Michael Reinking:

Hello, I'm Michael Reinking, Senior Market Strategist at the New York Stock Exchange, and this is Market Storylines. Every week, we're here to keep you up to date on the key trends and events driving global markets. We are recording on Thursday afternoon, so let's dive into this week's Market Storylines. Now, the most important event of the week was Veterans Day. And on behalf of everyone here at the New York Stock Exchange, I'd like to start off by thanking all the veterans out there for their service.

Now, the two major storylines were the anticipation and eventual end of the government shutdown and the ongoing AI debate, which will be with us and have lots of twists and turns for the foreseeable future. So, let's start with the government shutdown. Now, there was some movement in negotiations over the weekend. A bill keeping the government funded through January 30th, ultimately moved through Congress and was signed by President Trump on Wednesday evening, ending a record 43-day shutdown.

Now, the government is not like a light switch, and the impact of the shutdown will linger for some time on different areas of the economy. Now, purely from a market perspective, the biggest impact has been the lack of economic data. Now, the Administration has suggested that the September jobs data, which was scheduled to be released as the shutdown began, could come out as early as next week. However, the cadence and the ability for agencies to collect other data remains unclear, but the big takeaway is that it will be pretty sloppy for a while.

Now, during the government shutdown, markets have become more reliant on private sector data. This week, ADP published its new weekly jobs report, which looks at the average weekly hiring on a trailing four-week basis. That is released every Tuesday, except for when the monthly report is published. Now this report, which looked at the trailing four weeks ending on October 25th, showed employers shed just over 11,000 jobs per week, pointing to a significant deceleration in the back half of the month after the last update two weeks ago showed about 14,000 jobs were being added to the economy.

Now, this did initially help to push treasury yields modestly lower, but that has been overshadowed by a steady stream of Fed commentary, which is highlighting the reticence of many members on the committee to aggressively cut rates with inflation remaining elevated. Now, markets are still pricing in a little more than a 50/50 chance of a cut in December, and I'd imagine that the economic data that we do see between now and then could help to pull some members of the committee that are on the fence over the line, but the bar to continue easing will be higher from there.

Now, speaking of raising the bar, a seemingly endless wave of new AI deal and partnerships announcements over the last few weeks sent stocks sharply higher, but markets started to get desensitized to these headlines with the subsequent rallies getting smaller. Now, in addition, the circular nature of many of these deals, along with questions about future financing with the increasing use of debt, started to raise concerns.

Now, the debate seemed to hit a bit of a breaking point last week with multiple Wall Street CEOs warning of an eventual pullback in markets, though with many caveats, and Michael Burry, one of the main characters in The Big Short, made a return to Twitter discussing an AI bubble and an SEC filing showing his hedge fund had bought puts on Nvidia and Palantir. Now, that triggered some unwind last week, and that has resumed in the back half of this week.

Now, there once again have been a couple of positive updates this week with AMD sharply increasing guidance at its analyst day, and Cisco putting up very strong numbers with strength in its networking business. However, CoreWeave, a neodata center operator, lowered Q4 guidance after construction and permitting delays at a third party developer. Now, the stock has moved sharply lower this week, and is reminding investors of the bottlenecks in bringing this capacity online.

Now, for some time, investors have been drawing parallels to the late 1990s, and then there have been more warning sides building up. Markets can go through boom and bust phases. However, it's not always a binary outcome. There can be an in-between, and positioning often needs to reset along the way. I think it is way too early to draw off firm conclusions yet, and the ebb and flow of this debate will carry on for the foreseeable future.

So, how is this all impacting markets? When Eric left you last week, equity markets were pulling back with the S&P 500 breaking below its 20-day moving average on Thursday. Now, the downside momentum continued on Friday morning in both equity and crypto, but buyers stepped in to defend key technical levels. Now, the S&P 500 briefly broke below its 50-day moving average for the first time since it was reclaimed at the beginning of May after the tariff turmoil, but rallied nearly 1.5% off the lows to end the week slightly higher.

Now, that upside momentum continued to start the week with risk assets moving higher on Monday, as there was finally some movement on the government shutdown negotiations and President Trump teased the idea of a tariff dividend. Now, the S&P 500 gapped back above its 20-day moving average, trading back up to around $68.50 over the next couple of days, filling that post Michael Burry headline induced momentum unwind we just discussed. However, since Monday's rally, we've started to see a change in character in the market.

Now, over the last year, the AI trade has expanded beyond just the Mag seven and has been the primary factor driving gains in many other sectors as well. Now, positioning and exposure to this theme was almost unavoidable, and we are seeing an unwind to some of that. Now, in addition, other more speculative and thematic areas of the market, which had gone parabolic a couple of weeks ago, are unwinding those gains sharply. Now, as we've noted at the time, those types of moves often unwind with equal but opposite force, which is occurring in the popular themes like rare earths, SMRs, and quantum computing stocks.

Now, many of these stocks are off well north of 25% this week, but I don't want to overdramatize overall declines in the market, which goes back to the change in personality. Investors seem to be moving up the quality scale, favoring large cap over small, value over growth, and profits versus the promise of the future. Now, in fact, the Dow Jones Industrial Average traded over 48,000 for the first time yesterday. And as we're recording, major US indices are down about 1.5% on the session, but around unchanged for the week though the equal weight version of the S&P 500 is holding onto modest gains. Healthcare, consumer staples, energy materials, and financials are all in the green for the week.

Now, as we've been highlighting, there have been some caution signs flashing for a bit. We've noted the crypto complex being a leading indicator over much of the last year, and it has never been able to recover after that October 10th flash crash. Now today, Bitcoin is breaking back below a 100,000, and retesting last week's lows. If this gives way, that could open the door for a move into the low 90,000s.

Now, the VIX is moving back above 20 for the third time in the last month, and the S&P 500 is less than 1% away from its 50-day moving average, which is now around 6,700. Now, a break of this level, along with the increase in volatility could trigger some additional systematic risk reduction. Now, key levels to watch are last week's low around 66.30 and the October 10th low of 65.50, which also coincides with around the 100-day moving average. Now, this is all happening going into an options expiration week, which could exacerbate some of the volatility and some major catalysts, including earnings from major U.S. retailers and the AI poster child, NVIDIA. Global Flash PMIs for November will be released at the end of the week, and we should get some more clarity about government data going forward.

That's going to do it for this week. Thanks for spending some time with us. If you liked today's episode, please tell a friend or leave a comment wherever you listen to your podcasts. Thanks for joining me. I'm Michael Reinking. We'll talk to you again next week.