Yields Still Center Stage, But A Slight Uptick Appears To Loosen Chokehold On Market

Earlier this year, the latest rumors about trade negotiations with China could sometimes send U.S. stocks off to the races or into the pits. These days, it looks like moves in the interest rate complex might be having the same impact.

With China talks simmering but not sizzling, interest rates now appear to be the main focus. There’s still an inversion in the Treasury market, with three-month yields slightly higher than 10-year yields, but the 10-year yield narrowed the gap a little early Tuesday and that appeared to put some cheer into the market after Friday and Monday’s yield-related slide.

The yield curve inversion has spooked some investors because in the past, inversions often preceded recessions. However, as we often say, past isn’t always prologue. No one is too good at predicting recessions, and the Fed still expects better than 2% U.S. gross domestic product growth this year. That doesn’t mean a recession can’t happen, only that the yield curve inversion isn’t necessarily proof that one is coming.

Anyone interested in the Treasury market might want to pay attention today as the U.S. Treasury plans to auction $26 billion in 52-week bills and $40 billion in two-year notes. That auction might get watched more closely than usual considering the inversion.

Tuesday also brought fresh data in the form of housing starts and building permits for February, and both numbers came in below Wall Street analysts’ estimates. Housing starts were down nearly 9% from the previous month. If you’re looking for silver lining, January housing starts did get revised upward, but generally the report could continue to raise concerns about demand for new homes.

The Conference Board’s March consumer confidence number is also in the works today. The confidence number, which can often shape investors’ thoughts on future consumer spending, was pretty strong last time out, so we’ll see if that continued into the early spring.

Remember, soft data last week is one reason other than rates that the market stumbled, so this week’s data batch might get a little more focus than normal to see if the U.S. economy is holding up OK.

Apple’s AAPL big announcement Monday didn’t appear to help the stock too much, but it’s had a nice run for a while and maybe this was a “buy the rumor, sell the news” situation. AAPL continues to emphasize services like streaming as it sees iPhone sales apparently cresting, but the issue with services, as we’ve said before, is that the margins just aren’t as strong. Shares rose in pre-market trading Tuesday.

In premarket moves this morning, Bed Bath & Beyond BBBY surged more than 20% after a Wall Street Journal report said that three activist investors were planning a proxy fight to replace the company’s entire board, saying it has been too slow to pivot toward consumers’ online shopping demands. As we’ve seen over the last few years, retail companies that don’t successfully make the online move often get punished by the market.

Technical Safety Net Torn

The new week started pretty much where the old one left off, with U.S. markets burdened Monday by global growth worries. Though the Dow Jones Industrial Average ($DJI) made a marginal gain Monday, the Nasdaq (COMP) and S&P 500 (SPX) stayed under pressure. The SPX fell below 2800, a key psychological support point. This could conceivably set the market up for a test of the 200-day moving average down around 2755, according to technical analysts.

In one minor positive note, the Russell 2000 Index (RUT) of small-caps managed to put the brakes on a its skid, but it’s still down around 6% over the last month (see more below). Sometimes the RUT has been the first index to indicate a change of sentiment, as it was last summer when it started to come off the rails about a month before the SPX lost its footing. Past isn’t necessarily prologue, however.

Interest rates continue to draw headlines, with the U.S. benchmark 10-year Treasury yield at one point falling Monday to its lowest level since December 2017 and finishing the day near 2.4%. That’s down from 2.68% at the start of the year and 2019 highs near 2.8%. By early Tuesday, the 10-year had climbed to 2.44%.

At times like this, it helps to keep an eye on the global economy. Despite the low U.S. rates, they remain well above the zero rate of Germany and the 0.35% rate in France. For now, the U.S. economy, at least judging from the bond market, remains the belle of the ball, so to speak.

Treasury Market—Why Should Stock Investors Care?
A lot of investors might wonder why they should care so much about rates if they’re not trading fixed income. What do rates have to do with the stock market, they might ask. A lot, actually. They can affect multinational U.S. companies in a big way.

When the gap between U.S. and overseas yields starts to widen, as it is now even with the pressure on U.S. yields, that often can mean money heading into the dollar. The U.S. Dollar Index lost a touch of ground Monday and traded at around 96.54, which is down from recent highs above 97.50 but well above where it was a year ago when it scraped 90. One thing to consider watching is the path of the Dollar Index from here. It’s been in a pattern of setting higher lows when it does go down, sometimes a sign of strength. The dollar slide a little early Tuesday, which also might be helping stocks.

A stronger dollar can often pose issues for multinational companies by making their products seem more expensive to foreign customers. Earnings recently from both Nike Inc NKE and Tiffany & Co TIF might serve as good lessons about the impact of interest rates on companies. Both of these U.S. companies have a big presence overseas, and they arguably could be feeling the impact of a strong dollar to some extent. Earnings season might help provide clues on how widespread the dollar issue is getting.

Financials Continue to Sag

The other thing stock market investors often see at times of lower rates is a soft Financial sector, and that continued to be the case early this week. Financials once again were some of the worst performers on Monday as investors continue to seem worried that weak economic growth both here and overseas could hurt the banks’ businesses. Lower rates often mean lower profits for financial institutions (see more below), so it could be very illuminating in mid-April to hear what key bank CEOs have to say about the economy.

The pendulum has swung really hard against the banks. A year ago, Financial stocks got rewarded at times because there was widespread belief that interest rates were heading up. It was a frustrating sector for many to trade however, with a lot of stop-and-go.

It’s been mostly “stop” recently after Financials had a decent start to the year.  The sector is down more than 4% over the last month compared to slight gains for the SPX.

The scramble toward fixed income and bond proxy-stocks like Real Estate and Utilities continued at the start of the week, but not as fiercely as on Friday. Utilities and Real Estate both rose slightly, while another so-called “defensive” sector, Consumer Staples, fell a bit.

Meanwhile, volatility—which gained dramatically late last week—continued to slip Monday. The VIX ended the day around 16.3, down from highs above 17 on Friday but still well above last week’s lows of under 13. Looking back, the VIX might have been playing its historic role of being a warning sign for investors. Historically, a low VIX has often signaled weakness in stocks. 

One thing to potentially watch for if VIX stays elevated is any reaction from the “defensive” sectors we discussed higher up. Recall that last fall, when most of the market was cratering and VIX was above 20 for months, a lot of the Consumer Staples stocks actually did pretty well. Sometimes, though not always, stocks in Staples and Utilities can weather volatility better than some other sectors. Conagra (CAG), a well-known Staple, had another strong day Monday. Colgate-Palmolive CL also rose, as did Procter & Gamble Co PG.

SMALL FRIED: It’s been a rough month for the Russell 2000 (RUT) small-cap index, which has fallen sharply even while the S&P 500 (purple line) is pretty much flat. Some economists say small-caps can sometimes be a leading indicator, either positive or negative. Data source: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Talking Techs: Though the psychological 2800 level marks a near-term support/resistance level for the S&P 500 (SPX), according to analysts, a plunge below that might potentially open up the way toward another test of the 200-day moving average. That number now stands near 2755, and the SPX pushed above the 200-day last month for the first time since last year’s holiday-season sell-off. The 2750 level might have broader significance. Looking back over the last year, it arguably forms kind of a pivot point, with the SPX spending about half its time above that level and half below. The index keeps being drawn toward it like a moth to a flame, whether from above or below. Another thing technical traders sometimes keep an eye on is stochastics, and the SPX’s fast stochastic has fallen over the last week from levels that traditionally signal “overbought” into a more normal range. It’s been in the “overbought” range most of this year.

RUT Rout: Small-caps took by far the biggest losses in last Friday’s sell-off, with the small-cap Russell 2000 (RUT) falling more than 3%. The RUT took a beating in part because it’s exposed than the S&P 500 (SPX) to the banking sector, with banks making up about one-quarter of the index. The entire Financial sector has been under pressure lately from dovish Fed policy and worries about economic slowing in the U.S. and around the world. In addition, the RUT’s having its worst monthly under-performance vs. the SPX since 2002, Bloomberg noted. While the SPX is about flat over the last month, the RUT is down nearly 6%. For anyone who believes the old market adage about small stocks sometimes being a leading indicator for the overall market, that number probably doesn’t look too promising. However, it’s always a good idea to take the old adages in stride. Remember what they say about economists predicting 10 of the last seven recessions.

Seeking Guidance: The last “earnings recession,” meaning two quarters in a row or more of falling year-over-year earnings, occurred back in 2015-2016 and marked a shaky time for markets around the world. With many analysts expecting year-over-year earnings to fall 2% or more in Q1, worries about an earnings recession are starting to creep in again. However, some recent estimates for Q1 earnings results have been rising a little from their lows, and many analysts don’t expect earnings losses in Q2 and beyond. This is an evolving situation and we won’t really know anything until we go through earnings and see the actual numbers. Arguably the key thing to watch once Q1 earnings season starts is forward guidance from the major S&P 500 companies, which likely could give a lot more insight into how Q2 and the rest of the year might be shaping up. Some sort of resolution to the China tariff situation might help give companies more clarity, and U.S. and China negotiators are meeting this week.

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