Market Recap 5/17/2024: Dow Climbs Above 40,000 as Rally Rolls On

The Dow Jones Industrial Average marked a major milestone last week, closing above the 40,000 level for the first time amid a broad-based rally in U.S. stocks. The blue-chip index gained 134.21 points, or 0.34%, to finish at 40,003.59, notching its fifth straight weekly advance. The S&P 500 also eked out a modest gain, rising 6.17 points, or 0.12%, to 5,303.27, while the tech-heavy Nasdaq Composite slipped 12.35 points, or 0.07%, to 16,685.97.

Key Takeaways

• Dow tops 40,000 for the first time, gains 0.34% for fifth weekly rise
• S&P 500 edges up 0.12% to 5,303.27, Nasdaq dips 0.07% to 16,685.97
• Utilities sector shines as Vistra Corp earnings impress
• Tech, consumer discretionary stocks pressured by rising yields
• Inflation concerns linger ahead of key CPI, PPI data
• Fed rate cut expectations build, with 67% odds seen for September move

Utilities Power Ahead as Tech Stumbles

The market’s advance was driven largely by strength in the utilities sector, which outperformed as investors sought out defensive plays with steady earnings and attractive yields. Vistra Corp was a standout performer, with shares surging 9.1% after the power generator reported better-than-expected quarterly results and raised its full-year guidance.

On the flip side, the technology and consumer discretionary sectors came under pressure as rising Treasury yields weighed on high-growth, interest-rate sensitive stocks. The yield on the benchmark 10-year U.S. Treasury note climbed to its highest level in over a month, reflecting expectations for a Fed rate cut later this year but also raising borrowing costs for companies.

Uber Technologies was among the hardest hit, with shares tumbling 5.7% after the ride-hailing giant reported a surprise quarterly loss and warned of slowing growth in its core ride-sharing business. Tesla also saw its stock price slip as investors grew more cautious on the electric vehicle maker’s near-term prospects.

Inflation Jitters Persist Ahead of Key Data

Despite the market’s overall resilience, concerns about inflation and its potential impact on monetary policy continued to simmer beneath the surface. Investors are bracing for a fresh batch of price data in the week ahead, with the April Consumer Price Index (CPI) and Producer Price Index (PPI) set to provide crucial clues on the trajectory of inflation.

While the recent string of soft labor market data has helped ease fears of an overheating economy, the Fed remains laser-focused on bringing inflation back down to its 2% target. Any signs of persistent price pressures could complicate the central bank’s efforts to engineer a soft landing and keep rate hike expectations in check.

Still, markets are increasingly betting on a Fed pivot in the months ahead, with the CME FedWatch tool now pricing in a 67% chance of a quarter-point rate cut at the September policy meeting. The shift in expectations has helped fuel the rally in stocks and other risk assets, even as some investors warn of complacency in the face of lingering economic headwinds.

In a surprising twist, legendary hedge fund Renaissance Technologies significantly increased its stakes in meme stocks like GameStop and AMC Entertainment just before their latest surge, according to recent regulatory filings.

The quantitative trading firm, founded by late mathematician Jim Simons, built a 10% stake in GameStop and a 6.8% position in AMC during the first quarter, making it a top shareholder in both companies. The move raised eyebrows on Wall Street, given Renaissance’s reputation for using complex algorithms to exploit market inefficiencies rather than riding the coattails of retail investor frenzies.

GameStop has been a poster child for the meme stock craze, with its shares soaring more than 400% at one point last week on the back of a renewed retail investor frenzy. The rally was fueled in part by the return of Keith Gill, the trader known as “Roaring Kitty” who helped spark the initial GameStop surge in early 2021.

AMC also saw its shares jump as the meme stock mania spread, though gains were more muted than in previous bouts of speculative fervor. Still, Renaissance’s big bet on the movie theater chain underscores the enduring allure of meme stocks for some investors, even as regulators crack down on the social media-fueled trading frenzy.

Conservative Investors

With inflation risks still looming and valuations stretched by historical standards, conservative investors may want to focus on quality companies with pricing power and recession-resistant business models. The utilities sector has been a standout performer in recent weeks and could offer a measure of stability if volatility picks up. Dividend aristocrats and low-volatility ETFs are other options for income-oriented investors.

Growth Investors

Growth investors may need to be more selective in the current environment, as rising bond yields pressure high-multiple stocks. Look for companies with robust free cash flow, strong balance sheets, and exposure to secular growth trends such as artificial intelligence and renewable energy. Cybersecurity and cloud computing are other areas that could benefit from long-term tailwinds.

Opportunistic Investors

For investors with a higher risk tolerance, the meme stock resurgence may present some tactical trading opportunities, though caution is warranted given the potential for sharp reversals. Other areas to consider include small-cap value stocks, which have lagged the broader market rally and could benefit from a pickup in economic activity. Commodity exposure may also be worth considering as a hedge against inflation and geopolitical risks.

Our Take: Rally Highlights Hopes and Fears

The Dow’s historic milestone reflects the market’s resilience in the face of myriad economic and geopolitical headwinds. The combination of strong corporate earnings, receding recession fears, and expectations for a Fed pivot have helped fuel a broad-based rally that has caught many investors by surprise.

However, the market’s strength also belies some persistent risks that investors would be wise not to ignore. Inflation remains stubbornly high, and any signs of reacceleration in the upcoming CPI or PPI data could force the Fed to tighten policy more aggressively than currently anticipated. At the same time, the debt ceiling standoff in Washington and geopolitical tensions in the Middle East and Asia continue to loom as potential sources of volatility.

Perhaps most concerning, the frenzied trading in meme stocks like GameStop and AMC suggests that speculative excess is once again building in some corners of the market. While the impact on broader market sentiment has been limited so far, the risk of a sudden unwind in these high-flying names cannot be dismissed.

Given these cross-currents, we believe that a balanced approach remains warranted for most investors. While the market’s momentum is certainly encouraging, the prudent course is to focus on high-quality companies with durable competitive advantages and reasonable valuations. Diversification across sectors and asset classes is also key to mitigating risk and capturing potential upside.

All eyes will be on the April inflation data in the week ahead, with the CPI and PPI reports likely to set the tone for market sentiment. Investors will be closely parsing the numbers for signs of easing price pressures, which could bolster the case for a Fed rate cut later this year.

Retail sales and industrial production data will also be in focus, with any signs of weakening consumer demand or slowing factory activity likely to weigh on risk assets. Earnings season is largely in the rearview mirror, but a few key reports from retailers like Walmart and Home Depot could shed light on the health of the American consumer.

On the policy front, developments in the debt ceiling negotiations will be closely watched as the June 1 deadline approaches. A failure to reach a deal in time could have catastrophic consequences for financial markets and the economy, underscoring the high stakes of the political brinksmanship in Washington.

Geopolitical risks also warrant attention, with tensions between the U.S. and China over Taiwan and the ongoing conflict in Ukraine threatening to disrupt global trade and energy flows. As always, investors should stay attuned to these developments and be prepared to adjust their portfolios as conditions evolve.

Views expressed here should not be considered personal investment advice.

Sources:

Reuters

CNBC

Economy

NY Post