(Friday market open) U.S. stocks are poised to decline for the fourth day in a row, setting up the S&P 500® Index (SPX) and Nasdaq Composite (COMP) for their third straight weekly drops as investors weigh concerns over rising interest rates and weakness in China’s economy.
With no major economic data releases scheduled for Friday and just a handful of quarterly earnings reports from major companies left, the focus likely will be on key indicators such as the 10-year Treasury yield, which on Thursday touched its highest level in nearly 16 years.
U.S. stocks started to erode around the end of July when the 10-year Treasury yield climbed above 4%. Yields continued to rise this week, topping 4.30% and near levels not seen since October 2007. Rising yields can make bond returns more attractive relative to those from stocks, and also illustrate concerns the economy may still be running too strong for the Federal Reserve.
News from China further soured investor sentiment, as Evergrande Group, one of the country’s largest property developers, filed for Chapter 15 bankruptcy protection in a U.S. court on Thursday. The reports followed weaker-than-expected economic readings from China earlier this week that fueled concerns the world’s second-largest economy may be faltering.
According to Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, rising yields are among the bearish forces weighing on a U.S. equity market that was due for a pullback after turning in outsized gains during the first half of the year.
“After ignoring weeks of warnings intended to dampen enthusiasm, it feels like retail traders are finally getting the message,” Frederick said. “Yields are too high, stock prices have gotten ahead of themselves, earnings are flat and China is stalling. This is not an ideal environment for unfettered bullishness.”
Morning rush
- The 10-year Treasury note yield (TNX) was down about 4 basis points at 4.26%.
- The U.S. Dollar Index ($DXY) rose slightly to 103.62.
- Cboe Volatility Index® (VIX) futures were up at 19.54
- WTI Crude Oil (/CL) slipped to $79.18 per barrel.
Eye on the Fed
The U.S. economy continues to show resilience despite the Federal Reserve’s sharp policy-tightening of the past 17 months, which has lifted the central bank’s benchmark funds rate to its highest point in over 22 years. Still, investors appear confident the Fed may be near the end of its rate hikes.
Futures trading indicates just a 10% probability that the FOMC will raise interest rates by 25 basis points next month, up slightly from a week ago, according to the CME FedWatch Tool. The probability of rates being 25 basis points higher than they are now after the November meeting is around 36%.
The hawkish July FOMC minutes released earlier this week might put even more emphasis on Federal Reserve Chairman Jerome Powell’s speech at next week’s Jackson Hole Economic Symposium. Powell may be under pressure to demonstrate the Fed’s inflation-fighting resolve, especially after this week’s strong data on Retail Sales, Philadelphia Fed Index, and Industrial Production. And while The Conference Board’s July Leading Economic Index (LEI) did slide 0.4% as expected, that represented a narrower decline than 0.7% in June.
Stocks in Spotlight
Running like a...: Deere & Co. (DE) reported quarterly results Friday morning that surpassed analysts’ expectations, illustrating ongoing strength in the farm economy due to high crop and livestock prices.
Deere said it earned $10.20 per share in the previous quarter, about $2 above Wall Street expectations, according to estimates compiled by Nasdaq. The tractor maker’s revenue totaled $15.8 billion, up 12% from the same quarter a year earlier and about $1.5 billion above expectations.
Deere’s earnings call later today could be worth tracking for insight into whether China’s economic struggles are hurting demand for construction and agricultural equipment. Other major U.S. manufacturing firms with big exposure to China, including Caterpillar CAT, Dow (DOW) and DuPont de Nemours DD all recently noted China’s slow recovery from COVID-19 poses a challenge.
Among other large companies, Applied Materials AMAT appears headed for a stronger open after the semiconductor equipment maker reported strong earnings on Thursday.
Back to future: Though earnings season is roughly 90% done, next Tuesday might remind investors of the salad days of the Q2 reporting calendar. It features a wide assortment of quarterly corporate reports from across multiple sectors: Medtronic MDT, Lowe’s LOW, Macy’s M, Toll Brothers TOL, and Dick’s Sporting Goods DKS all step to the plate.
Lowe’s could be interesting as a follow-up to this week’s Home Depot HD results that showed consumer caution on big-ticket purchases. Medtronic puts the spotlight on medical devices after the health care sector sagged this summer. Toll Brothers shifts focus to the luxury home market after Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) made a splash earlier this month by purchasing shares of several home-building companies.
What to Watch
We’re heading into a bit of a data vacuum as the end of August approaches. While final August University of Michigan Consumer Sentiment and July Existing Home Sales and New Home Sales line up on next week’s calendar, the recent burst of numbers fades a bit and no extremely influential ones like Personal Consumption Expenditure (PCE) prices and Gross Domestic Product (GDP) are due out until the week of August 28.
The absence of notable data next week could give the market a bit of respite from the recent host of numbers suggesting the economy continues to grow faster than many economists had expected despite 17 months of rising interest rates. Chances are growing that we could face another rate increase in November, the futures market suggests. Solid data was one factor helping push the 10-year Treasury note yield to its highest close since 2007 on Thursday.
![](https://tickertapecdn.tdameritrade.com/assets/images/pages/md/chart-8-18.png)
CHART OF THE DAY: FORCE OF NATURE: The 10-year Treasury note yield (TNX—candlesticks) rose to highs last seen in October 2022 yesterday—above 4.3%. That arguably could make it tougher for the S&P 500 (SPX—purple line) to climb out of the hole it’s digging compared with last spring when it rallied from its March sell-off. Back then, as this chart shows, the 10-year yield was well below current levels. Data sources: S&P Dow Jones Indices, Cboe. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Thinking cap
Ideas to mull as you trade or invest
New barrier to chip M&A? Intel’s (INTC) attempt to buy Israeli chip foundry business Tower Semiconductor for $5.4 billion fell off the table this week after Intel failed to obtain Chinese regulatory approval, the Wall Street Journal reported. This was a relatively small deal but sends some high-charged signals to both the U.S. government and the semiconductor industry. The lack of approval for Intel’s deal was the third time in recent years that China’s been able to scuttle merger and acquisition (M&A) activity in the tech sector, the paper reported, and implies that Beijing is willing to sit on deals requiring its approval as the U.S. government tries to curb China’s access to advanced technology. It also points up the chip sector’s dependence on China, where most firms in the industry have large supply chain exposure. Even beyond China, regulatory issues continue to slow deal-making in the tech space, notably Microsoft’s (MSFT) bid to buy Activision Blizzard (ATVI), which awaits approval from the U.K.
Valuation meter: Wall Street’s pullback probably hasn’t felt great if you’re an investor, but looking at it from a valuation standpoint might improve the view. Earnings per share (EPS) continue to flag versus a year ago, but a nearly 5% drop in the S&P 500 Index (SPX) since July 31 removed a bit of the froth from its price-earnings (P/E) ratio. Though the market’s 12-month forward valuation varies depending on which analyst you follow, using FactSet’s most recent earnings consensus as a baseline puts the current SPX P/E near 18.7, down from almost 20 earlier this month. The current level is just above the five-year average of 18.6, though well above the 10-year average of 17.4. It is down, however, from 19.1 going into Q2 earnings season. Keep in mind that almost all the P/E rise since the start of the year represented growth in stock prices, because earnings fell year-over-year in Q1 and Q2. Analysts tracked by FactSet expect EPS to grow starting in the current quarter and accelerate by double-digits next year, which could finally provide the “E” a bit more punch to match near record-high “P” in the P/E equation.
Simmering down: Last month brought widespread concern that overwhelming bullish sentiment could set stocks up for a decline. That seems counter-intuitive, but when sentiment becomes extremely high or low, it often signals a near-term change in direction. Fears were evidently well placed, considering the S&P 500 Index (SPX) is down nearly 5% so far in August—the steepest drop since March. That’s arguably helped shift the ground on Wall Street, where earlier this week only 33% of stocks in the Nasdaq (COMP) traded above their 50-day moving averages (MA), versus 60% in late July. In the SPX, roughly 38% of stocks traded above their 50-day MAs, down from a peak of 70%. This could help ease worries about “overbought” conditions, especially as the Russell 2000 Index (RUT), the Nasdaq 100 (NDX), and the SPX all fell below technical support at their respective 50-day moving averages this week.
Calendar
Aug. 21: Expected earnings from Zoom Video (ZM).
Aug. 22: July Existing Home Sales and expected earnings from Medtronic (MDT), Dick’s Sporting Goods (DKS), Lowe’s (LOW), Macy’s (M), and Toll Brothers (TOL).
Aug. 23: July New Home Sales, and expected earnings from Foot Locker (FL), Kohl’s (KSS), and Nvidia (NVDA).
Aug. 24: July Durable Orders and expected earnings from Dollar Tree (DLTR) and Gap (GPS).
Aug 25: Final August University of Michigan Consumer Sentiment.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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