Market Rollercoaster Continues in Wake of Powell's Comments

If you ever wondered what it was like to be a yo-yo, this market is giving you the opportunity. Market volatility is such that the stocks that you hated yesterday, you may find that you love today. U.S. stocks up strongly this morning, reversing the move of yesterday’s selloff. Both Dow and Nasdaq futures gained over 1% leading into the market open, and futures on the Russell 2000 Index, which has been particularly hard-hit of late, rose nearly 2%. Accordingly, parts of the market that were struggling in yesterday’s action are mostly rebounding this morning. This market volatility comes as the result of two main factors: concerns over the course of the Covid-19 omicron variant and a possible accelerated timeline for Fed tapering. 

Energy stocks are mostly higher this morning, following the price of crude oil, which is now above $69 per barrel. Additionally, major “reopening” stocks, such as Expedia EXPE, Carnival CCL, and Hilton Worldwide HLT are all up strongly.

The yield on the 10-year Treasury note also has regained some ground, and is up near the 1.5% level, although this is still well below last week’s yields of 1.69%. Something to look for will be how interest-rate-sensitive financial stocks react to this move.

ADP Non-Farm Employment numbers came in this morning above expectations (534k actual vs. 525k estimate), which may also help to give the market a boost.

But the theme of the week so far is volatility, and that is reflected in the VIX. While the volatility index has now dropped below 24 on the move up in the market, this level is still elevated, and unlikely to drop to normal levels in the next couple of weeks: keep in mind, Quadruple Witching Day will occur in just over two weeks.

One of the notable gainers this morning is Merck MRK, which received FDA advisory committee approval for its antiviral Covid-19 pill, which would be the first such pill to be taken at home. 

Another gainer this morning is Mastercard MA, which both authorized an $8 billion share repurchase program and increased its quarterly dividend by 11%, both actions which investors typically like.

Cloud Burst 

After Tuesday’s close, Salesforce.com CRM announced better-than-expected earnings and revenue. However, the stock fell 6.5% in after-hours trading after the company forecasted lower revenue because of increased competition in cloud services. Additionally, the company promoted Bret Taylor to co-CEO one day after Taylor was named chairman of Twitter’s TWTR board of directors. The move restores the previous structure of having two CEOs that changed when former co-CEO Keith Block stepped down in 2019. 

In fact, Salesforce.com competitor Zscaler ZS also announced better-than-expected earnings and revenues after the bell but then rallied 4.62% in after-hours trading. The cloud security company provided greater-than-expected guidance for its January quarter. 

Another earnings announcement of note is NetApp NTAP, which also beat revenues and estimates but only traded slightly higher after the bell. NetApp provides software and cloud services. 

 Fed Changes Focus

On Tuesday, Federal Reserve Chairman Jerome Powell told the Senate banking committee that inflation no longer looks transitory and that the Fed will consider accelerating its tapering plans before inflation becomes entrenched. Mr. Powell admitted that the Fed made a mistake in evaluating supply problems that were causing more inflation and that these issues could take longer to be resolved. Additionally, he expressed concern that the Omicron variant could lead to more lockdowns around the globe, which could make supply problems even worse.  

Powell’s comments seemed to confirm the concerns that many investors had about the economy, which pushed an already bearish day even lower. However, as the day went on and investors had time to reflect on the comments, some buying came in and took stocks off their lows. The Nasdaq Composite GIDS fell about 2% before closing 1.55% lower. The S&P 500 (SPX) and Dow Jones Industrial Average($DJI) had similar reactions, dropping 2% before rallying off their lows and closing 1.90% and 1.86% lower. 

Despite the bearishness of the markets, it’s important to remember that the Fed is making these moves because it views the economy as strong and no longer in need of extra stimulus. At this point, the Fed feels that it’s more important to address the downside of economic strength by moving its focus to inflation. While many analysts will argue about the Fed’s timing is too late or not big enough, many investors may see this move as a vote of confidence for the economy. With the S&P 500, about 2.7% off its November high, the current market action has yet to reach a basic correction territory around 5% to 10%. 

CHART OF THE DAY: SUPPORT GROUP. The 10-year Treasury Yield (TNX—left) touched support around 1.42 before trading higher. The S&P 500 (SPX—middle) appears to have more room before it tests support around 4550. Crude oil (/CL—right) could fall a little more than $3 before hitting support around $62. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Taper Off: If the Fed decides a faster taper is the way to go, then the Fed will be buying fewer bonds, and rates will be more free to rise and fall with market demand. Additionally, the faster taper could result in the Fed raising the overnight rate sooner as well. The possibility of the Fed hiking its rate sooner resulted in the 2-year yield rising from 0.20 to 0.21. The rising 2-year and the falling 10-year flattened the 2s and 10s ratio, which is often used to measure the steepness of the yield curve. 

Oil Slick: One reason yields fell was because of falling oil prices (/CL). Oil prices slid 8% after the open, but it also rallied off its daily low and closed down 4.69%. Elsewhere among the energy markets, natural gas futures (/NG) finished at a three-month low after dropping 5.17%. Falling energy prices should help the inflation picture, assuming it doesn’t prompt more usage. 

However, the winter months tend to be a weaker time for most energy products outside of heating oil (/HO). In October, heating oil had reached 2013 prices. However, the futures price has dropped nearly 20% from its October high. Heating oil and natural gas are seeing less demand as weather forecasts in the United States remain relatively warm. 

FYI: Information technology was the top-performing and strongest sector among Tuesday’s sell-off. Apple AAPL was the lone stalwart among tech stocks, rallying 3.16% on the day, although IPG Photonics IPGP also just barely closed on the positive side. While the sector still traded lower on the day, it could be one that benefits if the Omicron variant turns out to be a big concern and workers go back to remote work instead of the office.   

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

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