After the worst week since early December, the market came out of the starting gate with a very strong showing, which then almost completely disappeared late in the session before steadying somewhat into the close.
The Dow had the nerve to gain as much as 372 points in the morning before having the nerve to actually go negative by 2 points at 3:40pm before regaining its balance, so to speak, and finished with a closing gain of 72 up to 32,889. It was led in this endeavor by gains in BA and CAT.
The S&P followed a similar pattern with a strong 48 point advance in the morning which then almost vanished to only a 3 point gain at 3:40pm before it also regained its balance and ended higher by 12 to 3982 for just its second positive day in the last seven. The Nasdaq did the best with a final advance of 72 to 11,467 helped by gains NFLX, NVDA and TLSA while the Russell 2000 Index of small stocks finished up 6 to 1896. The VIX declined as it should on a higher day and ended at 20.95, once again stuck in this very narrow range for months now despite the urging of some participants to buy calls on this item which strategy has not worked at all.
Stocks have struggled in February after a strong start to the year as reports have shown inflation and much of the overall economy are staying more resilient than expected. While the strong economic data calms fears that a recession may be imminent, it also has forced investors to raise their forecasts for how high the Federal Reserve will take interest rates and how long it will keep them there.
High rates can drive down inflation, but they also raise the risk of a recession in the future because they slow the economy. The heightened expectations for rates have been most evident in the bond market, where yields have shot higher in recent weeks. On Monday, the yield on the 10-year Treasury eased back a bit, which took away some of the pressure on stocks.
The 10-year Treasury yield dipped to 3.92% from 3.95% late Friday while the two-year yield slipped to 4.79% from 4.81%. It is still near its highest level since 2007.
Yields eased after a report showed that preliminary January durable goods orders for machinery, aircraft and other long-lasting manufactured goods fell by more than expected, a loss of 4.5% which was the lowest since April 2020.
Economists have been expecting more softness in the economy after the Fed increased rates last year at the fastest pace in decades. But reports on everything from the job market to spending by consumers to inflation itself have been coming in firmer than expected over the last few weeks and the fear is that if the economy stays on strong footing, it could feed into upward pressure on inflation. That is why expectations have swung so hard, from earlier thinking that the Fed could soon take it easier on interest rates to now believing it could raise them above 5.25%.
The Fed’s key overnight rate is now in a range of 4.50% to 4.75%, up from virtually zero at the start of last year.
Even Monday’s weaker-than-expected report on durable goods had some underlying strength. Excluding transportation-related equipment, orders jumped last month to the biggest advance since last March with a gain of 0.7%.
Economies around the world have remained more resilient than feared, with China loosening its business damaging anti-COVID restrictions and Europe avoiding a worst-case energy crisis due to much warmer weather than expected.
Even with the worries about rates going higher than expected, the S&P is still holding onto a gain of 3.7% for the year so far, and shoppers are still continuing to spend at stores. But both can add upward pressure on inflation.
Shares of UNP gained 10% for one of the biggest gains after the railroad announced plans to replace its CEO later this year. The company has been under pressure from a hedge fund with a big ownership stake in it.
The fourth-quarter earnings reporting season is coming to an end with the following lineup: today – OXY, NCLH, AZO lower and AAP, SEAS, TGT, WDAY,ZM higher; tonight – AMC, A, CBRL, MNST, RIVN, ROST, SPCE, WRBY; Wednesday – DLTR, LOW, ANF, JACK, KSS, NIO, OKTA, SNOW, TUP, WEN and Dow component CRM; Thursday – BUD, BBY, BIGG, HPE, M, JWN, SIX, VSCO VME, COST, DELL, HRL, KR, MRVL; Friday – HIBB.
Economic reports will have: yesterday – January preliminary durable goods orders fell by4.8% which is the lowest since April 2000 but excluding transportation were up by 0.7%, January pending home sales rose by 8.1% to the highest since June 2020; today – February Consumer Confidence fell to 102.9 which was the lowest since November, December CaseShiller Home Price Index rose by 5.8% which was lower than November’s 7.6% due to higher mortgage rates, ISM February Chicago Business Barometer fell to 43.6, Richmond Fed Manufacturing Index dropped to -16 which was the lowest since 5/2020; Wednesday – ISM February Manufacturing Index; Thursday – weekly jobless claims; Friday – ISM February Services Index.
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.