Key Takeaways

University of Michigan consumer sentiment and New Home Sales due after the open 

Bristol Myers aims for neuroscience research with proposed $14 deal for Karuna 

How projected interest rate declines in ’24 could help real estate—and mortgage lenders  

(Friday market open) The pre-holiday economic data dump continues with durable goods orders, another inflation report, new home sales, and consumer sentiment insights.

Equity index futures were pointing to a lower open before the durable goods and Personal Consumption Expenditures (PCE) prices reports were released. While Dow futures remained negative, the S&P 500® and Nasdaq futures pointed to a potential positive open.

Chinese video game and software stocks fell on Friday after Chinese regulators announced new gaming restrictions in the government’s campaign to curb gaming addiction. The plan is to limit the amount of money and time spent online. NetEase (NTES) and Bilibili (BILI) were among the losers tumbling 21% and 11% respectively overnight.

Treasury yields extended a six-week slide on Thursday, with the 10-year Treasury note yield (TNX) dropping under 3.83% to a five-month low.

According to Joe Mazzola, director of Schwab trader education, [MOU1] the stock market may be poised for a sideways consolidation phase through the holiday period and into early 2024. But it still could face bouts of heightened volatility if, for example, bond yields swing sharply higher or lower or interest rate expectations shift.

“Volatility is beginning to reappear after the previous day’s market reversals,” Mazzola said. The market “may be taking a breather to consolidate, given the sharp rally in riskier assets over the past month has pushed a myriad of sentiment indicators into ‘extreme optimism’ territory,” Mazzola explained. “We still believe equity volatility will be influenced by fixed income volatility in 2024.”

A move lower in rates “may lead to lower volatility,” but volatility “may remain relatively elevated given the macroeconomic uncertainty,” Mazzola added.

Morning rush

The10-year U.S. Treasury Yield (TNX) dropped three basis points to 3.85%.The U.S. Dollar Index ($DXY) fell 0.18% to 101.66. Cboe Volatility Index® futures (/VX) ticked 0.19% higher to 15.47. WTI Crude Oil (/CL) rose $0.58 to $74.48.

Just in

Orders for manufactured items were expected to rise 0.2% in the latest durable goods orders report. It was up 5.4%, which was well above the forecasts. In fact, last month’s report was a –5.4% which was adjusted to –5.1%.

The November PCE prices report fell 0.1% month over month, better than the forecasted rise of 0.1%. The year over year rate was 2.6%, which was also better than the estimate. The core rate, which excludes food and energy prices, was expected to rise 0.2% but only rose 0.1%, which adds to a string of positive inflation news. Additionally, the core year-over-year rate was 3.2%, an improvement to the forecasted 3.3%. The PCE is the Fed’s favored inflation gauge, and while it has fallen most of the year, it remains above the central bank’s 2% long-term target.

Personal Income was up 0.4% in November as expected, while Personal Spending rose 0.2%. Consumers appear to still be doing well, which could be a good sign for the economy.    

What to watch

After the open, the Michigan consumer sentiment survey and new home sales report will give investors more data to consider.

Standard options expiration took place last Friday, but investors may see some late-day volatility today [MOU1] [CR2] as many options traders close their positions because of the three-day holiday. A lot can happen in three days and leveraged instruments can make the ride a stomach-turning event, especially if you’re stuck in a position that you can’t get out of. However, it’s not uncommon for the trading volumes to slow in the afternoon as traders head home early for some eggnog.

Options traders looking for longer-term strategies might consider hedging, according to  Mazzola. The Cboe Volatility Index (VIX)  remains near historic lows and institutions may be looking to hedge too as Q4 earnings start next month.

Investors are hoping for a Santa rally, which normally takes place between the Christmas holiday and the first few days of the new year.  Investors may be trying to get an early jump on the seasonal cycle by setting up their portfolios to take advantage of the potential move. However, the rising VIX may suggest turbulence for Santa.

Stocks in spotlight

Nike (NKE) reported better-than-expected earnings and revenue after Thursday’s close. However, the stock fell more than 5% in after-hours trading after announcing a $2 billion cost-cutting plan. By morning, the losses worsened to 12%.

BlackBerry (BB) plunged 13% after the company released weaker-than-expected revenue guidance for its fiscal fourth quarter.

Salesforce (CRM) rose 2.7%, leading gainers on the Dow Jones Industrial Average®, after an analyst upgraded the software company from “equal weight” to “overweight” and increased its price target 21%, from $290 to $350, saying the company’s Data Cloud offering “will likely see traction” as clients look to prep their data for generative artificial intelligence.

Spotify Technology (SPOT) rose 2.2% after Pivotal Research upgraded the music streaming service from “hold” to “buy,” citing a “renewed focus on financial discipline.”

Bristol-Myers Squibb (BMY) announced a deal to buy psychiatric and neurological drugmaker Karuna Therapeutics (KRTX) for $14 billion. KRTX rocketed more than 47% in premarket trading.

Eye on the Fed

Early today, futures trading pegged chances at 85.5% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following the FOMC’s January 30–31 meeting, according to the CME FedWatch Tool. The market prices in a 72.7% chance the funds rate will be a quarter point lower after the Fed’s March meeting.

CHART OF THE DAY: SECTOR WATCH. Q3 has been a strong one for real estate. The Real Estate Select Sector Index ($IXRE—red) has led all sectors from October 1 to Thursday, the first of October coming in just shy of 18%. The Technology Select Sector Index ($IXT—gray) is second at 15%. The Financial Select Sector Index ($IXM-salmon), Industrial Select Sector Index ($IXI—blue), Consumer Discretionary Select Sector Index ($IXY—lavender), Utilities Select Sector Index ($IXU—green), and Materials Select Sector Index ($IXB—white) are bunched near each other between 9.6% and 12.6%. Health Care Select Sector Index ($IXV—orange) and Consumer Staples Select Sector Index ($IXR—yellow) are hovering around 3%. The Energy Select Sector Index ($IXE—pink) is the only negative index over the time frame. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Thinking cap

Ideas to mull as you trade or invest

Open
house: As the chart
above shows, the real estate sector appeared to benefit last quarter from the
market’s belief that the Federal Reserve was going to end rate hikes. Interest
expense is a big obstacle of real estate companies, so now that the Fed has indicated
cuts are coming, the fundamental picture for the sector is clearer. Another
benefit of the relationship to real estate and rates is that higher yields tend
to draw income investors away from real estate and into bonds. This is likely
why utilities have gained in the last quarter as well. Yet the improvement in
financials is notable because a falling rate picture would generally be seen as
bearish. However, the Fed’s rate hike cycle was so aggressive that lending
slowed dramatically. So, some investors may see the end of hikes as a sign that
lending may pick up.

Calendar 

Dec.
25: Markets closed for Christmas.

Dec.
26: December consumer confidence.

Dec.
27: No major data or earnings.

Dec
28: Pending home sales.

Jan
1: Markets closed for New Years Day

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