This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. The market continues to pause, stall, digest and regroup with the S & P 500 churning near the 4,000 level, its maximum gain off the Oct. 13 intraday low 15% to this week’s high. Reading the action is always tricky, no more so than during a strong rally within a broader downtrend. We have had multiple double-digit rebounds that failed at lower highs since early this year. Bear-market rallies tend to be sharp and led by lower-quality/heavily shorted stocks, but that’s also how many lasting bottoms are made. Momentum was decent off the low, but it has yet to set off clear triggers that would give trend-followers more confidence. It remains notable that as of this morning the S & P 500 was essentially flat over the prior six months, absorbing 300 basis points of Fed rate hikes, a full percentage-point rise in 10-year Treasury yields , reduced corporate-earnings forecasts and a string of unfriendly inflation reports, not to mention growing expectations of recession. It looks like resilience, though it could also be read as denial. Over that six-month span, industrials and financials have gained 6% to 7%, megacap tech is down and consumer cyclicals have been about neutral. Pockets of outperformance by handfuls of economically geared groups, but it’s not the overwhelming message. Once more, there is much talk about the steeply inverted Treasury yield curve, which to some seals the argument for a recession waiting out there. Yet, history shows this can be a very early signal. In any case it doesn’t seem the markets have been ignoring this risk. Of the four prior inversions of the 2/10-year Treasury yield spread (in 2019, 2005, 1998 and 1988), the S & P 500 was on average either flat or up (by as much as 29% in the 1998 instance) in the year leading up to the initial inversion. This time, the S & P 500 was down 11.5% before the curve went negative. One year later, stocks were higher each time, too. Same is the case for the 3-month/10-year spread, which went negative in late October of this year. S & P 500 was down 15% in the prior year to that point. This proves nothing, but it strongly suggests that the market this time is surely not ignoring the macro risks, even if we have no idea whether they’re sufficiently priced in. The retail sales report is better than forecast this morning, which further ratifies the stance that some version of a softer landing is not out of the question. Inside the report, strength in services/gasoline/groceries (due mostly to inflation) and weakness in goods categories fits the broader picture and makes for a sort of joyless spending trend. It also explains Target ‘s struggles relative to other retail areas. A partial thaw in financial conditions is at work in this equity rally phase: The dollar is rolling over hard, Treasury yields have retreated from highs, market volatility gauges are easing and credit spreads are relaxing lower. Here, the spreads on the high-yield corporate-bond index have slid below the more-acute danger zone above 500 basis points. With Treasury yields higher than in past years, it means absolute debt expense for riskier borrowers has begun to pinch, but for now spreads show no alarming pattern. The crypto comeuppance is still pulling in new casualties as the linkages among dealers, lenders, “exchanges” and speculators have been exposed with the FTX bankruptcy. Traditional financial markets remain for now notably steady in the face of it all, something that could not have been taken for granted several months ago. Market breadth is soft today: 75% downside volume. Hopes for an emphatic “breadth thrust” coming out of last week’s burst higher in prices are so far not being met. With the pullback so far tame and the indexes hovering, the VIX is restrained, now near 24 as an options expiration and then Thanksgiving-slowed trading approach.
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