In A Rut: Worst Week In A Month Continues As Volatility Heats Up After Fed Minutes

In boxing, they say it’s the punch you don’t see coming that hurts the most. It’s the opposite today on Wall Street, where stocks are falling sharply despite a blow from the Fed that almost everyone probably knew was in the works.

It probably didn’t surprise many investors that yesterday’s Fed minutes showed officials discussing possible tapering of stimulus by later this year. The Fed’s been telegraphing that for a while. Still, stocks took a dive yesterday and continued to retreat this morning in premarket trading.

Wall Street is in its worst rut since mid-July after recently recording a series of all-time highs. It’s not just the idea of the Fed pulling away the punch bowl, either. Worries about the global economy as the Delta variant spreads play a part, too. 

You can track that in the crude market, where prices fell to three-month lows this morning amid demand fears. Copper—another key industrial commodity—fell too. Treasury yields came under pressure as the 10-year yield fell five basis points to 1.22%, and volatility just exploded overnight. The Cboe Volatility Index (VIX), which late last week fell to near post-pandemic lows of around 15, recently climbed above 23.

With this kind of explosive volatility, trading could be treacherous today if you’re not experienced. The usual ideas come into play, like keeping trade sizes smaller than normal, focusing on quality companies, or just stepping back and not trading while you see where things go.

Stepping Back For A Big Picture View

Let’s keep things in perspective, too. The market was making new highs over and over, and it appears to have run out of catalysts. Earnings season is just about over, so that particular kind of positive catalyst is mostly in the rear-view mirror.

Even the new highs didn’t reflect huge gains, which stands to reason considering how far the major indices have already come this year. Speaking of which, the major indices are still just a touch below those all-time highs despite this week’s selling.

It feels like the market was looking for an excuse to step back, and the Fed minutes provided one. There’s nothing really new going on today that we didn’t know a day ago regarding the Delta variant and the Fed’s likely plans. Those are kind of tied together, by the way. If things get a lot worse due to Covid, maybe the Fed could decide to delay tapering.

Assuming pressure continues, the level you might want to watch is 4345, which marks the 50-day moving average for the S&P 500 Index (SPX). As we noted earlier this week, that’s been a key technical support point for the index all year, and the SPX bounced off of it on its July descent and roared back to new highs by early August.

Another Look At The Minutes

The Fed minutes showed “an emerging consensus” at the Fed toward scaling back its $120 billion in monthly purchases of Treasury and mortgage securities, The Wall Street Journal noted. That’s assuming economic growth doesn’t get clipped by the Delta variant. Keep in mind that the Fed’s last meeting concluded three weeks ago on July 28, when the variant was definitely an issue but not as big as it is now.

We’re likely to get a more up-to-the-minute view next week when Fed Chairman Jerome Powell delivers a speech at the Fed’s policy symposium in Jackson Hole. That may be why the bond market barely moved after the minutes came out, holding near 1.27% for the 10-year yield. That was about where it finished on Tuesday, and down 10 basis points from recent highs.

Many analysts think yields will eventually start moving higher if the Fed announces timing for a taper, something the minutes didn’t shed direct light on. Judging from what officials said at the Fed meeting, some want to start tapering in late 2021, but others want to wait until early next year, depending on how the job picture progresses.

The Fed’s meeting ended before the central bank and the rest of us received the July jobs report, which showed more than 900,000 new positions created and unemployment dipping to a post-pandemic low of 5.4%. That’s the second strong jobs report in a row, but it’s unclear if two good reports represent the “substantial further progress,” that the Fed has said it wants to see before any tapering.

As some analysts note, there’s been a “deterioration in data” over the last two weeks since the jobs report. Consumer and business confidence have fallen, and retail sales dropped. The Fed didn’t know any of this when it had its meeting, but some of the data might play into the taper timing.

Crude Down, Dollar Up Amid Taper Talk

Crude was down even before the Fed minutes’ release, but suffered steeper losses later in the day as the U.S. front-month contract fell below recent lows near $65 a barrel. The daily low of $64.73 was the weakest price for front-month U.S. crude since late May, and Energy shares suffered the worst performance of any S&P sector on Wednesday. Crude fell even more early Thursday to near $63.

Again, this shouldn’t come as a surprise. If the Fed does start to taper, that would likely provide some support for the U.S. dollar. A rising dollar is often associated with falling commodity prices. The U.S. dollar index closed above 93 for the second straight day and is approaching its 2021 highs.

Prolonged strength in the dollar, if it occurs, could spell trouble for multinational U.S. companies that do a lot of overseas business, because a strong dollar tends to make their products more expensive in foreign markets. Having said that, the dollar index spent most of both 2017 and 2019 at higher levels than it is now, and both years saw plenty of U.S. stock market strength.

Crude is also getting hit hard by signs of possible slowing in China’s economy this week, analysts said. We’re approaching the end of the U.S. “driving season,” too, when crude typically starts to show seasonal weakness.

Retail Bucks Trend, Sees Mid-Week Gains

A day after Walmart WMT and Home Depot HD shares failed to rally following what appeared to be pretty good earnings, Lowe’s LOW got some love from investors and rose nearly 10% Wednesday. The company appears to be benefitting from home remodeling projects being worked on by professionals, instead of the mom and pop market, so to speak. Macy’s M also had a very nice earnings report. It looks like shoppers are anxious to be out among other people.

Consumer Discretionary had the best day of any sector and was the only one in the green yesterday, helped by that LOW strength. Retailer earnings have really come on strong, a positive sign that U.S. consumer demand appears to remain firm despite the Delta variant.

Over in Tech, Cisco CSCO is a company worth watching because of its worldwide breadth that gives it a wide view of business trends. Shares fell overnight despite a solid earnings report and a bunch of analyst upgrades. What the company said was positive. They continue to see momentum in the business.

Also keep an eye on the vaccine stocks, Pfizer PFE and Moderna MRNA. The Wall Street Journal reported today that these two companies could pull in billions more revenue thanks to the government’s booster shot plan.

In data today, initial jobless claims fell to 348,000, the lowest since the pandemic started and another possible sign that the Delta variation isn’t taking a toll yet on employment.

CHART OF THE DAY: DOLLAR/CRUDE STICK TO HISTORIC TREND. Sometimes markets move in weird ways, but once in a while they act just as you might expect them to. Take the current relationship between the U.S. dollar index ($DXY—candlestick) and crude futures (/CL—purple line). Earlier this year, when the dollar was scuffling, crude soared to three-year highs. Recently, the dollar got its mojo back and crude fell to three-month lows. Traditionally, crude tends to go the opposite way of the dollar, and that’s certainly the case lately. Data Sources: CME Group, ICE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Amid Retreat, Some Positive Tech Earnings News: This isn’t necessarily the best time to report earnings if you’re a company trying to get some traction in the stock market. Nvidia NVDA arguably doesn’t need much help after the year it’s had. The chipmaker reported strong earnings after yesterday’s close. Its graphics unit that crushed expectations the previous quarter repeated that performance, growing 40% over the last quarter and 156% year over year to the tune of $519 million. The big picture is that NVDA beat analyst consensus across the board in both revenue and earnings. 

The stock is up nearly 50% so far this year, helped in part by strong graphics-processing-unit (GPU) demand. Gaming and data center businesses have both shined in 2021. NVDA’s share price fell 2% leading up to yesterday’s earnings report, and perhaps this reflected more on overall market sentiment rather than the NVDA’s earnings expectations. The stock rose in overnight trading, but on any pullback, keep an eye on the critical support level of $180. Any price action above it may indicate that NVDA’s uptrend is still intact. 

Sorry. We’re Out: Ever since Covid hit, Americans have been dealing with supply shortages. Those annoying scarcities don’t seem to be going away, either. Hospitals face shortages of medical equipment. Coffee shops can’t get certain kinds of coffee. Parents are having trouble locating back-to-school supplies like backpacks and shoes, according to media reports. And almost everyone must have heard by now about the semiconductor chip shortage that’s making cars more expensive. So maybe it’s good that business inventories rose 0.8% in June, data released earlier this week showed. Inventory increases can be a good sign of businesses expecting demand to grow in the coming months, and hopefully restocking supplies so people can get what they want. 

Early Worries Ahead Of Black Friday, Holiday Shopping Season: Anyone hoping for a quick solution to the supply chain crisis may be whistling Dixie, as the old saying goes. Much of the problem starts in China, where new Covid cases have authorities doubling down to block the spread. This could exacerbate what already were major delays at ports, where cargo ships were lined up in some cases. The supply crunch could affect the coming U.S. holiday season and even extend well into 2022, CNBC reported this week. It could also raise the cost of goods, doubling down on inflationary trends already hitting the U.S. economy. 

In a report, CNBC quoted a couple of U.S. consumer product company executives saying shipping costs have risen and they’re experiencing delays. This could mean fewer discounts on “Black Friday,” a key day in the U.S. shopping season often used as a barometer for consumer demand. Average prices for consumer goods could rise 3% to 15% during the holiday season if these trends continue, the report said. We’ll have to watch how this plays out and the possible impact on the Consumer Discretionary sector.

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