Weekly | Technical Stock Market Rebound

Your weekly summary with the most important news for your investments:

• The price-to-earnings ratio of the U.S. market

• The decision by the Federal Reserve (Fed) and other central banks not to move their interest rates, how this decision and factors affect the financial markets.

• Factors driving a technical rebound in the market.

The previous week we mentioned that the price to earnings ratio of the US market, after the stock market dislocation that started at the end of July, had dropped to 17.2 times, placing it below the 5 and 10 year historical average, giving us a parameter that very possibly the market decline had been overextended. It only took one set of events, which we list below, for investment agents to go out and buy stocks and long-term treasury bonds, allowing for a weekly average return of +5.8% in US equities and a drop in the 10-year sovereign rate to 4.52% (-32 basis points), respectively. The price of treasury bonds, and therefore in fixed income instruments, moves inversely to the movement of interest rates and therefore we saw greater demand for sovereign instruments.  

Among the factors that triggered the technical rebound were: 

1. The Federal Reserve (FED) and the Central Bank of England opted not to move their monetary policy interest rates joining the European Central Bank and the Central Bank of Japan in recent weeks.

2. The quarterly results of S&P 500 companies, including the giant Apple, came in considerably above market expectations. Already with more than 400 S&P 500 companies having reported their third quarter results for the year, according to Factset, sales have expanded +2.3% and earnings +3.7% relative to the same quarter last year. Earlier in the season, earnings were expected to fall. This week 55 other S&P 500 companies will be reporting including AMC, Disney and Uber among others.

3. The Treasury announced that it will be bidding fewer long-term sovereign instruments than expected to finance its deficit, just a couple of hours before the Fed's monetary policy announcement.

4. October's employment data showed a gradual economic slowdown, something that could generate less inflationary pressure entering the final stretch of the year.

5. The Republican party was able to consolidate the presidency of the House of Representatives around Mike Johnson, restoring legislative power.

6. The price of oil dropped masterfully to US$81 per barrel, accumulating a weekly mismatch of close to -5% despite the escalation of the war led by Israel against Hamas in the Gaza Strip.

Let's start by briefly analyzing the comments made by FED Chairman Jerome Powell after maintaining the monetary policy rate at 5.5%. The policymaker argued the following through his verbal intervention: 

"We remain committed to bringing inflation back to our 2 percent objective and to keeping long-term inflation expectations well anchored. Reducing inflation will likely require a period of below-trend growth and some weakening of labor market conditions. Restoring price stability is essential to lay the groundwork for maximum employment and stable prices over the long term. But the fact that we have decided to hold the policy rate at this meeting does not mean that we have decided whether or not we have achieved the monetary policy stance we seek at this time. First, real interest rates are currently positive and significantly positive, which is a good thing. We need policy to be tight in order to bring inflation down to target." 

Thus implying that there would still be room to raise the rate at the last monetary policy meeting to be held in December (between the 12th and 13th).

However, a couple of hours earlier, former FED Chair and now Treasury Secretary Janet Yellen made an announcement regarding the issuance of long-term debt by the country to finance the growing fiscal deficit. This announcement contemplated a considerably lower issuance than expected by investment agents immediately leading to a structural demand across the entire curve generating extraordinary demand in the longer term, which is why interest rates on 10 and 30 year sovereign bonds fell by a large magnitude. This, in turn, alleviated the Fed's concern about a possible de-anchoring of the long rate structure with the 10-year sovereign rate reaching 5% on October 23rd. This announcement by the Treasury allowed for a technical rebound in the fixed income market.

Meanwhile, the unemployment rate in October rose to 3.9% (from 3.8%), monthly job creation closed at 150 thousand and wage inflation eased to 4.1% (from 4.3%), all figures that support that the labor market could be adjusting to the more restrictive monetary policy. This is welcomed by the Fed as one of the factors that has generated inflationary pressures has been the imbalance between labor supply and demand.

Apple's results came in above market expectations, however, its CFO, Luca Maestri, was cautious for projected sales for this last quarter of the year, noting that they expect similar sales despite the holiday season. The giant Berkshire Hathaway accumulated liquidity in the order of US$157 billion during the third quarter of the year, surpassing today's Disney's market capitalization of US$156 billion.

Finally, market participants will be looking for direction from FED speakers, including Powell this coming Thursday, to determine whether last week's technical rebound has been sustained or was simply temporary and led by the most sophisticated market investors.

This Week

Monday (November 06)

Quarterly Reports

• Ryanair Holdings plc

• Vertex Pharmaceuticals Incorporated

• Itau Unibanco Banco Holding SA

• NXP Semiconductors N.V.

• Realty Income Corporation

Tuesday (November 07)

Quarterly Reports

• Gilead Sciences, Inc.

• Uber Technologies, Inc.

• UBS AG

• Air Products and Chemicals, Inc.

• Occidental Petroleum Corporation

Economic Reports

• Red Book Monthly Change Report

• Trade Balance Report

• Imports Report

• Exports Report

Wednesday (November 08)

Quarterly Reports

• Walt Disney Company (The

• Honda Motor Company, Ltd.

• TC Energy Corporation

• Corteva, Inc.

• Warner Bros. Discovery, Inc.

Economic reports

• Wholesale inventories report.

Thursday (November 9)

Quarterly Reports

• Sony Group Corporation

• Astrazeneca PLC

• Becton, Dickinson and Company

• Brookfield Corporation

• Li Auto Inc.

Economic Reports

Initial Jobless Claims Report

Friday (November 10)

Quarterly Reports

• Polestar Automotive Holding UK Limited

• Algonquin Power & Utilities Corp.

• Soho House & Co Inc.

• Consolidated Water Co. Ltd.

• Innovid Corp.

Economic Reports

• Preliminary Consumer Confidence Report, Michigan.

Now you have more information about your investments. See you next week with more news.

*This is an illustrative example and does not represent an investment recommendation.