After Turbulent Week, Friday Rally Helps Market Recover Some Ground

The market finished the week 4% lower, but might have left investors with some positive vibes after rallying most of the day Friday and making better than 1% gains. Next week brings more bank earnings.

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Key Takeaways

  • After turbulent week, Friday brings a bit of recovery as stocks record big gains

  • Tech, consumer discretionary and communication services help lead rally

  • Rates stay relatively subdued, but financials lag despite positive earnings news

(Friday Market Close) Friday brought some relief for investors weary of seeing red. 

Stocks started higher Friday, lost ground at midday, but rallied into the close. This could arguably help set up some positive momentum heading into Monday, but with all the turbulence of the last week, things are still unsettled and a lot can happen between now and then.

Though stocks still finished the week down 4%, Friday saw strength in sectors like info tech, communication services, and consumer discretionary, helping lift the S&P 500 (SPX) to a 1.4% gain. 

Remember, communication services is the new sector that includes well-known companies like Facebook (FB), Netflix (NFLX), Alphabet (GOOG, GOOGL,) Disney (DIS) and AT&T (T). All of those names rose Friday, with big gains for AMZN, NFLX and GOOG, in particular.

Perhaps significantly, Friday’s rally brought the SPX back above its 200-day moving average. That number, at around 2766, might continue to be worth watching next week. Over the last six months or so, the 200-day has proven to be a pretty important technical support level, and the SPX hasn’t spent much time under it without bouncing back.

Financials Miss The Party

Financials didn’t really share in the wealth on Friday, rising just 0.3% and finishing second to last on the leader board despite what seemed like pretty good results from JP Morgan, Citigroup (C) and Wells Fargo (WFC). The last few earnings seasons, big bank stocks saw quick rallies in the hour or two after reporting, only to pull back later in the day as analysts pick away at the numbers. 

Financials appear to be an area that’s just befuddling many investors. There were good numbers Friday and JPM Chairman and CEO Jamie Dimon had positive things to say about the economy, but JPM missed Wall Street estimates for Q3 bond trading and the stock ended the day with 1% losses.

Banks remain in the spotlight next week, with Bank of America (BAC) reporting Monday and Goldman Sachs (GS) and Morgan Stanley (MS) on Tuesday. Tech also is in line for some possible attention as Netflix (NFLX) results bow Tuesday.

All wasn’t well with the real estate sector, either, on Friday. It finished last on the sector leader board as homebuilder stocks hit fresh 52-week lows. Lots of housing data are in store next week, so stay tuned.

How Does the Consumer Feel?

Looking back at Friday’s data, consumer sentiment for early October came in a little shy of expectations, according to the University of Michigan’s latest report. The survey respondents seemed a bit more nervous about the possibility of near-term inflation, but long-term inflation expectations actually fell. The headline number of 99 remains near recent highs. Retail sales for September due Monday morning might also offer insight.

Going into next week, interest rates might remain center stage amid concerns about any possible impact on corporate profitability. What’s potentially more constructive is that as earnings season continues, those concerns share the stage with reports and guidance from major companies that actually deal with the real-world issue of higher borrowing costs. The bank CEOs tend to have a close view of these issues, and their words and guidance might be more illuminating than the actual numbers from last quarter. 

Perspective Time

As we wrap up this turbulent week, it might be worthwhile for long-term investors to keep things in perspective. The markets are still up sharply over the long term, and the U.S. economy is in good shape. Though emerging markets are struggling, some signs of economic progress in Europe and Japan surfaced this year. 

Interest rates, though higher than the market had grown used to over the last five years, are nowhere near their long-term averages, with the 10-year Treasury yield finishing this week at around 3.16%, down 10 basis points from the decade highs set a few days ago. Back in the 1990’s and early-to-mid 2000’s, rates of 6% or higher were common. 

The last three days of the week saw a huge amount of volatility, and the VIX remained above 21 despite dropping 14% Friday. It often takes three sessions to work through the turbulence when the market has this kind of movement, and it looks like the market might be trying to set some kind of base. 

FIGURE 1: Frenzied Week: This chart of the S&P 500 (candlestick) and Nasdaq (purple line) goes back to last Friday, and clearly shows the intense turbulence of the past week. Stocks started higher Friday, came down at midday, but rallied into the close. Data Source: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Good Trading, 

JJ

@TDAJJKinahan 

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