Futures are pointing to a higher open. News and announcements were light before the open which gave investors a chance to digest Tuesday’s selloff. The selloff was orderly which may suggest that the selloff wasn’t a taper tantrum but a “normal” September slump where money managers are rearranging their portfolios for the final quarter. Therefore, investors can look at the winners and losers to try and determine which sectors and industry groups could finish the year strong.
The first hour of trading may be key to how well the market holds. After the open, investors will digest August's pending home sales and crude oil inventories. Crude inventories have the potential to move markets because the global energy crises are at the forefront of investors’ minds. Crude oil (/CL) was trading slightly lower pre-market as the dollar tests 2021 highs.
Troubled Chinese real estate developer Evergrande EGRNF announced plans to sell its $1.5 billion stakes in Shengjing Bank. The stock rallied 15% in pre-market trading.
Investors continue to monitor the debt ceiling debate out of Washington D.C. On Tuesday, the Senate banking committee heard from Treasury Secretary Janet Yellen Tuesday who warned that Congress must increase the debt ceiling by October 18 or “catastrophic” consequences would follow. Alongside Yellen as Fed Chair Jerome Powell warned Congress of inflation pressures lasting longer than expected due to ongoing bottleneck issues in the supply chain.
Tech Tumbled Hard as 10-Year Yield Spikes
The Nasdaq 100 (NDX) took a nasty fall, down 2.8% with some of the largest Tech names dragging down the broader market. Tech behemoth Microsoft MSFT dropped about 3% while Apple AAPL declined around 2%. Facebook FB entered deeper negative territory, down 3.3%,
But chipmakers like Nvidia NVDA and Advanced Micro Devices AMD arguably took the worst punishment, plunging more than 4% and 5% respectively. Applied Materials AMAT got smacked, falling 6%. Semiconductors were the hardest hit among all industries in Tech.
Although the Communications sector took the brunt of the beating in yesterday’s session and Tech finished second to last, you’re probably wondering why there seems to be a “tech wreck” every time 10-year Treasury yields spiked. The most common answer is that Tech stocks, like all stocks, are in competition with bond yields. The market’s like a discounting mechanism. Investors have to ask themselves whether they’ll get more bang for their buck over the next year investing in bonds or Tech stocks. Bond yields will tell you exactly how much you expect to earn over a period of time.
When it comes to Tech stocks, their values rest on their earnings potential, which is more uncertain. Plus, you’ve got the inflation factor to consider, which not only erodes the value of the dollar but adds even more uncertainty to the Tech earnings speculation.
Keep in mind that because of Tech’s heavy weighting in the SPX, it tends to have a bigger impact than any other sector on the overall index. So, strength in lower-weighted sectors like Energy may help individual stocks, but won’t lend much help to the overall index.
Something to Chew On
While it’s not the buffet that earnings season brings, investors were treated to a healthy breakfast Tuesday morning when United Natural Foods UNFI climbed 23.73%. UNFI topped the FactSet consensus number of $0.80 per share with an impressive adjusted EPS of $1.18 per share. To top it off, UNFI raised its forward outlook. For the dinner course, after the close, had food company Cal-Maine CALM beat analyst estimates by reporting a smaller loss than expected. The stock was up more than 3% in after-hours trading. Perhaps some staple stocks are just what investors need to nibble on after the sell-off.
On the other hand, Micron MU also announced earnings after the close, sending it 4% lower in after-hours trading. MU beat earnings estimates but was disappointed with a lower-than-expected earnings forecast.
The recent road rally in automakers was refueled with Ford F announcing a major investment in a new plant in Kentucky and Tennessee. Ford is going after Tesla TSLA by investing heavily in electric cars and batteries. In addition to assembling new cars and trucks, the compound will make batteries and recycle old ones completing a green lifecycle for their green vehicles.
China Losing Its Chi?
However, charging electric cars is getting a little harder overseas. Barron’s reported that China’s energy crisis is going unnoticed with the focus on troubled real estate developer Evergrande. Like Europe, China is seeing shortages in coal and natural gas, and its energy woes are compounded by strict emissions goals in line with China’s promise to help with climate change. Numerous factories have had to be shut down, including three electronics companies that supply Apple AAPL and Tesla TSLA.
However, it’s not just large tech companies that are feeling the pain. Many Chinese factories have also been shuttered, leading analysts from Goldman Sachs GS and Nomura NMR to downgrade their forecasts for the Chinese economy. The energy problems add to the growing list of investor concerns for China.
Europe, Asia, and China are now competing for resources. Britain has seen a few 1974-style lines at the pump as the country scrambles for truck drivers. To address the issue, government officials are looking at granting temporary work visas to immigrants who left after new Brexit-related immigration laws. Prime Minister Boris Johnson has suggested using military personnel to deliver fuel.
The scramble for fuel has led to rallies in natural gas (/NG), crude oil (/CL), heating oil (/HO), and coal (/QL).
CHART OF THE DAY: THE ENERGY BLOWOUT. The Energy Services Select Sector Index (Energy $IXE—blue, Financials $IXM—silver, Materials $IXB—pink, Consumer Discretionary $IXY—white, Industrials $IXI—salmon, S&P 500 SPX—red/green, Technology $IXT—yellow, Consumer Staples $IXR—red, Health Care $IXV—tan, Real Estate $IXRE—green, Utilities $IXU—gray) lead the recent rally, returning about 11% over the last five days. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Rotating Sectors: The recent rally has seen a shift in stock leadership. It’s no surprise with energy crises popping up around the globe that the Energy sector is leading the charge. Rising energy prices may add to the inflation woes, which often translates to higher interest rates and the Financials sector as a beneficiary. Also related to inflation, is the third sector—Materials. These three groups could set the stage for some time.
On the other side, Health Care, Real Estate, and Utilities are bringing up the rear. These sectors tend to do better during bearish times, so it could be a good sign for stocks that investors aren’t piling into them. Perhaps there’s more growth to be had despite the energy crises and rising rates.
Trouble with the Curve: The bond market is adjusting to the inflation and energy data with yields rising particularly in the 10- and 30-year maturities. Monday’s hotter-than-expected durable goods orders prompted a spike in the 30-year yield (TYX) which is now trading above 2%. The 10-year yield (TNX), which often correlates with mortgage rates, has risen from 1.31% on September 1 to 1.53% on September 28.
Bond yields move opposite to bond prices which means that rising yields are tough on bullish bond speculators. Higher yields in longer maturities may attract investors buying new bonds. This means the short end of the yield curve could struggle to find buyers. In order to find buyers, short-term yields will likely rise.
Is Value En Vogue?: Another side to rising yields and a more hawkish Fed is that value investing may be en vogue once again. The trend of falling rates for decades has prompted growth investing to dominate value investing. The trend is so long that value seems retro chic.
Value investing is the selection of stocks based on book and intrinsic values. It’s a fundamental analysis approach to stock market investing made popular by Benjamin Graham and Warren Buffett. Value investors tend to be long-term oriented and focus on stocks that are undervalued and often pay dividends.
Right now, value investing may be in the hipster stage, look to the cool kids to start jumping on the trend.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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