Daily Market Notes: 3-8-2021

In another wild volatile day on Friday, the market opened higher, then dropped sharpy lower before ending the day on an upswing so that when all was set and done, the Dow finished the week with its best weekly performance in four weeks, the S&P ended higher after two negative weeks after being down for three straight days following that unbelievable upside surge on Monday to start the new week, its best showing since last June followed by those three sharply lower days which put it negative for the year on Thursday’s intraday lows. On the other hand, the Nasdaq got the booby prize with its third straight weekly decline.

And it was not without tremendous drama as the market started out higher after the strong jobs report, then sold off when the 10 year Note reached as high as 1.62% with the Dow lower by 157, the S&P even worse as usual at 24 points down and the Nasdaq with an awful loss of 326 which actually put it negative for the year. These lows all took place at 11:30am.

But then, miracle of miracles, the yield on the 10-year Note pulled back a bit to around 1.56% and investors thought that this was wonderful so as a result the major indices reversed course to the upside in a very dramatic fashion and just kept pushing and pushing to the upside with the result that the Dow ended with a tremendous gain of 572 to 31,496 while the S&P did better with a really large gain of 73 to 3842, a reversal of 111 intraday points while even the awful Nasdaq reversed a horrible 326 point decline into a final gain of 196, also a tremendous intraday turnaround, to finish higher by 196 to 12,920. The Russell 2000 Index also turned a loss into a final gain of 45 up to 2192.

Breadth numbers were positive at a 1.7 to 1 upside ratio and the VIX ended lower at 24.66.

The market’s latest gyrations came as investors struggled to figure out what a good jobs report and the recent climb in bond yields could mean for the economy. So it has become a case of the bad thing being higher interest rates and the good one being an improvement in the economy.

The uncertainty resulted from the February jobs report which showed a gain of 379,000 after that awful ADP estimate on Wednesday of only 117,000 helped set the negative tone on that day. While the jobs report was encouraging in terms of positions added by the economy, wage growth, an inflation bellwether, rose last month in line with expectations with an advance of 0.2%. That may have helped ease some bond investors inflation worries, at least for now.

That view could change next week, when the government issues the February C.P.I. and P.P.I. reports on Wednesday and Friday respectively.

For about a year, the stock market kept climbing on expectations that an economic recovery was on the way, even when the coronavirus pandemic meant conditions at the time seemed very bleak. Now that the recovery is much closer on the horizon, the market is unsettled because one of the main underpinnings for that incredible run is under threat, namely ultra-low interest rates.

Yields have been marching higher with rising expectations for the economy’s growth and for the inflation that could accompany it. Economists have been upgrading their forecasts for this year as more people get COVID-19 vaccines, businesses reopen and Congress finally passed the $1.9 trillion aid package over the weekend.

The worry is that inflation could take off, or something else could happen to push yields up even further as for instance energy prices have been climbing steadily higher on restrained output by OPEC.

It is the speed at which Treasury yields have climbed that has gotten investors so uncomfortable, more than the actual level, which is still low relative to history. Remember that at the start of 2021, the 10-year Note yield was around .90%.

Higher yields put downward pressure on stocks generally, in part because they can steer away dollars that had been headed for the stock market and into bonds instead. That makes investors less willing to pay as high prices for stocks.

The pressure is most intense on stocks that have the highest price/earnings ratios as well as those bid up on expectations of fast growth far into the future. Critics say most stocks across the market look expensive after prices climbed much faster than profits, and warnings about a possible bubble have been on the rise.

Tech stocks and other high-growth companies in particular have been at the center of the downdraft. They soared more than the rest of the market for much of the pandemic, and in the years preceding it. As an example, TSLA was the heaviest weight dragging on the S&P on Friday, falling by 4% and is now lower by 15% so far this year. Others in the fund that made tremendous gains last year of 125% also ended down on Friday such as ROKU, SQ, ZM and TDOC. This was despite the fact that the Nasdaq ended nicely higher as mentioned above and the “old-time” technology leaders, which have been awful lately such as AAPL, AMZN, FB, MSFT and GOOG, all turned around to end higher.

It is another reminder of how dominant big tech stocks have become in the market. If inflation does ultimately remain under control, as Federal Reserve Chair Powell and many economists expect, the general expectation among investors is that most stocks could benefit.

A stronger economy would mean bigger profits for companies, which would allow their prices to hold steady or rise, even if rates are climbing.

By Friday afternoon, the vast majority of stocks in the S&P had rebounded. Energy producers made some of the largest gains with FANG and CVX higher by over 4%.

Tech stocks would likely also see some improvement in their profits, just not to the same degree as companies whose businesses are closely tied to the strength of the economy, such as banks or travel companies.

But the large tech stocks have grown so big that their movements can mask what is going on in the broader market. Five of them (AAPL, MSFT, FB, AMZN, GOOG) still make up more than 21% of the S&P by market value, so weakness for tech can hold back S&P index funds even if many stocks within it are rising.

All the big movements in the bond market have increased attention on the Federal Reserve, whose chair said this week that he’s noticed the recent climb in yields. He disappointed some investors when he didn’t offer anything more forceful that could cap the rise. This has anticipation building for the Fed’s next policy meeting, a two-day session that ends on March 17th, and whether Powell will offer any more guidance on what moves the Fed may make next.

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 finally coming to an end with the following lineup this week: tonight  – CASY, SFIX, WISH; Tuesday – DKS, HRB, BMBL, ORCL, CPB, CLDR; Thursday – DOCU, ULTA, MTN; Friday – KIRK

Economic reports will have – Tuesday – February small business optimism index; Wednesday – February P.P.I.; Thursday – weekly jobless claims; Friday – February P.P.I., mid-March U. of Michigan Consumer Sentiment Survey.    

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.