Bulls Back in Driver's Seat For Moment as Buyers Resurface Following Heavy Selloff

(Thursday Market Open) Investors swooped back in and snapped up stocks early Thursday after yesterday’s heavy sell-off, perhaps a sign that a decent pool of potential buyers is still out there for the time being. Upbeat earnings news from Walt Disney DIS and PepsiCo PEP didn’t hurt, either.

We’re heading into a bit of a news vacuum. Last week’s Fed meeting and most of this week’s follow-up commentary from Fed speakers is wrapped up. Until we get fresh inflation data next week, it’s all about the bull narrative that inflation is coming down and the jobs market is holding up, all good signs for the economy.

The takeaway might be that instead of a “soft landing,” we really don’t feel a landing at all. Inflation comes down without causing massive job loss or economic disruption. There’s still a long way to go before we know if that particular bull case comes true, but that’s the prevailing narrative in the markets this morning, anyway. Consumer discretionary stocks may benefit from the PEP and DIS earnings.

Paypal PYPL and Lyft LYFT are expected to report after the close, as earnings season remains kind of a mixed bag. Just 69.5% of S&P companies are beating analysts’ earnings estimates, according to research firm FactSet, down from the three-year average of 79%.

Morning rush

• The 10-year Treasury yield (TNX) slid 4 points to 3.59%.
• The U.S. Dollar Index ($DXY) fell to 102.85.
• Cboe Volatility Index® (VIX) dropped to 19.34.
• WTI Crude Oil (/CL) is steady at $78.18 per barrel.

Treasury yields are in whipsaw mode, which could mean volatility starts edging up too. Though correlation isn’t causation, it’s interesting to see how the VIX inched toward 20 yesterday as the 10-year Treasury yield approached 3.7% for the first time in a month.

The yield rise could be evidence of investors seeking protection (outside of the bond market) ahead of next Tuesday’s January Consumer Price Index (CPI) report. Early expectations from Wall Street are for a 0.3% rise in the headline CPI, equal to December’s increase. The question is what happens if the number is way above expectations like jobs growth in January. That could spook the bond market and take a toll on stocks as well.

Wednesday’s late slide in Treasury yields didn’t appear to draw much support into stocks, though if it continues today and the 10-year Treasury yield remains below 3.6%, that could provide a short-term bullish boost for equities.

Data docket

Tomorrow’s key report is the initial February University of Michigan Consumer Sentiment Index, due soon after the open. For many months, sentiment has drifted near historic lows. Now, it appears to be very slowly ticking higher, so we’ll see if tomorrow’s report reinforces that view.

Analysts expect a headline reading of 65.0, according to consensus from Briefing.com. That’s up slightly from 59.7 in December and 64.9 in January. 

Another high-profile number to watch in the Michigan report is consumer expectations for one-year inflation, which eased from 4.4% in December to 3.9% last month. That’s a nearly two-year low, and the Federal Reserve would likely welcome more of the same. Inflation is a mindset as well as a number because if enough people think prices might go up, it can lead to that very outcome.

Just in

Weekly initial jobless claims came in at 196,000, up from 183,000 a week ago and slightly above analysts’ estimates but still historically low.

PEP beat analysts’ earnings and revenue estimates in Q4, getting some additional fizz from price hikes. Shares rose 1.4% in premarket trading. In a press release, the company called its business “resilient” and announced a 10% increase in the dividend.

Mouse ears

Wednesday was an ugly day on Wall Street until Walt Disney (DIS) delivered some fireworks after the close. The media giant outpaced analysts’ forecasts on both earnings and revenue, and streaming losses weren’t as bad as many had anticipated. During its earnings call, DIS also announced long-awaited job cuts as part of an effort to trim more than $5 billion in costs.

Shares of DIS—already up more than 30% from the lows of late December—rose more than 5% in premarket trading, gaining more ground after the job cut announcement.

• Park revenue led the growth parade for DIS, even as losses in the streaming business exceeded $1 billion for the quarter. That was less than the $1.5 billion in streaming losses the prior quarter, and a smaller loss than DIS itself had forecast. Disney+ subscribers fell 1% to just under 162 million, missing the street’s average forecast of 163 million.
• DIS CEO Bob Iger echoed his predecessor’s promise of a streaming business that will eventually become profitable. This is an extremely competitive market, and while DIS has incredible resources and arguably many advantages, it faces the same challenges as everyone else in a packed industry.
• For those watching the streaming wars, it feels a bit disconcerting that DIS saw subscribership edge lower at the same time competitor Netflix (NFLX) added subscribers at a blistering pace. A DIS streaming price increase might’ve been one factor driving subscriber losses.

Home fires

Investors took a 2x4 to homebuilders stocks Wednesday despite a rise in weekly mortgage applications and refinancing applications. Apparently, that wasn’t enough to ease worries that the brief period of good times might be closing fast thanks to a hawkish Fed. The fixed income market is swinging toward the Fed’s views that rates need to go above 5%, not good news for a mortgage market where the 30-year rate recently came down to near 6%.

This week’s full-court press on rates by Powell and company seemed to undermine the S&P Homebuilders Select Industry Index ($SPSIHO), which had risen more than 20% between the start of the year and early February. The next major homebuilder to report is Toll Brothers (TOL) later this month. PulteGroup (PHM) had a nice earnings report last week but saw shares drop 4% Wednesday.

Reviewing the market minutes

Wednesday felt like a big step back, but it’s important to keep things in perspective. The S&P 500® index (SPX) fell more than 1% to 4,117, and the Nasdaq Composite® ($COMP) lost even more ground, declining more than 1.5% as the volatile semiconductor space took a blow.

That said, Wednesday’s SPX close was just 1.4% below last Thursday’s settlement,  the highest closing level since last August. The $COMP, too, is just a sliver below five-month highs. This doesn’t mean there can’t be more pain ahead, but current levels remain above anything we saw the entire Q4.

Volume was lighter than usual Wednesday, possibly a sign the selling doesn’t have incredible conviction behind it. Communication services, info tech, and consumer discretionary all finished deep in the red Wednesday but remain the three leading sectors year-to-date. All are up 15% or more since the end of 2022.

Alphabet (GOOGL) by itself accounted for much of the carnage yesterday in the $COMP, and communication services fell 7%. Analysts blamed growing artificial intelligence (AI) search competition from Microsoft (MSFT), though MSFT shares finished well off their intraday highs Wednesday. Like DIS and the streaming business, AI is a neighborhood with tons of competition, and it remains to be seen how it plays out.

Here’s how the major indexes performed Wednesday:

• The Dow Jones Industrial Average® ($DJI) fell 207 points, or 0.61%, to 33,949.
• The $COMP fell 1.68% to 11,910.
• The Russell 2000® (RUT) dropped 1.52% to 1,942.
• The SPX lost 46 points, or 1.11%, to close at 4,117.

Talking technicals: The SPX pivoted around 4,150 early Wednesday but selling accelerated after the SPX lost its grip on that level. A late-session comeback attempt fell short. A test of 4,100 support might be something to watch for today, and a tumble below that could open up a test of lower support near last week’s lows of between 4,015 and 4,020. The SPX remains well above a downtrending line on the charts from last summer’s highs that it recently powered through.

Want the latest thinking from Charles Schwab Chief Market Strategist Liz Ann Sonders? In her new Market Snapshot video, she discusses the markets and the economy.

CHART OF THE DAY: BREAKOUT FOR BONDS? So far, we’ve spent the talking about possible breakouts for stocks and oil, but let’s not ignore bonds. The 10-year Treasury yield (TNX—candlesticks) bounced off its 200-day moving average (blue line) when it slid last week, but this week’s rally has it testing a downtrending line (red line) from the October high that’s now just above the market. A push above this level could open up a possible run toward 3.9% or even 4%, according to chart-watchers. Data source: Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Rolling on: Despite all the discussion about a healthy jobs market, the economy likely remains in a “rolling recession” where softness moves through various sectors over time, not across all at once. Weakness has hurt the housing, manufacturing, and services parts of the economy, though housing and services have shown recent signs of recovery. The Conference Board’s Leading Economic Index  is down 10 months in a row, which seldom happens outside of recessions. And the Treasury market remains in a deep inversion, with shorter-term yields outpacing longer-term ones. This implies investors are getting  defensive.

Credit check: However, one part of the economy that seems to argue against recession is the corporate credit market. There’s really no sign of a recession in credit spreads, which have narrowed to levels last seen over a year ago before inflation and rate hikes took hold. When the spread between yields of non-investment grade—or riskier—corporate bonds and the yield of Treasury bonds narrows, it often signals investor confidence in the economy. It’s also a sign that banks—despite the precautions they’ve taken against possible defaults—continue to lend, even to companies that perhaps have more risk in their outlooks.

Seasonal musings: The SPX rose more than 6% in January, and the $COMP performed even better, typically a bullish sign. Historically, January rallies often translate to annual gains. There’s no guarantee that will happen again, of course, but one thing to remember is that February and March often experience weakness in years with a strong January. This could simply reflect a slowdown of the new buying that fired things up after the new year, or even some profit-taking. Despite Wednesday’s poor showing, the market remains up in February, but we’re not even one-third of the way through. If profit-taking shows up, it might happen in growth sectors like communication services and info tech that led January’s rally. Shares of Alphabet (GOOGL) got crushed yesterday, for instance. Still, after a nearly 20% rally since the start of the year, investors might have decided to use the AI discussion as a good excuse to sift a little GOOGL profit off the top. Could other big January gainers like Tesla (TSLA) and Apple (AAPL) be next?

Notable calendar items

Feb. 10: University of Michigan Consumer Sentiment for February and expected earnings from Enbridge (ENB) and Honda Motor (HMC)

Feb. 13: No major earnings or data of note

Feb. 14: January Consumer Price Index (CPI) and expected earnings from Coca-Cola (KO) and Marriott (MAR)

Feb. 15: January Retail Sales, January Capacity Utilization and Industrial Production, and expected earnings from Biogen (BIIB) and Kraft Heinz (KHC)

Feb. 16: January Housing Starts and Building Permits, January Producer Price Index (PPI), and expected earnings from Entergy (ETR), Hasbro (HAS), and Hyatt Hotels (H)

Feb. 17: January Import and Export Prices, January Leading Indicators, and expected earnings from Deere (DE)

Feb. 20: President’s Day – market holiday

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

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