Daily Market Notes: 3-4-2021

In a pattern that was creepily reminiscent of what happened the day before, the market yesterday underwent another late meltdown which caused the Dow to go from slightly positive to sharply negative and the other indices, which had been lagging badly, to end deeper into the red as a result.

For instance, on Tuesday the Dow went from being ahead by 47 points at 3:30pm to end with a closing decline of 143. Yesterday it was ahead by 29 as late as 3:50pm before also collapsing to end down by 121 to 31,270. This is after it had been higher by as much as 172 due to ongoing strength in the financials, energy and industrial areas.

The same pattern was seen in the S&P, which went from being lower by 3 points to collapse to a large decline of 31 on Tuesday whereas yesterday it went from being down by 34 with 10 minutes to go before ending 50 points lower at 3820. This was its second straight loss after that huge gain on Monday, its beset in nine months which now seems like a distant memory, although believe it or not, the S&P is still nominally higher for the week. This will change depending on what happens today.

Ditto for the Nasdaq which also worsened its declines in the late going on both days and finished yesterday 361 points lower to 12,997, for its worst two day setback in six months. The same pattern occurred with the Russell 2000 Index of small stocks, which gave up a small gain late and ended down by 23 to 2208.

Breadth numbers were weak and the VIX loved it with a rise to 26.67 and once again it is moving away from its ultimate downside support at 20 and below, which appears like a pipe dream at this point.

And once again the villain was the bond market, where the 10-year yield rose to 1.47% from 1.41%.

When bond yields rise quickly, as they have in recent weeks, it forces investors to rethink the value of stocks, making each $1 of profit that companies earn a little less valuable. Technology stocks are most vulnerable to this re-assessment, in large part because their recent dominance left them looking even pricier than the rest of the market.

On the flipside, banks benefit when bond yields rise, because it allows them to charge higher rates on mortgages and many other kinds of loans. Financial sector stocks were once again the largest gainers with GS, JPM at new highs while AXP and TRV also rose.

The market continues to look to Washington, where economic data, comments out of the Federal Reserve and President Biden’s stimulus package remain front and center. Treasury yields hit as high as 1.60% intraday last week as investors braced for stronger economic growth but also a possible increase in inflation.

On Tuesday, Federal Reserve Governor Brainard sought to calm financial markets by emphasizing 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. Based on what happened in the market, she did not do a very good job.

Fed Chair Powell will speak today on monetary policy. Investors heard from him last week when he testified in front of Congress, but the format, namely a question-and-answer session with The Wall Street Journal, could be more illuminating than Powell’s calculated answers to politicians.

Not helping was the ADP estimate for tomorrow’s jobs report which showed an addition of only 117,000, well below the consensus of around 200,000. One should not take their estimates as the final result given their often poor track record over the years but on the other hand they have gotten closer to the final numbers more recently.

Overall, the economic outlook has been brightening in recent weeks following a surprisingly good retail sales report which showed that $600 stimulus payments approved in late December had translated into a January jump that was the strongest since June.

With prospects rising for passage of President Biden’s $1.9 trillion COVID-19 relief package with $1,400 individual payments and good news on vaccine distribution, forecasters have been revising upward their economic projections.

Many believe the economy this year could see a rebound with growth coming in at the strongest pace since 1984 with gains of as much as 6%. That would mark a significant rebound from last year when the economy contracted by the largest amount since 1946, namely around 3.5%.

The Fed Beige Book of economic conditions reported a modest improvement in employment conditions, a modest rise in inflation and supply disruptions in certain areas, such as semiconductor chips, and along with strong demand this has led to price increases.

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 has shown 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 and these areas have done the best lately because they have basically beaten the lowered expectations.

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

Economic reports will have – yesterday – 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; today – weekly jobless claims were 745,000, January factory orders rose by a better than expected 2.6%, final January durable goods orders were higher at 3.4%; 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.