-called Magnificent Seven companies – Nvidia, Apple Inc., Amazon.com Inc., Meta Platforms Inc., Alphabet Inc., Tesla Inc. and Microsoft Corp. – account for about 20.7% of hedge funds’ total net exposure to U.S. individual stocks, the report found.

A strong start to the year for U.S. stocks points to above-average performance in the second half of 2024, according to data analyzed by Goldman Sachs Group Inc.’s Scott Rubner.

Going back to 1950, there have been 21 episodes in which the S&P 500 has risen more than 10% by the end of May.

Of these, the only two instances where the S&P 500 ended the rest of the year were in 1987, when it fell 13%, and in 1986, when it fell 0.1%, meaning the index fell about 90% of the time rose.

Amid the various twists and turns in stock prices, traders also waded through the latest inflation report.

The so-called core PCE, which excludes volatile food and energy components, rose 0.2% from the previous month. Inflation-adjusted consumer spending unexpectedly fell 0.1%, driven by a decline in spending on goods and softer services spending. Wage growth, the main fuel for demand, is subdued.

“Markets are seeing inflation at a slow but steady pace lower,” said Quincy Krosby of LPL Financial. “The question remains how much more the Fed needs in terms of slower inflation before an easing cycle kicks in.”

Overnight index swap contracts tied to upcoming Fed policy meetings continue to fully price in a quarter-point rate cut in December, with the probability of a rate cut as early as September rising to around 50%. For all of 2024, the contracts imply a total of 35 basis points of rate cuts, a slight increase from Thursday’s close.

While the PCE data will likely be welcomed by the Fed, the core index is still up 3.5% annually over the past three months, according to David Donabedian of CIBC Private Wealth.

“So it’s way too early for any kind of victory lap for the Fed,” he noted.

Inflation may not return to the U.S. central bank’s 2% target until mid-2027, according to research from the Fed Bank of Cleveland.

That’s because the inflationary consequences of the pandemic-era shocks have largely resolved and the remaining forces keeping inflation high are “very persistent,” Cleveland Fed economist Randal Verbrugge wrote in a report Thursday.

On another note, consumer spending slowed in the first month of the new quarter as real disposable incomes fell, LPL Financial’s Jeff Roach noted.

“Businesses need to prepare for an environment where consumers don’t spend as much as last year,” he noted.

“We are in a ‘be careful what you wish for’ moment, because if slowing consumer spending leads to lower inflation and allows the Fed to slowly cut spending, then that will be good for the markets,” said Chris Zaccarelli. Independent Advisor Alliance. “However, if consumer spending – and the economy – slows too quickly, corporate profits and stock prices will fall much faster than the Fed will be able to cut rates, so we would be cautious at this point.”

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