In one of the more bizarre huge market selloffs, things actually started out on the upside yesterday with the Dow gaining 106 points, the S&P doing better with a 24 point advance while the Nasdaq was ahead by 125.
But shortly after that, things began to deteriorate as for instance the Dow went negative at 10:25am and began to lead the downside similar to what it had done the day before on the GS earnings disaster.
This was then followed by the S&P which turned that strong early advance into a negative reading at 10:45am which was followed by the Nasdaq which was the last to go into the minus column at 11am after that nice early gain as well.
But that point into the close, the session turned into a real disaster as the Dow ended close to its worst level of the day at a huge 614 point loss to 33,297 led by selling in AMGN, HON, MCD, UNH and MSFT.
The S&P ended lower by 62 points down to 3929 while the Nasdaq gave back 138 to finish at 10,957. The Russell 2000 Index of small stocks lost 30 down to 1854 while the VIX rose again up to 20.34.
And how many times have I said that the 19 VIX level has been strong support that has turned back rallies for months now, so its close last Friday at 18.35 was a really strong indication that the market was very overbought, and the last two days have certainly proven that to be the case.
This was the worst day of the new year which started out with two higher weeks and wiped out much of the gains from last week’s best market showing since November and ended the Nasdaq’s seven-day winning streak.
So the question was – how did this happen, and the logistics of the decline seem a little strange, as the main report of the day was the highly anticipated December P.P.I. report which came in lower than expected, and which should have been friendly as it originally was by showing a decline of 0.5% and led to the initial reasoning that this is friendly for stocks because it takes pressure off of the Fed to be aggressive in its future interest rate hikes. This put the year over year increase at 6.2% which continues the recent downtrend of this statistic over the past six months.
But then the experts apparently changed their tune by pointing out that the December retail sales report was weak at a 1.1% decline for the second negative reading in a row, but ex food and energy it was higher by 0.1%. So this now showed that the economy was possibly heading into a recession as the 10am release of the December industrial production report showed a decline of 0.7% which was the lowest since September 2021 while capacity utilization eased back to 78.8%.
So it was right after this statistic was released that things reversed course to the downside as mentioned above. And even with these weaker numbers, comments from Fed Governor Mester said that interest rates need to go higher than the central bank has previously signaled and added that “I still see the larger risk coming from tightening too little.”
She stressed her belief that the Fed’s key rate should rise a “little bit” above the 5% to 5.25% range that policymakers have collectively projected for the end of this year, which is not what the federal funds futures market is predicting.
The central bank has raised its key overnight rate to a range of 4.25% to 4.50% from roughly zero a year ago. The next decision on interest rates comes on February 1st and investors are largely forecasting a raise of just 25 basis points, down from December’s half-point hike and from four prior increases 75 basis points.
Treasury yields fell broadly as a result of the weaker reports with the 10-year Note at 3.37% from 3.55% late Tuesday while the 2-year dropped to 4.07% from about 4.16% just before the latest economic data was released. It was as high as 4.21% late Tuesday.
The fourth-quarter earnings parade continues this week with the following: yesterday – – IBKR, JBHT higher while UAL, SHWB and PNC were lower; today – Dow component PG lower in addition to AAL, FAST, NTRS, KEY, DIVB, DFS while CMA and FITB are higher; tonight – NFLX, PPG and MTB; Friday – SLB and SST.
Economic reports will have: yesterday – December retail sales fell by 1.1% while ex-food and energy were up 0.1%, December P.P.I. fell by 0.5% to an annual rate of 6.2%, December industrial production fell by 0.7% to the lowest since September 2021and capacity utilization dropped to 78.8%, Fed Beige Book at 2pm said that economic activity was unchanged since the last report and that consumer spending was up slightly; today – weekly jobless claims fell by 15K down to 190K for the lowest since September, January Philadelphia Business Outlook dropped to -8.9 which was the sixth straight negative reading, December housing starts were down by 1.4%; Friday – December existing home sales.
Donald M. Selkin
Chief Market Strategist
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.