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Investors Exercise Caution Despite Rally: Fundamentals and Caution Guide Market Moves

By:JJ Kinahan

Strong fundamentals are backing the market's rally, yet unpredictability persists

  • Market momentum is continuing as equities surge, concerns about inflation ease, and companies report robust earns and strong fundamentals.
  • Commodities and interest rates are declining, signaling subdued inflation worries and economic stability.
  • Investors are treading cautiously despite market optimism; they’re cautious amid potential unforeseen market shifts.

Throughout the past week, both the S&P 500 and Nasdaq Composite registered their third consecutive week of gains. The S&P 500 displayed positive momentum in 13 thirteen of the last 15 weeks, resulting in a 2.2% increase, while the Nasdaq surged by 2.4%. These gains have escalated the S&P and Nasdaq by 10% and 13% respectively since the end of October, bringing them within a mere 2% of their yearly highs.

Concerns surrounding inflation seem to be diminishing as evidenced by notable declines in commodity prices and interest rates. Oil prices have tumbled by 20% since September's end, while Natural Gas saw a 19% drop since October's close. Correspondingly, the yield on the 10-year note plummeted by 57 basis points to 4.44%, while the two-year yield declined by 37 basis points to 4.83% since mid-October. Despite weaker-than-anticipated economic indicators driving this reduction in interest rates, the overall growth remains positive, allaying fears of a recession.

Positive developments

Reasons for optimism include the potential resolution of the United Auto Workers' strikes through new worker-backed contracts, along with Congress and the White House passing a bill ensuring government operations until early next year, averting potential spikes in unemployment rates.

Earnings reports reveal uplifting statistics: 82% of S&P 500 companies surpassed earnings per share expectations, contributing to a 4.3% year-over-year earnings growth rate. This trend surpassed the 10-year average in both the number and size of earnings surprises. Looking ahead, 64 companies issued negative guidance while 32 issued positive guidance. The S&P 500's forward 12-month price-to-earnings ratio, standing at 18.6, slightly below its five-year average, reinforces the ongoing equity surge grounded in fundamental support.

Moreover, the decline in certain commodities and decreased corporate concerns about inflation was evident. The frequency of inflation mentions during earnings calls is at its lowest since 2Q of 2021, aligning with a consistent decrease in inflation and recession references over the past five quarters.

Strong fundamentals

The market's rally appears substantiated by fundamentals, portraying controlled inflation and successful economic navigation, potentially due to Jerome Powell's strategies. Yet, market unpredictability persists, urging caution and prudence in investment decisions. The adage "bulls make money, bears make money, pigs get slaughtered" echoes the necessity of balanced investment strategies.

As Thanksgiving approaches, the message extends warm wishes, emphasizing the simplicity and joy of this holiday—a time for indulgence in food, football and cherished moments with loved ones. Despite the positive market trends, it's prudent to maintain an investment strategy and, as always, exercise caution and balance in decision-making.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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