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(Monday Market Open) S&P 500 futures were trading 40 points higher overnight but cut those gains to trade in the red before the market open. Normally, one might expect stocks to remain fairly flat ahead of Wednesday’s Federal Open Market Committee (FOMC) interest rate announcement, but Friday’s plunge was very dramatic.
Potential Market Movers
The Cboe Market Volatility Index (VIX) rose again this morning, trading just below the 35 level. Investors are feeling very uncertain ahead of the FOMC meeting. With that said, the CME FedWatch Tool is discounting a 99.8% probability of the Fed sticking with a 50-basis-point hike on the overnight rate. This suggests that investors are more concerned with what the accompanying Fed statement might say more than the hike itself. Last Friday’s PCE Price Index was much hotter than expected and could prompt the Fed to be more aggressive going into the June meeting.
The 10-year Treasury yield (TNX) was up 74 basis points in premarket, and some analysts are looking for another spike in the 10-year yield before the week is out. Many investors anticipated that the TNX will go to 3% soon, and the next technical level of resistance is around 3.25%.
China, Hong Kong, and Singapore were closed Monday for Labor Day, but economic news still came out over the weekend that didn’t look good for China. China reported manufacturing slowdowns and significant decreases in non-manufacturing purchases. The COVID-19 lockdowns in China are obviously having very negative effects on the country’s economy. Chinese regulators are also concerned about the fallout wartime sanctions on Russia are having on China.
Declining economic sentiment isn’t just a China problem. Europe is also struggling. The eurozone’s April manufacturing purchases number was slightly higher than expected, but the April Business and Consumer Survey was lower, reflecting a negative outlook. Additionally, Germany reported negative retail sales growth in April and Italy and Spain both reported fewer manufacturing purchase orders for April.
Economic slowdowns in Europe and particularly China appear to be suppressing commodity prices. WTI crude oil futures were down 3.62% in premarket action and gold futures were down 2.45%. Last week, gold broke support around the $1,900 level and appears to be heading lower.
After the open, the ISM Manufacturing PMI report will be released, and investors will be able to see how U.S. manufacturing stacks up against China and Europe. Most of the United States isn’t living with pandemic restrictions like China and Europe, so they’re likely to perform better. However, the strong U.S. dollar has hurt U.S. exporters, which could reduce the number of purchase orders to U.S. manufacturers.
Reviewing the Market Minutes
The S&P 500 (SPX) took a dramatic 3.63% slide on Friday right down to its February and March lows while Cboe Market Volatility Index (VIX) spiked to a close near 34. Investors began heading for the exits after the PCE Price Index—the Federal Reserve’s preferred barometer—showed inflation rose a staggering 0.9% in March and 6.6% year over year. Many analysts were hoping that peak inflation occurred in March, but Friday’s PCE surprise clouded the picture.
March’s PCE report shook investors wondering how an already-hawkish Fed might react during the two-day Federal Open Market Committee meeting starting today. Investors were already expecting a 50-basis-point hike in the Fed’s overnight rate, but the CME FedWatch Tool revealed a small chance of a 75-basis-point hike last week. But this possibility has faded since Friday’s volatile session.
After rallying more than 3% on Thursday, Friday’s Nasdaq Composite ($COMP) gave back all of its gains and then some. The index began falling early in the session on news that Apple (NASDAQ: AAPL) anticipated future supply chain problems. AAPL fell 3.66% on the day and ugly earnings miss Thursday by Amazon (NASDAQ: AMZN) caused it to fall more than 14%.
Negative earnings reports weren’t limited to tech stocks—even the energy sector saw misses from Exxon Mobil (XOM) and Chevron (CVX) despite enormous gains in revenue. The miss by CVX caused the stock to fall 3.16% which, as one of the Dow’s 30 industrials, helped bring down the Dow Jones Industrial Average ($DJI) 2.77% by the close.
Of the major indexes, the Dow had the best month but only because it fell the least—finishing off 4.9% for the month of April. The SPX dropped nearly 9%, the Russell 2000 (RUT) lost nearly 11%, and the Nasdaq fell more 13% in a volatile April. The Russell and the Nasdaq are now back in bear market territory because both indexes are more than 20% off their all-time highs.
Energy led all sectors last week with the Energy Select Sector Index returning 3.72%. It was followed by the Materials Select Sector Index at 0.87% All other sectors were negative for the week. The Consumer Discretionary Select Sector Index was the worst, falling more than 7%, indicating consumer hesitancy could be on the rise.
The Consumer Staples Select Sector Index, which tracks essential goods, was the only sector index to end the month in the green. It hung on to a gain of about 2%. The technology index finished down 12.57%, behind the consumer discretionary index which lost 10.78%.
![](https://tickertapecdn.tdameritrade.com/assets/images/pages/md/soxvsixtvsspx_04292022.jpg)
CHART OF THE DAY: STINKY SOX. The PHLX Semiconductor Index (SOX—candlesticks) has underperformed the Technology Select Sector Index ($IXT—blue) and the S&P 500 (SPX—pink) over the last 12 months. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Three Things to Watch
Chips Have Dipped: One story you might have missed with all the talk around Apple and Amazon is that Intel’s INTC Q1 earnings missed expectations, shaking the global semiconductor sector. The miss was fueled, at least in part, by the seemingly endless conversation about pandemic supply chain disruptions and day-to-day market instability from the Russia-Ukraine war. But there are some signs that the chip shortage may finally be ending.
Despite reporting a slowdown in demand for PC computer chips, Intel projected the chip shortage could stretch into 2023. However, tech research company Gartner IT, indicated that chip shortages appear to depend on the product sector. Gartner sees semiconductor shortages easing in PCs and smartphones and the auto industry could be caught up by the end of the year.
The PHLX Semiconductor Index (SOX) rallied on news of the shortages back in fourth quarter 2021 and gave back much of its gains in January. Today, it is underperforming the technology sector and the S&P 500 (SPX).
Latest on Earnings: Refinitiv reported that as of last Friday the 275 companies in the S&P 500 have reported earnings and 80.4% have beat analyst estimates. That’s better than the long-term average of 66% but lower than the previous four-quarter average of 83.1%. This week, 160 S&P 500 companies are scheduled to report.
Energy and materials remain the top-performing sectors for earnings growth, while the financials sector has had the worst earnings growth. According to the Mortgage Bankers Association, mortgage applications have fallen 17% from their 2021 high. The slowdown in the mortgage markets is likely to continue to hurt financials as a whole and banks specifically.
Checking the Buffett: Over its big annual meeting weekend in Omaha, Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) missed on earnings and revenue estimates. The news prompted the stock to trade 2.94% lower in premarket action. Berkshire has recently bought shares in insurer Alleghany Y, oil companies like Chevron CVX and Occidental Petroleum OXY, and added to its stake in tech giant Apple AAPL.
However, neither Buffett nor his friend and partner Charlie Munger were willing to speculate on the future of inflation or the stock market. They criticized portfolio managers focused more on the S&P 500 index versus providing more customer value to justify their management fees. They also expressed concerned that younger investors were using the stock market to gamble instead of investing.
Notable Calendar Items
May 3: JOLTs Job Openings and earnings from Pfizer PFE, Advanced Micro Devices AMD, and Airbnb ABNB
May 4: FOMC Interest Rate Decision and earnings from Novo Nordisk (NVO), Moderna MRNA, MetLife MET, and Marriott MAR
May 5: Earnings from Shell SHEL, ConocoPhillips COP, and Anheuser Busch BUD
May 6: Employment situation report and earnings from Alibaba BABA, and Cigna CI
May 9: Earnings from Duke Energy DUK, Simon Property SPG, BioNTech BNTX, and Tyson Foods TSN
TD Ameritrade® commentary for educational purposes only. Member SIPC.
Image sourced from Unsplash
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