The S&P 500 Was Favoring Round Numbers Until Panic Selling Set In

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(Friday Market Close) Stocks followed up Thursday’s sell-off with a Friday sell-off. The S&P 500 (SPX) fell 2.77% as the benchmark index moved lower, level to level. On Thursday, the SPX tested 4,500 before selling off to 4,400. On Friday, it dropped to 4,300. The bears were unable to sustain a move below the 4,300 level but one final push into the close finally broke through. This could an important level on Monday.

The Dow Jones Industrial Average ($DJI) also fell more than 1,000 points at one point but trimmed its losses to 740 points to close 2.82% lower on the day. The Dow was showing strength earlier this week as investors appeared to favor “old economy” stocks to tech stocks. However, the Dow gave all of its gains for the week and some.

The Nasdaq Composite ($COMP) actually held up a little better throughout the day, but still closed 2.55% lower. Next week is tech earnings week with the likes of Meta Platforms (NASDAQ: FB), Apple (NASDAQ: AAPL), and Amazon (NASDAQ: AMZN). While Meta has seen a lot of selling since September, and Amazon has sold-off starting in November, Apple is trading just 11% off its all-time high.  

The rise in investor fear was reflected in a spike on the Cboe Market Volatility Index (VIX), which jumped above 28. Despite the selloff, the 10-year Treasury yield (TNX) was down 11 basis points. Investors appear to be more afraid of the prospect of higher yields than the actual yields. 

CHART OF THE DAY: ROUND NUMBERS. Sometimes, markets seem to prefer round numbers, and that appears to be the case with the S&P 500 (SPX—candlesticks). Currently, the SPX appears to be drawn to round numbers that are at levels 100 points apart. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Forecasting the Fed

Despite the small move in the 10-year yield, investors appear worried that the Fed may be getting a little too aggressive. The Fed has been criticized for being behind the curve on inflation and now with Fed Chair Jerome Powell joining the hawkish chorus of Fed Governor Lael Brainard and St. Louis Fed President James Bullard, fear seems to be rising that the Fed is willing to let the economy take a slight dip with the goal of a soft landing off the table.

While yields may not have moved much, the probabilities have shifted for other rate hikes. The market continues to anticipate a 50-basis point hike in May, but now it’s anticipating another 75-basis point hike in June. That would take the overnight rate from 0.25% to 1.50% after the June hike. The market was anticipating the Fed rate to be between 2% to 2.25% by the end of the year, but now it’s pricing in 2.75% to 3% by year-end.

As I’ve noted in the past, every time rate expectations increase, stock valuation, economic models, and forecasts change. Each rate hike decreases stock valuations and increases the likelihood of recession. For example, Gap GPS reported earnings today and had to cut its earnings outlook to adjust for a period of higher cost and less credit.

Cleveland Fed President Loretta Mester was on CNBC downplaying some of the Fed hawkishness. She said that she didn’t favor a 75-basis point hike in June and felt like it would likely to take longer to get rates up to the levels the market is anticipating. However, she did say that it might take 2-3 years to get inflation back below the 2% goal. Ms. Mester is the last one to comment publicly as we’re heading into the blackout period where Fed member stop speaking and making media appearances before their May meeting.

Notable Calendar Items

April 26: Durable goods orders, CB consumer confidence, new home sales, and earnings from Visa (V), PepsiCo (PEP), United Parcel Service (UPS), and Texas Instruments (TXN)

April 27: Pending home sales, and earnings from Meta Platforms (FB), T-Mobile (TMUS), and PayPal (PYPL)

April 28: Gross Domestic Product, and earnings from Apple (AAPL), Amazon.com (AMZN), Merck (MRK), Intel (INTC), and McDonald’s (MCD)

April 29: Earnings from Exxon (XOM), Chevron (CVX), and AbbVie (ABBV)

May 2: ISM Manufacturing PMI, Earnings from Berkshire Hathaway (BRK/A), Devon Energy (DVN), and Expedia (EXPE)

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

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.