In the Rally We Trust?

Equity markets sped higher on Thursday ahead of Friday's "triple witching" expirations event and ahead of Friday's S&P index rebalancing. This should make for an extreme pop in trading volume on the final trading session of the week, and perhaps bring with it some expected, or maybe even some unexpected volatility.

The record I speak of belongs to the S&P 500. The market's benchmark large-cap equity index sliced through the 5,700 level early in the Thursday session and held onto those gains throughout. The S&P 500 gained 1.7% on Thursday to close at 5,713. The Nasdaq Composite ran 2.51% on Thursday to close at its highest level since mid-July.

What a difference a good night of sleep can make. Equities had rallied just after the Fed's policy statement had announced the central bank's half-percentage point rate cut only to sell off quite broadly during and after Fed Chair Jerome Powell's press conference. The major U.S. equity indexes closed near session lows that day.

But the bulls showed up early on Thursday morning and didn't really let up through both bells. Interestingly, as equity traders and investors changed course on Thursday from Wednesday afternoon, bond traders still bought the short end of the Treasury curve as the yield for the U.S. Two Year Note dropped three basis points to 3.60%. I have seen that yield drop two more basis points overnight, as that product pays 3.58% through the zero-dark hours on Friday morning.

Demand for the U.S. Three Month T-Bill has been even more aggressive, as that yield has dropped from a high of 4.89% on Wednesday to a low of 4.71% very early this morning. There has even been some demand overnight for the long end of the curve. The yield for the U.S. Ten Year Note may have fallen two basis points on Thursday to 3.72%, but the Ten Year has since regained those two basis points.

In a real tell-tale sign of what's going on, front-month gold futures have tacked on an additional $20 since late Thursday. I have seen gold trading at $2,635 early this morning as the U.S. Dollar Index remains below the 101 level (100.73 last) after trading as high as 101.44 late Wednesday.

What Should Be Hot Going Forward?

Well, is growth slowing? I think it is. Not quite recessionary, but I do think growth is running well below the estimates for third-quarter gross domestic product that we see now. Don't forget, gross domestic product ran well below GDP for the second quarter and well, well below GDP for all of 2023. GDI is recognized by the Federal Reserve as a valid measure of economic growth and is not subordinate to GDP. So, growth, in my professional opinion, has not been and is not currently what we've been led to believe.

Consumer-level inflation has cooled but has not reached the Fed's target. The negative impacts of inflation, especially upon lower to middle income consumers is cumulative, so 2.5% is really 20% or more (depending on the good or service purchased) over three years. The Federal Open Market Committee's actions on Wednesday and implied intent going forward may aid growth, will improve business conditions for the most indebted corporations (as well as the government itself), but will also likely reawaken the acceleration in consumer-level inflation that I had warned you about for late 2024 and early 2025.

So, what does well in a slow growth, lower interest rate, inflationary environment? Well, obviously gold, and other "precious" commodities should do well as the dollar is intentionally devalued in order to ease the federal government's burden in servicing its debt. Utilities and real estate investment trusts should do well as rates go lower as investors being pushed out of cash seek out dividend stocks to serve as bond proxies.

What will also likely improve will be the landscape for tech stocks. While there still may or will be a reason to invest in sectors such as the industrials or discretionaries on a stock-by-stock or industry-by-industry basis, and certain commodities might push materials higher against that greenback, professional investors will, in my opinion, seek growth that outpaces what the economy and market outside of tech will provide.

Tech struggled as growth and inflation decelerated together. Over the past three months, the Tech sector SPDR XLK is the only one of the 11 sector SPDRs in the red (-3.2%). I know it's just one day, but Tech led the way on Thursday (+2.97%) as the Philadelphia Semiconductor Index ramped 4.27% for the session. The group was led by Advanced Micro Devices AMD, Applied Materials AMAT and KLA Corp KLAC as those three names all gained between 5.66% and 5.7% for the day.

Trust Thursday's Rally?

Long-term I think you have to. While the Fed has cut rates at the top of a bull market something like a dozen times in history and more often than not, that cut ultimately led to recession, the fact is that in just about every case, the equity indexes were higher a year later. Investors will need to take advantage of the coming renewed acceleration of inflation where they can, which will be in risk asset prices for now, as opportunity and upward mobility dry up across the broader economy.

As mentioned, nearly every major and mid-major equity index moved a minimum of 1.25% higher on Thursday. Only the Dow Utilities failed to participate. Eight of the 11 sector SPDRs gained ground for the session, as both Tech and the Discretionaries XLY gained more than 2%. Not unexpectedly, the four defensive sectors finished in the bottom four places on the daily performance table.

Winners beat losers by a 15 to 4 margin at the NYSE and by roughly 3 to 1 at the Nasdaq. Advancing volume was consistent, taking a 72.6% share of composite NYSE-listed trade and a 72.8% share of composite Nasdaq-listed activity. This is a little odd. Aggregate trading volume was up 9% day over day across NYSE-listings, but actually contracted just a bit across Nasdaq-listed securities. Is that meaningful? Hard to say. It could be a lack of conviction. It could also be a sign of caution related solely to the extreme trading volumes expected today (Friday).

Macro Mixed

The macro was quite mixed on Thursday. While weekly first-time jobless claims printed at just 219,000, which was the fewest since May and continuing claims actually contracted, August existing home sales hit the tape below expectations. In fact the existing home sales print of 3.86 million at a seasonally adjusted annual rate was the lowest print for this series in 2024.

The star of the day, for optimists, seemed to be the September Philly Fed Manufacturing Index, which hit the tape in positive territory at 1.7, above the -0.8 that economists had been looking for and up from a -7 tag for July. However, for Philadelphia in September, the devil was in the details. All of the most important components of this survey printed in a state of contraction. New orders, Shipments, and Unfilled Orders all fell from August's levels.

Where was there enough growth to push the headline into positive territory? You already know the answer: Inflation. Prices Paid soared to a scorching 34, up from an already too hot to touch 24 in August. That's awful. Oh, Number of Employees increased. That's a positive. Except that the average workweek contracted faster than employment grew.

Where was there enough growth to push the headline into positive territory? You already know the answer: Inflation. 

Oh, and lastly, because the financial media will never report this, especially a month and a half ahead of a national election, the Conference Board's Index of Leading Indicators, which is a composite index composed of ten leading economic indicators printed in a state of contraction (-0.2% m/m) for August. This index has printed in a state of expansion for exactly one month (fed 2024) in the past 29 months. Two and a half years of basically every single month contracting from the month prior. But the economy was strong in 2023 and still is. Right? No, the Conference Board is not a government entity.

News: FedEx, Nike, Palantir 

FedEx FDX is down more than 13% overnight as the parcel delivery service missed expectations for fiscal Q1 earnings and revenue generation. The firm also reduced fiscal full year guidance for both revenue growth and earnings per share. What does this mean for consumer or B to B health? United Parcel Service (UPS) is down 2.5% in sympathy with FedEx.

Nike NKE shares are soaring overnight (+6.2) as beleaguered CEO John Donahoe has "decided" to retire. The Donahoe era has been an extremely painful one for the former high-flying purveyor of athletic equipment and apparel. The stock peaked at $179.10 in late 2021 and traded also low as $70.75 last month.

Elliot Hill will return to the firm as President and CEO on Oct. 14. He will also serve on the Board of Directors. Donahoe will stay on in an advisory capacity through the end of January. Oh, I'm sure they'll be leaning to him for a ton of advice. 

Palantir PLTR will be headed into the S&P 500 after the close of business tonight. That would, in theory, bring in a lot of demand for the shares as all of the funds mandated to track the S&P 500 must get long this name. The opportunity also brings out sellers as they know there will be buyers. PLTR closed at $36.83 on Thursday afternoon. The stock traded as low as $35.81 overnight and I have seen it last trade at $36.22.

What gives? Morgan Stanley MS was said last night to be shopping a 10 million share block for an unidentified shareholder. The shares were being offered between $35.90 and Thursday's closing price and will trade on Friday. The sale has been described as an unregistered secondary resale.

Don't forget that about a week and a half ago, Barron's reported that Palantir Chairman Peter Thiel filed to sell up to $1 billion worth of PLTR shares. Under the Rule 10b5-1 plan adopted back in May, an approximate 28.6 million shares of PLTR could be sold by year's end 2025 at the latest.

Economics (All Times Eastern)

13:00 - Baker Hughes Total Rig Count (Weekly): Last 590.13:00 - Baker Hughes Oil Rig Count (Weekly): Last 485.



The Fed (All Times Eastern)

14:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.

Today's Earnings Highlights (Consensus EPS Expectations)

No significant quarterly earnings scheduled.

At the time of publication, Guilfoyle was long PLTR equity.