If the phrase, “Never sell a dull market” needs a perfect example, yesterday might be the one. We had a really impressive rally despite very little market-related news. Today, the long streak of positive performances appears to be threatened.
The S&P 500 Index (SPX) rallied for the fifth straight day yesterday, basically ignoring talk of a possible Fed stimulus tapering. Then overnight people started talking about it. Throw in some geopolitical strife and China talking about unfair competition, add a bit of Covid stuff, and you get what we have this morning: Major indices in the red.
China is again the major focus today, in part because shares there tumbled 2% overnight. Some of the weaknesses could have to do with the country publishing what it called “draft rules” aimed at curbing “unfair” competition on the internet. Shares of some major Tech companies there got dinged, and that’s extending now to the Tech sector here.
The softness in Shanghai is also weighing on crude for the second day in a row, as prices fell below $67 a barrel.
Strong Earnings Not Helping Walmart
It looks like investors are up to their old ways early Tuesday, selling good earnings news. Walmart (NYSE:WMT) is the latest example.
When stocks are near all-time highs, everything’s got to look just about perfect to sustain the rally, and investors found an imperfection in WMT’s results. E-commerce sales grew a bit more slowly than expected, and some analysts say this is why WMT is down 1% in pre-market trading. Otherwise, numbers impressed, with WMT beating analysts’ top- and bottom-line estimates. WMT also raised guidance.
In other corporate news, Spirit Airlines (NYSE:SAVE) stock is down 4% after the company canceled nearly 3,000 flights.
Buy The Dip Persists, But What Are People Buying?
The market managed to rebound from Monday’s early lows, another sign of how resilient Wall Street continues to be even as volatility and bonds jumped and crude eased. All of those non-stock moves typically reflect caution.
We didn’t get a hugely positive move yesterday, but “buy the dip” hasn’t necessarily gone away. It’s something that’s worked for many investors most of this year, and for now, they don’t seem to be abandoning it. Kind of like in football where if you can make 5 yards at a time running up the middle, you keep calling it until the defense figures out how to stop you.
Fed Minutes Tomorrow Could Be Watched For Tapering Signals
Today’s retail sales and WMT earnings came after last Friday’s very disappointing consumer sentiment data and a bearish reading on Empire State manufacturing yesterday. It’s quite possible the Fed is watching these numbers very closely amid more talk of possible tapering.
While we’re not likely to get any solid answers on the Fed’s next move until its Jackson Hole symposium next week, the market seems more certain that tapering is on the way despite the recent bad string of data.
Several Fed officials—including ones you don’t normally associate with the hawkish side of the ledger—have made it clear recently that they think tapering needs to happen. We could get more insight into what they’re thinking with tomorrow afternoon’s release of Fed minutes from their last meeting. This report is often a way to be a fly on the wall and see what the conversation was like in the room when Fed officials gathered last month.
On the other hand, you could argue that a Fed announcement about taper timing isn’t necessarily an opportunity for a “taper tantrum” from the market. After all, if the Fed sees the time as ripe to taper, it must be seeing something good happening in the economy that could mean less need for the training wheels, so to speak.
Riddle Game: One Fed-related riddle is this: Why do we continue seeing the 10-year Treasury yield keep retreating despite all this taper talk? The 10-year yield fell to 1.25% on Monday from a high last week of around 1.37%. If tapering is more likely, you’d expect to see the 10-year yield climb.
The answer could be that investors feel that a tapering program—especially if it’s over the course of months—could allow the Fed to tighten slightly without relying on rate hikes. A tapering program that manages to give the Fed a longer runway before raising rates might allow the Fed (and the market) to have its cake and eat it too. They can tighten the money supply and fight inflation without the formal step of raising rates. But that remains to be seen.
See also: HOW TO SPEAK CHINESE
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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