Daily Market Notes: 2-26-2021

The market did not have a chance yesterday, as rising bond yields triggered a broad sell-off that erased the market’s gains for the week and handed the Nasdaq composite its biggest loss in nearly four months.

After a weakish start, things began to crater as the yield on the 10-year U.S. Note moved to  1.6%, a level not seen in more than a year and far above the 0.92% it was trading at only two months ago. The move raised the alarm on Wall Street that yields, and the interest rates they influence, will move higher from here.

Bond yields have been rising this month, reflecting growing confidence among investors that the economy is on the path to recovery, but also concern that inflation is headed higher. Rising yields can make stocks look less attractive relative to bonds to some investors, which is why every tick up in yields recently has corresponded with a tick down in stock prices.

As a result, the Dow got clobbered to the tune of 559 negative points down to 31,402 a day after reaching a new record high the day before. It was hurt by a large decline in BA, just as it had been helped by this one on the way up. In addition, there was extreme selling in DIS, HD, HON, MSFT and CRM ahead of its earnings last night. And heaven forbid, even the mighty financial and energy stocks, which had been going like gangbusters these past few weeks, succumbed to the selling as well.

As is usually the case on these types of huge selloffs, the S&P did worse and took it on the chin to the tune of 96 downside points to 3829 as those large technology stocks, now thrown on the ash heap of market has-beens by their sensitivity to higher rates due to their higher multiples, continued to collapse. Ditto for the Nasdaq, which did not have a chance because of this, ended with a huge decline of 478 down to 13,114 as many of the newer more glamorous names in cloud computing got slammed to the downside really hard.

The mighty Russell 2000 Index of small stocks also got hit very hard with an 84 point downside shellacking to 2200. Breadth numbers were awful at a negative 1 to 6 downside ratio and the VIX really loved this with a large gain up to 28.89 and the 20 and below support level now seems like a pipedream.

The second estimate of fourth-quarter G.D.P. came in at 4.1% The influx of new government stimulus efforts and accelerated vaccine distribution could lift growth in the current quarter, ending in March, to 5% or even higher, economists believe.

The bond market is reacting to the positive economic growth, so here is a case of the old good news is bad news syndrome. On the other hand, rising bond yields can translate into higher borrowing costs for individuals and companies, which can end up hurting a company’s longer-term earnings, especially in the technology sector as previously mentioned. .

Global stock markets have soared over the past six months on optimism about coronavirus vaccines and central bank promises of abundant credit to support struggling economies. Those sentiments have faltered due to warnings the rally might be too early and that inflation might rise.

On Wednesday, Federal Reserve Chair Powell once again affirmed the Fed’s commitment to low interest rates in a second day of testimony to legislators in Washington. The central bank earlier indicated it would allow the economy to “run hot” to make sure a recovery is well-established following its deepest slump since the 1930s. Powell said it might take more than three years to hit the Fed’s target of 2% inflation. But there is the danger that the bond market’s inexorable rise might force the central bank’s hand to move sooner than the market anticipates.

Investors also are looking for Congress to approve President Joe Biden’s proposed coronavirus relief package. That includes $1,400 checks to most Americans. However, the plan faces staunch opposition from Republicans and is still subject to negotiations. Democrats have chosen to use the legislative process known as reconciliation that would allow them to pass the bill without GOP support.

The shares of GME jumped by 19%, a day after the video game retailer’s stock more than doubled. It also dragged its sad-sack companions higher but these also faded, and this illustrious group includes money-losers AMC, KOSS and even NAKD. The former has been mostly declining this month after skyrocketing 1,600% in January as a large group of investors on Reddit and other social media sites encouraged each other to drive up the shares at the expense of hedge funds betting the stock would go lower. On the other hand, it faded out as the day moved along and finished at its low, resulting in huge numbers of out of the money calls to lose most of their value ahead of today’s final trading day of the month.

For 2021, the consensus is for $175 in S&P earnings which means that the S&P is trading at a 23 multiple, higher than the historical average but not too much considering the record low interest rates currently in existence. The fourth quarter of 2020 is now projected to show a slight earnings gain of 2.8% which is much better than expected at the start of the earnings season last month with the largest profit declines expected in the energy and industrial sectors.

Earnings reports for the fourth-quarter of 2020 are winding down and this week will see the following: yesterday – BKNG, LB, APA, VIAC, MRNA, NCLH, W higher while TDOC, NVDA, NTAP, BBY, PLUG, DPZ and PCG lower;  today – Dow component CRM plus DASH, WDAY, ADSK, WW, SPCE, CZR, VMW, CVNA, CNA lower while BYND, DELL, ZS, DKNG and ETSY are higher.

Economic reports saw: yesterday – weekly jobless claims fell to 730,000, January durable goods orders rose by 3.4% and ex-transportation was up 1.4% and 2.3% ex-defense, second estimate of 4Q 2020 G.D.P. was 4.1%; today – January personal income rose by 10% due to the effect of stimulus checks and personal spending increased by 2.4%, final February U. of Michigan Consumer Sentiment Survey slipped to 76.8 from 78 last month. 

Donald M. Selkin

Chief Market Strategist

 

Disclosures:

 Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.