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(Friday Market Open) Equity index futures traded lower ahead of the U.S. jobs report and then continued to slide afterward as fears emerged that the Federal Reserve may want to raise rates more aggressively.
Potential Market Movers
The Employment Situation Report revealed that the economy added 390,000 jobs in May, well above the forecasted 325,000. The labor participation rate increased which may be a signal that workers are having to return to work to make ends meet. In the end, it was a Fed-friendly jobs report because the jobs market remains strong, but lower-than-expected average hourly earnings will help keep wage inflation in check.
With the job market still strong, the Fed continues to have leeway to be aggressive in raising the overnight rate. However, many have recently speculated that the Fed will slow the hikes in September. However, Federal Reserve Vice Chair Lael Brainard told CNBC yesterday that she couldn’t see a scenario where the Fed would “pause” rate hikes. In fact, the 10-year Treasury yield (TNX) rallied nearly seven basis points ahead of the open.
After the stock market opens, investors will get more information on the service side of the economy with the release of the U.S. ISM Non-Manufacturing PMI. The report has come in lower than forecasted in four of the last five announcements and today’s jobs report found that retailers were among the weakest sectors in the jobs market.
More negative economic and jobs news came from Tesla (TSLA). TSLA fell more than 5% in premarket trading after CEO Elon Musk said he felt the economy was weak and that Tesla would freeze hiring. Additionally, Musk expressed a desire to cut staff by 10%. This comes a day after Mr. Musk said that Tesla employees need to come back into the office or look for work elsewhere.
Chipmaker Micron (MU) was downgraded by Piper Sandler this morning due to weakness in consumer spending. This could be another bad sign not just for semiconductors but the overall economy. Consumption was the strongest part of the economy, according to the last gross domestic product (GDP) report. If the consumer continues to weaken, it could be bad news for the economy.
This list of tech companies seeing weakness is growing. Yesterday, Microsoft (MSFT) lowered its earnings guidance. Apple’s (AAPL) chart saw a bearish technical signal known as a “death cross” where the 50-day moving average crosses below the 200-day moving average. With all this negative news, that’s why we may be lucky that we aren’t down more.
However, much of the struggle with technology companies may simply be a currency adjustment where the stronger dollar is cutting into overseas profits. If the Dollar Index ($DXY) were to drop below 100, large multinational tech companies may find a little relief. But with the hawkish talk from the Fed, it’s likely the dollar will remain strong because a strong dollar combats inflation.
Turning to the health care sector, Bristol-Myers Squibb (BMY) has announced plans to buy biotech company Turning Point Therapeutics (TPTX) for $76 a share. The news caused TPTX to rally 114% in premarket action.
After Thursday’s close, Lululemon (LULU) and RH (RH) aka Restoration Hardware, beat on earnings and revenue and rallied 5.76% and 1.39% respectively in extended hours trading. LULU and RH, like Capri (CAPRI) which reported earlier this week, belong to a list of high-end retailers reporting better earnings than others thanks to their wealthier clientele. Such stores have the pricing power to pass on more of their higher input costs to their customers.
CrowdStrike (CRWD) also reported better-than-expected earnings and revenues and offered higher forward earnings guidance, but fell 2.5% in after-hours trading despite rallying 7.79% earlier in the day.
Reviewing the Market Minutes
The S&P 500 (SPX) inched closer to 4,200 on Thursday as the Cboe Market Volatility Index (VIX) finally dropped below 25. This could be a good sign for the bulls as investors are feeling confident about stocks. Buyers moved into the riskier parts of the markets Thursday, pushing the Nasdaq Composite ($COMP) 2.69% higher and driving the Russell 2000 (RUT) up 2.31%. In fact, the S&P 500 Pure Growth Index climbed 3.25% compared to the S&P 500 Pure Value Index, which ticked up just 0.52%.
Investors were able to shrug off a warning from Microsoft (MSFT) reducing their earnings guidance. MSFT fell as much as 4% but rallied to close 0.8% higher on the day. Additionally, rising oil prices didn’t hurt the buying mood despite rebounding from a 3% loss on the day to settle 1.3% higher. Oil rallied on the news that OPEC+ would only provide small increases in production to help offset some of the supply from Russia.
Despite rising oil prices, the energy sector was the worst performer on the day and the Energy Select Sector Index was the only sector index to close in the red. Meanwhile, SolarEdge (SEDG) was able to overcome falling oil prices after getting a boost from Oppenheimer analysts upgrading the stock to ‘Outperform.’ Consumer discretionary, materials, and technology were the top sectors on Thursday.
CHART OF THE DAY: YIELD SEEKING. The Dow Jones U.S. Dividend Index ($DVDVP—candlesticks) underperformed the S&P 500 (SPX—pink) much of the last 12 months. Recently, the dividend index has overtaken the SPX for the year, but it demonstrated relative strength (green) compared to the SPX since January. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Three Things to Watch
Yielding the Right-of-Way: Even before Benjamin Graham wrote his famous book the Intelligent Investor, market analysts have been using yields to determine where to invest their funds. Over the years, investor focus has been on future earnings potential and less on dividends. However, when markets turn volatile, many investors go right back to focusing on yields just as Graham taught.
The Dow Jones U.S. Dividend Index reflects this notion as it has outperformed the S&P 500 (SPX) from the beginning of the year as the benchmark index has fallen. Consistent income provided by dividends creates yields that investor seek when markets are in question. They also provide stability as long as the dividend remains consistent in payments and dividend increases if the company has regularly raised their dividend in the past.
In fact, Credit Suisse (CS) released a study last week that found that dividend stocks outperformed stocks with share buyback programs over the long-term.
Yield Ahead: While dividend-paying stocks are considered by many investors as less risky compared to other stocks, safety conscience investors will often reduce their exposure to dividend stocks when bond yields rise to a level where they see the safety of bonds as preferable to stocks. Like all investing, it’s a measure of risk and reward.
Currently, the 10-year Treasury yield (TNX) is trading near its 10-year highs. With the 10-year Treasury bond paying 3%, it’s likely that many investors will prefer the safety of Treasuries to dividend-paying stocks. However, if investors think yields will continue to rise, then they’ll likely stick with dividend stocks. In fact, the dividend index has a yield of about 3.15% which may not be enough to entice income investors to stick around.
Bunds in the Oven: Yields in European countries are also rising as the European Central Bank (ECB) may be forced to address rising inflation by raising interest rates next week. Higher-than-forecasted inflation has pushed the German 10-year Bund (bond) yield to 1.234% on Thursday. It has climbed nearly 30 basis points during May. Additionally, the 10-year Bund yield was around -0.5% in August—yes, that is negative.
If the ECB starts raising its key rate, it could help the euro appreciate against the U.S. dollar and slow the greenback’s roll. In fact, the euro has mostly appreciated the against the dollar since May 13. Multinational companies would welcome some weakness in the dollar because it would help reduce some of the currency costs.
Notable Calendar Items
June 7: U.S. Trade Balance and earnings from J.M Smucker (SJM), Verint Systems (VRNT), and Cracker Barrel (CBRL)
June 8: Earnings from Campbell Soup (CPB)
June 10: May Consumer Price Index (CPI) and preliminary University of Michigan Consumer Sentiment Index Results
TD Ameritrade® commentary for educational purposes only. Member SIP
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