Daily Market Notes: 3-3-2021

After Monday’s huge upside moonshot to start the new month on a really positive tone, the market could not stand that prosperity yesterday and underwent one of those typical late in the day collapses, led by ongoing weakness in the large technology former leaders, and what else is new in this regard?

The Dow actually was nominally higher for parts of the session and at 3:10pm it was up by 47 points with gains once again in some financials and industrial types. On the other hand, the Nasdaq never had a chance and was lower all day. So here you had the classic discrepancy between the two indices and once again we saw who got the best of the other, with the pattern in the latter controlling the final outcome as it usually does in cases such as this one, namely because the population of the Nasdaq is over 100 times that of the Dow.

For instance the Dow went from that 47 point advance with 50 minutes to go to a final slide of 143 down to 31,391 and naturally the selling accelerated into the close in the old familiar pattern of giving mutual fund sellers the worst possible execution. The S&P really got clocked as it was lower by “only” 3 points at 3:10pm before getting slammed to a final loss of 31 down to 3870. And naturally the Nasdaq gave way further on the downside with a 230 point loss to 13,358.

The Russell 2000 Index of small stocks had nothing going for it and ended off by 44 to 2231 while breadth numbers were slightly negative and the VIX rose to 24.10, once again making the 20 and below level more difficult to attain.

For weeks, investors have been focused on the bond market, where a swift recent rise in interest rates is threatening one of the main reasons for the stock market’s run to records through the pandemic. Bond yields eased across the board Tuesday, but expectations for stronger economic growth in coming months continue to fuel worries that interest rates will head higher.

Higher rates force investors to rethink how much they are willing to pay for stocks, making each $1 of profit that companies earn a little less valuable. That is forcing investors to reconsider the value of technology stocks, in large part because their recent dominance has left them looking even pricier than the rest of the market, hence their recent weakness.

Treasury yields have been climbing with expectations for economic growth and inflation, and such a rise makes borrowing more expensive for homebuyers, companies taking out loans and virtually everyone else. That can slow economic growth. For instance, due to the recent rise in rates, mortgage applications increased by only a fractional amount last month.

The yield on the 10-year Note did ease a bit, falling to 1.41% from 1.44% late Monday, a reprieve following weeks of relentless rising. The 10-year crossed above 1.60% intraday last week, up from roughly 0.90% at the start of the year, and the sharp move higher raised worries that more increases could destabilize the market.

Tech stocks were weak again, with those in the S&P 500 falling by 1.6%. But investors remain fairly optimistic, saying stocks in other areas of the market are likely to rise with expectations for the economy’s improvement later this year. Gains for banks, energy producers and other companies whose profits are closely tied to the economy’s strength can help offset a pullback for tech stocks, which had been driving the market for years, so the thinking goes.

ZM, the company whose software helps students and workers around the world talk with each other from a distance, fell 9% as concerns over slower subscriber growth offset its otherwise solid quarterly financial report and forecast. It had been higher by as much as 40 points on Monday night following that report so this reversal in the negative direction must have made those who rushed in to buy it scratch their heads on the losses that they suffered so far.

And in a here we go again scenario, RKT soared by 71%, the latest stock to be hyped in the same online forum that fueled the sharp rise in GME and other stocks in January. Shares in this one were around 50% of the float being shorted, so those people certainly paid the penalty, at least for one day. The company, which operates several personal finance brands, including Rocket Mortgage, said last week that its revenue more than doubled in the fourth-quarter, reflecting strong growth across all its businesses.

Going forward, there was some optimism in the comments from Federal Reserve Governor Lael Brainard who said in a speech that the Fed, while generally optimistic about the economy, is still far from raising interest rates or reducing its $120 billion a month in asset purchases.

She also said that the central bank is closely monitoring the recent rise in the 10-year yield and an increase in investors’ inflation expectations. But she repeatedly said the economy is 10 million jobs short of its pre-pandemic level and the Fed would keep rates at nearly zero until the job market has fully recovered.

Worries have been rising in recent months that inflation could be headed higher as COVID-19 vaccines get the economy back to strong growth and Washington gets close to delivering another $1.9 trillion in aid for the economy.

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.

Fourth-quarter earnings are in the home stretch with retailers bringing up the rear and this week will see the following: yesterday – KSS AZO higher while  ZM, TGT, NVAX, NIO, LMND were lower; today – JWN, ROST, FUBO, DLTR lower; tonight – MRVL, SNOW, SPLK, OKTA, VRM; Thursday – AVGO, COO, COST GPS, KR.

Economic reports will have – today – February ISM Services Index fell to 55.3 which was the lowest since May, ADP estimate for Friday’s jobs report came in at 117,000 which was below consensus, Fed Beige Book; Thursday – weekly jobless claims, January factory orders, January durable goods orders; Friday – February jobs report for which the expectation is for 200,000 after 49,000 were added in January. 

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.