Market Insights

Stocks shifted gears dramatically last week, but kept driving toward record highs.

Simply put, investors liquidated safe havens that had been rallying — especially bonds and gold. They then poured money into value stocks that had been struggling — especially banks, energy and materials. The result was a stark divergence unlike anything in almost three years.

Two big forces were at work. First, better trade relations between the U.S. and China:

• Monday, September 9: U.S. Treasury Secretary Steven Mnuchin spoke of a conceptual agreement on enforcement.
• Wednesday, September 11: China exempted some American products from tariffs and delayed tax increases on others.
• Wednesday, September 11: President Trump postponed some U.S. tariffs as a “gesture of good will.”
• Thursday, September 12: Bloomberg reported an interim trade deal had been reached, which the White House denied.
• Friday, September 13: China cut punitive tariffs against U.S. farm products including soybeans and pork.

On top of that, jobless claims fell more than expected to a five-month low. Retail sales and consumer sentiment also surprised to the upside. Where’s the recession everyone worried about?

That was item No. 2: the deflating fear bubble. Huge amounts of capital had been hiding in Treasury bonds, precious metals and real-estate investment trusts. Without a recession, those safe-havens make a lot less sense.

Taking Stock of a Dramatic Week

All told the S&P 500 rose 1 percent between Friday, September 6, and Friday, September 13. It was the third straight positive week and brought the index back within striking distance of its record high from late July.

Small caps were a big story, rallying more than 5 percent. Retailers spiked 6 percent. Banks ripped 8 percent. Steelmakers surged 10 percent. Investors hadn’t seen price action like that since President Trump was elected in late 2016.

But “growth stocks,” especially software and e-commerce firms, lagged.

Beyond just the sector performance, it’s noteworthy that most of the S&P 500’s best performers last week bounced from long-term lows. Obscure auto-parts supplier LKQ (LKQ), for instance, led the index with a 22 percent gain. It didn’t have any news, but it had been holding a support level from all the way back in 2014.

Nektar Therapeutics (NKTR) and State Street (STT) also climbed 18 percent after hitting multiyear lows in August.

On the flipside, most of the big decliners crashed just days after hitting record highs. Those include MarketAxess (MKTX) an Automatic Data Processing (ADP).

The Fed vs China

Two big catalysts now remain for the market before earnings season in mid-October: the Federal Reserve and China.

Jerome Powell’s team of central bankers announce monetary policy on Wednesday. Most economists still expect them to lower interest rates by 25 basis points. However probabilities of another cut on October 30 have fallen sharply.

The China story is less predictable. Could relations worsen again? When will investors learn details about the meeting in Washington early next month? Is all the good news priced in for now, or will positive momentum carry the S&P 500 to new highs before details are known? It wouldn’t be the first time investors “bought the rumor.” Will they “sell the news?”

Aside from the Fed, this week also has some housing data. The only item today is the New York Empire Manufacturing Index.

Tomorrow brings industrial production and NAHB’s homebuilder index. FedEd (FDX) and Adobe Systems (ADBE) report earnings in the afternoon.

Housing starts, building permits and oil inventories follow Wednesday morning. The Fed’s interest-rate announcement is at 2 p.m. ET, and Powell’s press conference begins 30 minutes later. Everyone’s sure to watch that for clues about the October meeting.

Thursday features initial jobless claims, the Philadelphia manufacturing index and existing home sales.