Fed Remarks Send Treasury Yield Above 1.5% And Nasdaq-100 Into Correction Mode

Key Takeaways:

  • Stocks crumble again as 10-year yield tops 1.5%, raising inflation concerns
  • Remarks by Fed’s Powell might have made investors nervous, but rate hikes not likely
  • Nasdaq
    NDAQ
    100 falls into correction territory as stocks like Tesla
    TSLA
    , Peloton weigh

Wall Street has apparently decided to get ahead of the Fed by staging a “taper tantrum” before any actual taper.

There’s no sign of the Fed rolling back its accommodative monetary policy in any way, but investors seem convinced the day will come. The feeling grew stronger Thursday when Fed Chairman Jerome Powell said the magic word, “inflation,” in public remarks, noting that reopening could create “upward pressure on prices.” Basically, Powell took everybody by surprise, kind of wobbling on the dovish tone he’d had last week. He sounded like he could see central banks starting to scale back monetary stimulus a little earlier than expected.

Wall Street responded with more selling, discarding bonds and stocks amid worries about economic overheating. Treasury yields boomeranged as high as 1.55%, not far below last week’s one-year peak and close to 15 basis points above this week’s lows. We noted this morning that the stock market has been getting shaky when yields top 1.45%, and that happened pretty quickly today. Keep in mind, however, that 1.5% or so is very low, historically.

Fear seems to be growing that the Fed might get “behind the curve,” as the saying goes, meaning basically it could be waiting too long to tighten policy as the economy emerges from the pandemic. Powell, of course, needs to focus on employment reviving, and that’s not really happening. Meaning the Fed isn’t in a hurry to roll anything back.

There’ve also been some rumblings about the proposed $1.9 trillion stimulus, which the Senate began voting on Thursday. This isn’t a political column, but some economists say the level of spending in the bill would have made more sense a few months ago but may be more than the economy needs now, according to the Washington Post. That could be playing into market concerns about possible overheating, too, though not all economists necessarily agree with that point of view.

The S&P 500 Index (SPX), which finished down about 1.3% at 3768, well off its session low, is now down nearly 4% from Monday’s close. It hasn’t posted a new high since Feb. 16 when it hit 3950, a point it’s now nearly 5% below. Typically, a 10% drop is considered a correction.

The Nasdaq (COMP) did worse, falling more than 2%. The small-cap Russell 2000 (RUT) brought up the rear with a 2.7% decline. It didn’t feel like any of the indices gained much momentum into the close, so we’ll have to keep a close eye on the futures market overnight for clues about tomorrow. Employment data early tomorrow will likely tell the tale.

Tech Check Continues, but Apple
AAPL
, Microsoft
MSFT
Outperform

From a sector perspective, Technology continues to lead, but on the wrong side of the ledger. It fell more than 2.2% Thursday. People are taking profits in some of the high-flyers that have been big beneficiaries of the Fed’s easy money policy. The semiconductor segment of Tech, which for a while had outpaced Tech overall on ideas that an economic recovery would raise chip demand, got slapped around even harder Thursday, down more than 4%.

It was interesting to see two of Tech’s biggest light posts, Apple (AAPL) and Microsoft (MSFT), outperform the broader sector a bit. If there’s going to be a Tech revival, those two so-called “mega-caps” would probably need to participate. AAPL shares are now down 17% from their all-time high of late January. Also, some of the major Communication Services names like Alphabet (GOOGL), Facebook (FB
FB
), ViacomCBS (VIAC), and AT&T
T
(T) had at least OK days. It may be because at times like these, people tend to go into more of the names that they know and have done well with.

The Nasdaq-100 (NDX) is now in correction mode, down 10% from highs. Stocks like Tesla (TSLA), Zoom (ZM), and Peloton (PTON) are taking it on the chin, all down 20% from their peaks.

Financials also crumbled Thursday after leading things higher earlier this week, while Industrials and Materials—two sectors that normally do well during times of economic recovery—got hammered. Boeing
BA
(BA) and Archer-Daniels-Midland
ADM
(ADM) both lost ground. It was interesting to see Financials fall despite rising yields, but they did come back a bit at the end of the day, and it might just reflect a general regrouping going on.

Perhaps when we look back, we’ll see this day in context of people turning more toward “value” stocks and away from the growth names, but that’s a see-saw that’s gone back and forth a lot over the last few months.

If you’re wondering about technical support for the SPX, it’s changing fast. Going into Thursday, it was near the 50-day moving average of 3817, but that got broken minutes into the session. Now you have to look at 3725, near the early February low. The SPX bounced off of that late in Thursday’s session (see chart below), but look out below if it carves further down tomorrow. The 100-day moving average of 3683 would be in sight. The SPX last traded below its 100-day MA in late October, and bounced off it twice last fall.

The Cboe Volatility Index (VIX) went above 30 at one point intraday before falling toward 28. That’s still above the 20-25 range it had been in for several weeks before this market hiccup.

Is Good News Good or Bad These Days?

The pandemic served up a gut-punch to the economy in 2020—no arguments there—and we’re still feeling the effects. But when you consider the collective action by the Fed and fiscal authorities—plus the general agreement that better days lie ahead—the market has been able to largely shrug off bad news. And arguably, it’s been able to take the “bad-news-is-good” argument, where a weak string of numbers has helped provide the impetus for a swifter and stronger stimulus. All the while, the march toward a vaccinated populace continues.

Against that backdrop, it’s easy to see why—at times—both good news and bad news have been able to push the market to new heights.

Now, many seem to be asking whether we’re at an inflection point—one that returns markets to their normalized response mode, meaning that bad news is bad for markets and vice versa. At least that’s the general feeling after seeing the market’s reaction to inflation rumblings.

Tomorrow morning we’ll get a fresh look at the state of employment in the U.S. Regardless of the number reported, it’s possible that markets will interpret it as being headed in the right direction, but not quickly enough.

Tomorrow’s payroll number is expected to show an addition of 200,000 jobs, according to consensus compiled by Briefing.com. Under normal circumstances that might be an out-of-the-park number, but we’re still playing catch-up after the pandemic. It would still be an improvement from just 49,000 in January and a negative result in December. These numbers just aren’t where you’d expect them to be if the economy is really coming back.

Rate Hikes Still Seen Unlikely

If you’re worried about the Fed hiking rates, don’t expect it anytime soon, even if job numbers improve in a big way and yields keep rising. Though a lot of inflation indicators are flashing—especially commodities like crude and copper—the weak jobs picture means it’s unlikely we’ll see anything from the Fed.

“The rising rates reflect the optimism surrounding an improving economy,” research firm CFRA’s Sam Stovall wrote in a note earlier this week. “(Rates) will need to move much higher before causing concern by forcing the Fed’s hand in hiking short-term rates sooner than anticipated.”

The chance of even a single 25-basis point hike by the end of the year stands at 4.1%, according to CME Group
CME
Fed funds futures.

That said, there are some options for the Fed if it wants to lower the steepening yield curve (measured by subtracting the 2-year yield from the 10-year yield). In 2011, the Fed executed a “twist” where it started selling its shorter-term paper and buying longer-term Treasuries to manage the so-called “long end” of the curve.

In this scenario, longer-dated yields would probably fall, taking some pressure off of parts of the economy more vulnerable to pressure from rising long-term rates. Think housing and automobiles. The last thing the Fed probably wants to do is let yields get out of hand and start clipping the recovery.

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

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