Global Markets Lower On Worries Other Central Banks Will Follow The Fed

(Monday Market Open) Equity index futures are pointing to a lower open as investors are still reeling after Friday’s tough talk from Federal Reserve Chairman Jerome Powell.  

Potential Market Movers

Last week ended with Powell opening the Fed’s Jackson Hole Economic Symposium with a speech reiterating the Fed’s commitment to attacking inflation even if it causes the economy to slow and unemployment to rise. He expressed concern that inflation could become stuck and entrenched in consumers’ minds without strong action.

Over the weekend, investors had a chance to consider what Powell’s comments meant for U.S. markets and how other central banks around the globe could react—and the picture isn’t pretty. It’s likely that other central banks will feel they need to respond in kind to avoid being buried under the strong dollar.

In fact, the European Central Bank (ECB) policymakers released a similar message to Powell’s on Saturday. The ECB signaled a 50-basis-point rate hike for September 8. The STOXX Europe 600 was down 0.87% on the news, while the French CAC 40 tumbled 1.14% and the German DAX fell 0.77%.

Similar selloffs were seen in the Asian markets. The Japanese Nikkei plunged 2.66% and the Hong Kong Hang Seng dropped 0.73%. However, the Shanghai composite rose 0.14%.

The fear of global central bank tightening caused the Cboe Market Volatility Index (VIX) to spike 6.5% in premarket action and back above the 27 level. At this level, market volatility has historically seen daily moves as high as 2%. If the VIX remains elevated, investors should consider viewing market rallies with caution.

The 2-year Treasury yield picked up where it left off on Friday, rising another five basis points ahead of the opening bell to 3.45%. The 10-year Treasury yield (TNX) gained seven basis points to reach 3.11%.

A couple of individual stocks were also making news this morning. Pinduoduo PDD reported better-than-expected earnings and revenues, helping the Chinese e-commerce platform to rally 9.7% in the premarket. Pinduoduo continues to benefit from China’s zero-COVID policy that keeps consumers in their homes and on their platform for their shopping needs.

Catalent CTLT plunged 9.6% ahead of the opening bell despite topping earnings expectations but offering lower-than-expected revenue guidance for the health care company’s 2023 fiscal year.  

Reviewing the Market Minutes

Contrary to Mr. Powell’s comments on inflation, a couple of upbeat inflation reports came out Friday morning. The Michigan Consumer Sentiment report revealed that falling gas prices throughout July helped boost consumers’ outlook on inflation. The Fed’s favored inflation report, the PCE price index, was released and showed that July’s core inflation numbers were good—coming in lower than expected at 0.1% month over month instead of the projected 0.3%. Year-over-year core inflation was 4.6%, which was below the expected 4.7%.

Despite the positive inflation reports, fear seemed to get the better of stock investors, and the Cboe Market Volatility Index (VIX) spiked back above 25 and above its June lows. The Dow Jones Industrial Average ($DJI) plunged more than 1,000 points to close 3.03% lower on the day. The Nasdaq (COMP) recorded the biggest loss, just shy of 4%. The S&P 500 (SPX) tumbled 3.37%.

The sell-off was broad with technology and consumer discretionary leading every sector into the red. Additionally, the small-cap Russell 2000 (RUT) plummeted 3.3%, and the NYSE decliners outpaced advancers nearly 9-to-1.

CHART OF THE DAY: INTEREST IN TECH. The Technology Select Sector Index ($IXT—candlesticks) and 10-year Treasury yield (TNX—pink) were uptrending at the same time from September 2020 to February 2021 when the 10-year yield hit 1.5% (pink horizontal line). Since that time, the two securities have basically moved in opposite directions. Rising yields caused investors to rethink the way they look at technology stocks, which led to changes in stock valuations. 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

SECTOR VALUATIONS: According to Yardeni Research, the valuations of most sectors have improved during 2022 when evaluated by their 12-month forward price-to-earnings (P/E) ratios. Some exceptions include defensive sectors, such as consumer staples, utilities, and health care. These sectors have forward P/E ratios similar to their 2021 numbers.

The blended forward P/E ratio for the S&P 500 is 18.2. The higher forward P/E ratios are with consumer discretionary (27.3), technology (23.2), and consumer staples (21.5). The lowest are energy (8.3), financials (12.8), and materials (14.3).

TECH VALUE: The industry groups within the technology sector have also seen some improvements in their forward P/E ratios. The Application Software group has seen the biggest improvement because it sported a nearly 55 forward P/E toward the end of 2021 but has since fallen to 33.1. Data Processing & Outsourcing has also seen improvements because it was around 35 last year, but now it boasts 23.7. Systems Software and IT Consulting & Other Services have forward P/Es of 27.2 and 19.6 respectively.

However, valuations can always get lower. In 2008, at the end of the Great Recession, the overall tech sector and each industry group were below 15.

HEAD IN THE CLOUDS: Last week, cloud computing companies had some important stocks report earnings, including Snowflake SNOW, Salesforce CRM, and Workday WDAY. Each reported better-than-expected earnings but had various market reactions. This week, we’ll hear from Crowdstrike CRWD, Broadcom AVGO, and DocuSign DOCU.

Cloud computing continues to be a big driver in the tech space, but similar to the dot.com era, it’s difficult to know which companies can survive a shakeout. And while each of these companies are influential within their own spheres, mega-cap companies like Apple AAPL, Amazon AMZN, and Microsoft MSFT are also big players in this space and have other proven businesses and product lines that can weather any storm, like a time of prolonged rate hikes.  

Notable Calendar Items

Aug 30: CB Consumer Confidence, JOLTs Job Openings, and earnings from Crowdstrike (CRWD), Hewlett Packard (HPE), Chewy (CHWY), Best Buy (BBY), and Big Lots (BIG)

Aug 31: Earnings from Polestar Automotive (PSNY), Trip.com (TCOM), Cooper (COO), and Five Below (FIVE)

Sep 1: ADP Nonfarm Employment, ISM Manufacturing PMI, and earnings from Broadcom (AVGO), Lululemon (LULU), Hormel Foods (HRL), Campbell Soup (CPB), and Toro (TTC)

Sep 2: Employment Situation Report and earnings from DocuSign (DOCU)

Sep 5: Markets closed for Labor Day Holiday

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

Image sourced from Shutterstock

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