Investors Already Ditching Safe Havens Despite Ongoing Russian Threat

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(Friday Market Open) For some investors, it may feel like we’ve lived a lifetime in a shortened week of trading, but the action continued overnight. The Dow Jones Industrials Average futures were down more than 400 points early this morning but are now pointing to a higher open. Equity index futures appeared to rally on news from the Associated Press (AP) that Russia is willing to negotiate. China has publicly urged Russia to find a diplomatic approach to the situation, and Chinese TV is actually reporting that Russia is willing to negotiate.

It’s great news if China is pressuring Russia to find a diplomatic way out of the Ukraine situation; however, the AP is also reporting that Russia has seized a strategic airport outside of the Ukrainian capital of Kyiv. The Russian military has also taken defensive positions along bridges and have paraded armored vehicles through the streets. So, we certainly aren’t out of the woods yet.

Despite the looming risks, investors appear to be increasingly bullish on the situation because they were shedding bonds in premarket trading, causing the 10-year Treasury yield (TNX) to rise 1.57%. Additionally, gold futures were down 1.9% ahead of the opening bell. Like Treasuries, gold was being treated as a safe haven. Gold had a roller coaster day on Thursday, rallying as high as 3.4% and falling as low as 1.65% before closing 0.32% lower on the day. The Cboe Market Volatility Index (VIX) was down about 3% and back below 30, suggesting that investor fears have subsided a little.

The United States is seeing some positive economic news with durable goods orders up 0.7% in January, which was much higher than the projected 0.4%. However, inflation was also higher than projected. The Core PCE Price Index was up 0.6% month over month above the forecasted 0.5%. And the Core PCE Price Index was up 5.2% year over year above the projected 5.1%. Personal spending also rose in January and came in higher than expected at 2.1% compared to the forecasted number of 1.5%. Equity futures were unmoved on the report.

Despite the geopolitical and economic news, earnings season continues with the fintech company formerly known as Square. Block SQ was more than 21% higher in premarket trading. SQ reported better-than-expected earnings and revenue despite slower growth for its Cash App services. Without government stimulus checks, many analysts were concerned that the cash app use would fall at a greater pace. Despite the rally, Block is down about 68% from its all-time high.

Shoe retailer Foot Locker FL is moving in the opposite direction of Block because it was down 21% in premarket trading. The company was able to beat on earnings despite missing on revenue. The stock is falling as the company management warns that revenue growth may continue to slow.  

Russian Roller Coaster

Early Thursday morning Russia added to its occupation of two Ukrainian regions by launching missiles into several cities and urging Ukrainian forces to lay down their arms to avoid war. The actions caused oil futures to spike overnight to $100 per barrel and U.S. equity futures to sell off dramatically. Investors went looking for safe havens, causing gold futures to climb more than 3% overnight and the 10-year Treasury yield (TNX) to fall 5.41% as investors buy up Treasuries and push bond prices higher. Currency traders piled into the dollar, pushing the U.S. Dollar Index up more than 1%.

However, as the day stretched on, investors appeared to see the situation differently, and stocks rallied back. The Nasdaq Composite ($COMP) gained momentum on the strength of cybersecurity stocks like Telos (TLS), Palo Alto Networks (PANW), CrowdStrike (CRWD), and Mandiant (MNDT), which rose 20.10%, 13.05%, 13.01%, and 12.36% respectively. The White House has warned Russia several times that any cyberattacks would result in immediate reprisal, but some investors may be expecting companies to try and protect themselves first.

The Nasdaq originally fell about 3.5% on the open, which took it more than 20% off its all-time high set back in November and into bear market territory. However, the tech-heavy index turned the tables and rallied off its lows to close 3.34% higher on the day. The S&P 500 (SPX) climbed 1.50%, while the Dow Jones Industrial Average ($DJI) rose just 0.28%.

Technology, consumer discretionary, and real estate sectors were the day’s top performers. The inflationary sectors including materials, energy, and financials joined consumer staples in the red.

The movement in sectors was likely driven in large part by changes in Treasury yields and, by extension, interest rates. Investors originally flocked into safe havens like Treasury bonds, which caused the 10-year Treasury yield (TNX) to fall more than 6%. The 2-year Treasury yield dropped from 1.6% to 1.48%. However, as the day moved on and investor fears subsided, the yields rallied and regained much of their losses. However, the rebound in yields didn’t dampen the euphoria in the rally.

The biggest whipsaw may have occurred in oil futures. WTI crude futures rallied more than 9% to trade over $100 per barrel but gave back all but 0.36% of its gains to close at $92.88 for the day. Natural gas futures rose more than 7% but ended up closing just 0.95% higher on the day.

With a day like this, investors may need to account a new risk—whiplash.

Risk Analysis

As the sell-off started Thursday morning, the Nasdaq Composite ($COMP) reached bear market levels by trading at 20% off its highs. Similarly, the Russell 2000 (RUT) has been flirting with bear market territory since testing support in January. These two indices are significant because they often reflect investors desire for riskier investments. The RUT is a small-cap index full of smaller companies that have greater risk of failing but also greater risk for growth.

The Nasdaq has more than 3,000 companies that tend to be growth stocks. It’s more than 51% technology when measured by market cap. However, when measured by the number of companies, health care is the highest with 1,089 compared to 446 tech companies. Financials are actually second at 903. Additionally, the index includes small-, mid-, large-, and mega-cap companies.

Both indices have underperformed the S&P 500 (SPX), but their ability to rally back on Thursday could be a sign that investors are getting increasingly more willing to take on risk. Risk appetite is an important sentiment indicator because it often signals that investors are willing to put more money to work. More money invested is more demand for shares, which pushes stock prices higher. If these levels continue to hold, it could be a good sign for the bulls. 

CHART OF THE DAY: ASSESSING RISK. The Russell 2000 Index (RUT—left) and the Nasdaq Composite ($COMP—right) broke support on Thursday but rallied back above the price level. Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Growth vs. Value: Another sentiment indicator is comparing growth stocks to value stocks. As we’ve seen over the last few months, investors tend to favor value stocks when market volatility increases. On Thursday, the S&P 500 Pure Value Index fell more than 3% on the open but closed just 0.78% lower by the end of the day. By comparison, the S&P 500 Pure Growth Index fell about 3% and closed 3.77% higher.

While these comparisons are helpful in demonstrating how investors favor certain stocks under different conditions, looking at trends over time can help investors identify where the institution’s funds, or so-called “smart money”, is going. The ability to identify and invest with them can help investors gain an edge.

Risky Business: Investors may be more willing to consider riskier investments despite Russia’s actions because there appears to be little appetite for war. Currently, the global community appears to be satisfied with sanctions and are not yet willing to engage in combat. So, while we don’t know what Russia will decide to do in the future, some investors may be willing to invest on the premise that it won’t get much worse.

Outside of the Russia question, last week’s FOMC Minutes revealed that there’s a larger streak of dovishness among Fed members despite what the bond markets have been signaling. So, while some members like President James Bullard may be pushing hard for a more aggressive approach to fighting inflation by raising interest rates, he may still be in the minority. If investors are thinking this is the case, they may be more willing to take on more risk.

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

Image sourced from Unsplash

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