Slight Respite: After Worst Day Since March, Stocks Rebound Slightly As Yields Ease

(Wednesday market open) The toxic trifecta of rising yields, a firm dollar, and expensive crude oil remains in place, but a slight pullback in Treasury yields appeared to give major indexes an overnight lift. Shares of some mega-caps rose ahead of the open, but Costco COST fell after its earnings report.

Steady selling over the last month has pushed the small-cap Russell 2000 (RUT) index back to flat for the year, and only 14% of S&P 500® stocks now trade above their 50-day moving averages. That’s the lowest percentage since October 14, 2022, which was two days after the S&P 500® Index (SPX) recorded its low for that year. In addition, the equal-weighted SPX (SPXEW) is now near unchanged for the year, meaning the only reason the SPX is up at all in 2023 is the performance of the mega-caps.

Still, some underlying metrics suggest the selling hasn’t reached “panic” levels yet. While volatility has spiked, the Cboe Volatility Index® (VIX) remains below the important 20 level. The market isn’t in “correction” territory, which would require a 10% decline from the recent July peak down to 4,130.

“We are still in a bull market, and the longer-term momentum is still clearly up,” says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

Tuesday featured SOS (same old suffering) for investors as stocks continued to crumble amid rising rates, crude oil, and the dollar. Utilities brought up the rear for Tuesday’s sector performance, burdened by high Treasury yields that compete with dividends. Consumer discretionary also had a rough day as recession fears bubbled. A drop in Consumer Confidence didn’t help matters. Volume was below average while declining stocks far outnumbered advancing ones.

“What started to look like a better profile for the market in the summer has mostly turned for the worse,” says Kevin Gordon, senior investment strategist at Schwab. “Breadth statistics are breaking down across the market and down the cap spectrum; and now with heavyweights no longer helping, the path of least resistance is still down from here.”

Morning rush

• The 10-year Treasury note yield (TNX) fell 5 basis points to 4.5%.
• The U.S. Dollar Index ($DXY) climbed to 106.39, near 10-month highs.
• Cboe Volatility Index® (VIX) futures fell to 18.29 but remain much higher than earlier this month.
• WTI Crude Oil (/CL) rose sharply to $92.36 per barrel and is trading just below last week’s 10-month high.

The VIX, the market’s “fear index,” blasted past the mid-August high intraday Tuesday to top 19 for the first time since mid-May.

The 10-year Treasury note yield rebounded yesterday to 16-year highs near 4.55% after early pressure. At some point, it seems the combination of high yields and low prices might lure more investors and end this intense upward yield surge.

“While there could be room for yields to drift a bit higher, we think upside is limited given that long-term yields tend to peak once the Federal Reserve hits its peak rate,” says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. “We don’t know when that peak is hit until after the fact, but we think we’re close.”

Just in

August U.S. Durable Goods data this morning looked stronger than analysts had expected, with non-defense durable orders excluding transportation rising 0.4%. The non-defense capital goods orders excluding aircraft—a proxy for capital spending—was up 0.9% versus Wall Street’s 0.1% expectation, and the highest monthly increase since January. However, there were downward revisions to the prior month, and August is just a single month of data. We’d have to see this continue in September to suggest a trend.

What to watch

Key economic news still on the docket this week includes the final estimate for Q2 Gross Domestic Product (GDP) due out on Thursday. Consensus for GDP is unchanged at an annualized rate of 2.1%, according to Trading Economics. Friday brings Personal Consumption Expenditures (PCE) prices for August, the inflation metric watched most closely by the Fed.

Early expectations are for PCE prices to rise 0.5% month-over-month and 3.5% year-over-year, according to Trading Economics, compared with 0.2 % and 3.3%, respectively, in July. Core PCE is seen rising 0.2% month-over-month, versus 0.2% in July. If numbers meet expectations, PCE would remain far above the Fed’s 2% goal and suggest that higher gas prices sent the headline numbers the wrong way even as core PCE looks unthreatening.

Government shutdown: On Tuesday the Senate advanced a bipartisan stopgap funding bill that would keep the government funded at current levels through November 17. Senate leaders hope to pass the bill later this week and then send it to the House, where its prospects appear iffy.

Stocks in spotlight

As investors have seen so often lately, another big company’s shares fell in premarket trading despite outpacing analysts’ earnings expectations. This time the victim was Costco COST. However, underneath the positive headline numbers, there were signs of consumer caution that might explain why shares fell. The size of the average consumer basket declined by 4.5% despite shopping frequency increasing by 5%. This suggests people turned away from more expensive items, which bears watching as other retailers report.

This week features quarterly results from a few major names, such as semiconductor giant Micron MU on Wednesday afternoon and athletic apparel Nike NKE on Thursday afternoon. BlackBerry Limited BB and CarMax Inc. KMX are also expected to report results on Thursday. Focus for Nike might be on sales in China, an important market for the company. Investors will likely want to know the latest on any anti-Western sentiment there being directed at well-known U.S. products, including those that bear the “swoosh.”

Tech companies suffered some sentiment issues yesterday as an Apple AAPL executive testified to the Justice Department in a case involving Alphabet GOOGL, which is under scrutiny for alleged monopolistic practices in its search business (see more below). In addition, the Federal Trade Commission (FTC) filed a lawsuit against Amazon AMZN focused on alleged monopolism in the company’s online retail business.

The headlines probably added to pressure already pushing tech values down this month, and the overhang of possible government action could remain a speed brake on any tech rallies. Info tech was the second-worst performing S&P 500 sector this month as of Tuesday.

Eye on the Fed

Early this morning, the probability that the Federal Open Market Committee (FOMC) will raise its benchmark funds rate from its current 5.25 to 5.50% target range following its October 31–November 1 meeting was just below 20%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 36%.

CHART OF THE DAY: DOLLAR TAKE TWO. Yesterday’s chart showed how rising yields have elevated the dollar to 10-month highs. Today, we look at it from a technical perspective, noting that the rally also has the dollar above an 18-month resistance level. This could be a drag on earnings for multinational corporations in coming quarters that could drag earnings and, in time, major indexes. Data source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Shutdown scorecard: As the deadline for a government shutdown rapidly approaches, Schwab Center for Financial Research data show previous shutdowns not having a big impact on stocks. In fact, the SPX rose in every shutdown since 1986. However, the average SPX gain during shutdowns is exaggerated by the shutdown of 2018–2019, when the SPX rose about 10% during a 35-day standoff. That event coincided with an extremely poor Q4 2018 performance from the SPX during a period of rising rates and plummeting technology stocks. By early 2019, the Fed showed signs of blinking, eventually leading to rate cuts later that year. The result was a major rebound in stocks as the shutdown lingered, but a rebound not completely connected to the government situation. The only other government shutdown featuring anything more than minimal SPX gains was in 2013, when the SPX rose about 3% during a 16-day shutdown. The past isn’t a road map, but stocks being down nearly 7% over the last two months suggests some of the negativity associated with Washington might be priced in.

Witness for the prosecution? An Apple AAPL executive testified to the Justice Department Tuesday on behalf of Alphabet GOOGL, which the government accuses of trying to dominate the internet search market. Alphabet’s Google product is the default search system on Apple’s products, but Alphabet pays Apple as much as $19 billion a year under terms of an agreement, CNBC reports, citing an analyst note. That $19 billion lands in Apple’s Services revenue, one of the company’s key profit drivers. A decision against Alphabet that forces Apple to change its default search setting could conceivably threaten that revenue. The question is what the government makes of Apple’s contention yesterday that it chose Google simply because it’s the best search platform. The government—which has gone after alleged monopolization in tech for years in an effort driven by both political parties—might be prone to seeing things otherwise.

Humble pie: Anyone who’s publicly commented on the economy and markets likely wishes at times they could take back their words. That goes for Wall Street analysts who predicted the U.S. economy would crumble this year due to higher interest rates, and possibly Fed Chairman Jerome Powell—who along with other policymakers took criticism for initially calling post-pandemic inflation “transitory.” Powell put things well at his press conference last Wednesday when he said, “Forecasters are a humble lot and have a lot to be humble about.” It’s hard not to hear some self-reference. Investors can learn from Powell’s words, which might be his way of warning that the Fed’s current economic projections could become tomorrow’s fish wrappers. Being humble doesn’t just mean avoiding greed on rallies; it also means not getting too discouraged on pullbacks and refraining from trades on the fly as Wall Street wobbles. Sticking with a long-term plan and checking it regularly to see if it’s still appropriate can help you avoid emotional trades based on expert forecasts that experts themselves often walk back.

Calendar

Sept. 28: Third estimate of Q2 Gross Domestic Product (GDP), August Pending Home Sales, and expected earnings from CarMax (KMX), Nike (NKE), and BlackBerry Limited (BB).

Sept. 29: September Chicago PMI, August Personal Income and Personal Spending, August Personal Consumption Expenditures (PCE) prices, and expected earnings from Carnival Corp. (CCL).Oct. 2: September ISM Manufacturing Index and August Construction Spending.

Oct. 3: August Job Openings and Labor Turnover (JOLTS).

Oct. 4: September ISM Non-Manufacturing Index and August Factory Orders.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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