Daily Market Notes: 3-5-2021

In one of the more astounding days in recent market history yesterday, the major indices went on another wild ride, but unfortunately the results were the same as they have been for the past three days, mainly sharply lower as major tops seem to be building not only in these indices themselves, but also in most technology stocks which are now going to have a tough time overtaking their all-time and recent highs.

As an example of the bizarre action, things actually had the nerve to start out better and by around 12 noon the Dow reached its best level of the session with a nice 192 point gain while the S&P did even better with a 23 point advance.

But from there, it was all downhill as another spike in bond yields and some confusing and contradictory comments from Fed Chairman Powell sent these indices plunging sharply lower with the Dow collapsing by an intraday worst level of 723 points down at 2pm and the S&P doing even worse with a 97 point downside massacre at the same time. From there they did manage to catch their breath, so to speak and “improved” so that the final damage was a 345 point lower close in the former to 30,924 while the latter ended off by 51 down to 3768.

The Nasdaq never had a chance but also finished above its worst intraday levels with a 274 point lower close to 12,703. This has given it the dubious “honor” of now being lower for the year. It was a complete disaster as those former high-tech leaders continue to sink with no relief in sight at the present time and it was this index’s worst three-day performance in six months.

Ditto for the Russell 2000 Index of small stocks which got whacked again for a 60 point decline down to 2147. Breadth numbers were horrible once again at a negative 1 to 5 downside ratio and the VIX loved this with a jump to 28.57.

Even though the energy stocks kept going to the upside as crude oil prices continued to rise to  $64.42 a barrel, the former darlings in the Dow such as GS, JPM, JNJ and HD sold off for a change, especially the former two even though longer-term yields rose again with the 10-year Note up to 1.54% from 1.47% before Mr. Powell began speaking. Remember that it was .93% at the start of the year.

The S&P was also lower for the third straight day and on the intraday lows as mentioned above actually had the nerve to be negative for the year before making that late recovery. It is now on track for its third consecutive weekly loss. Just four days ago to start the new month of March it notched its biggest gain since June which now seems like a distant memory. That rally was driven by what now appears to be a brief pause in the recent, swift rise in bond yields, which pushes up interest rates on loans for consumers and businesses.

The latest losses came as the yield on the 10-year Note rose during a question-and-answer session with Chair Powell during which he said that inflation will likely pick up in the coming months. On the other hand, he did caution that the increase will be temporary, and won’t be enough for the Fed to alter its low-interest rate policies. These confusing comments added to the downside selling pressure in the market as well.

The remarks, signaling a wait-and-see stance on the surge in bond yields, failed to ease investors’ concerns that stronger growth will lead to higher inflation, which unchecked can slow economic growth.

As the economy reopens this spring and summer, and vaccines are distributed and the coronavirus retreats, many economists expect a spending boom that will stretch available supplies of goods and services and will likely push up prices, which was another confusing  comment from the Chairman.

Even so, Powell gave no hint that the Fed would take steps to keep longer-term interest rates in check, such as by shifting some of its $80 billion in monthly Treasury purchases to longer-term securities to try to contain their yields on the upside as he mentioned that “We think our current policy stance is appropriate.”

Investors have been keeping a close eye on the bond market in recent weeks, where yields have been rising along with expectations that the economy, and possibly inflation, could be set to pick up as vaccinations increase and coronavirus restrictions on businesses, travel and schooling begin to lift more.

When yields rise quickly, it forces investors to rethink the value of stocks. Technology stocks are most vulnerable to this re-assessment after having soared during the pandemic, making them look pricier than the rest of the market. Bank stocks, in contrast, tend to do better when bond yields are rising because higher yields mean banks can charge higher rates on mortgages and other loans.

Meanwhile, the Senate is now trying to move ahead with President Biden’s stimulus bill, with most of the negotiations now happening between the more moderate Democrats in the Senate and the White House while the Republicans seem to be hardening their opposition to the large-scale spending that the $1.9 trillion package encompasses.

The tone for today’s trading will obviously be set by the 8:30am release of the February jobs report, for which the expectation is around 200,000. Any sharp deviation from that number could cause another volatile day, hopefully with some improvement after the past three-day market meltdown. Eyes could be on the average hourly wages component of the report, which is an inflation factor. Some of the details of the report are discussed below.

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 and starting to be negatively affected by the recent rise in interest rates. 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 .

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

Economic reports will have – yesterday – 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%; today – the February jobs report came in much better than expected with a whopping 379,000. The net effect of the prior two months revisions netted a slight gain of 38,000. The unemployment rate slipped to 6.2% while average hourly earnings rose by 0.2% which was in line. The length of the workweek fell by 0.3%; the January trade deficit weakened to $68.2 billion.   

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.