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“Of course it’s the same old story. Truth usually is the same old story.” – Margaret Thatcher

Morning stock market summary

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After an eventful month and week, markets are looking to slide into the weekend on a quiet note as US equity futures are little changed on either side of the flatline. Despite a weak batch of flash manufacturing PMI reports from Asia and Europe, global equities are closing off the week on a more positive note. The Nikkei closed 0.7% higher finishing down 0.9% for the week, but in China, both onshore and offshore indices finished down sharply putting them both into the red for the week. European stocks have traded more uniformly positive with the STOXX 6000 trading up 0.5% putting it into the green for the week as the flash PMI manufacturing index slid into contraction territory at 48.1 from 50.0 in October. That weaker-than-expected reading has increased the odds of a December rate cut, pushing the euro to its lowest level in two years at 1.04 versus the dollar.

While the odds of a December rate cut in Europe rise, the odds here in the US have been on the decline. At the start of November, the market was pricing in an 80% chance of a 25 bps cut in December, but as of this morning, the odds have slipped to 60%.

The first rate cut was just over two months ago, so we wanted to see what, if any, change there has been in sector performance before versus after the September cut. The chart below shows the performance ranking of the eleven sector ETFs on a YTD basis through 9/17 (x-axis) versus each one’s performance since then. If there had been no shift in sector performance in the pre-and post-rate cut periods, you would expect to see all the dots on a 45-degree upward-sloping line, but as shown in the chart below, that has hardly been the case.

While several sectors are grouped relatively close to that line, others have seen big shifts. At the lower right side of the chart, Consumer Discretionary, and Energy were two of the worst-performing sectors on a YTD basis leading up to the first rate cut, but they’ve been the two best since then. Normally, you would expect Energy and Consumer Discretionary to move in opposite directions, but that hasn’t been the case this year. At the other extreme, Utilities and Consumer Staples were two of the better-performing sectors on a YTD basis heading into the September cut, but they’ve been laggards ever since then.

Looking at the charts of Consumer Discretionary and Energy, both sectors got a boost from the rate cut in September, but both rallies stalled out in late October before getting turbo-charged after the election, so it hasn’t been just a rate cut story.  Energy’s rally is particularly surprising given it was the worst-performing sector during Trump’s first administration.

The Consumer Staples sector had been in a steady uptrend all year right up until September, but the rate cut almost served as a bell for the peak as the longer-term uptrend turned on a dime into a two-month downtrend.

The reversal in the Utilities sector hasn’t been as abrupt as the one in Consumer Staples, but as longer-term yields rose after the first cut, momentum slowed significantly, although the election results earlier this month have provided a boost on expectations for a weaker regulatory environment.