Cash appears to be king as investors sell stocks, bonds and commodities

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(Monday Market Open) Stock index futures point to a much lower open as S&P 500 Futures Contracts are finally below March lows after falling 1.9% before the open and trading below the 4,100 level. Again, the downward pressure appears to be coming from tech stocks as Nasdaq Futures Contracts were down 2.36% before the opening bell.

Market potential movers

If the stock market follows the futures market, the major indices will be working on their sixth consecutive week of declines. the Cboe Market Volatility Index (VIX) had risen to just below 34, while the 10-year Treasury yield (TNX) touched 3.2% earlier this morning in premarket action. Along with interest rate sensitivity, the rising 10-year yield is putting pressure on tech-heavy Nasdaq futures.

Rising yields appear to be prompting investors to cut other risky assets like cryptocurrencies which fell over the weekend and continued to fall this morning. Bitcoin BTC/USD was down 4.6% and trading below $33,000 heading into the 2021 lows. Crypto selling was wide with Ethereum ETH/USD 4.75% drop, gimbal ADA/USD down 8.4%, and Polkadot DOT/USD lose 6.7%.

Foreign markets were also down. Starting with Asia, Japan Nikkei fell 2.5%. China Shanghai Composite traded up 0.1% despite Bloomberg’s report that China’s premier warned that China’s labor market was “complicated and severe” due to COVID-19 lockdowns. In Europe, the Stoxx Europe 600 fell 2.1% with similar losses in Germany DaxUK FTSE100and France CAC 40. The Eurozone reported that investor confidence fell more than expected in April.

Among the announcements of results that make the news this morning:

  • duke energy duke missed earnings estimates despite battered earnings, sending the stock down 0.3% in premarket trading. DUK has reaffirmed its earnings guidance for fiscal year 2022.
  • Tyson Foods TSN rose 0.2% in premarket trading after reporting better-than-expected earnings and revenue and offering earnings guidance in line with estimates.
  • BioNTech BNTX also beat the revenue and net income figures, as its vaccine sales tripled in the first quarter. However, the company expects sales to decline for 2022.

Judging by the pre-market action, investors appear to be turning to cash with stocks falling, yields rising and futures like oil and gold also trading at 2.5% and 1.3% respectively. Moreover, foreign investors still seem to be turning to the US dollar as the global outlook deteriorates.

Market Minutes Review

The bulls had hoped stocks would rebound on Friday, but got no help from a mixed report on the jobs picture. The report found that non-farm payrolls added 428,000 new jobs last month, well above the 385,000 forecast but lower than March’s 424,000. However, most jobs have been added to lower-paying positions in the service sector. There was more negative news, with the participation rate dropping from 64.4% to 62.2% due to people leaving the workforce. In addition, the unemployment rate fell from 3.5% to 3.6%.

Stocks didn’t appear to be finding any upward traction as investors still looked reeling from Thursday’s plunge. the Nasdaq Compound ($COMP) remains at the center of the story dropping another 1.4% for a 6.4% loss over two days. The Nasdaq fell to highs it had pulled back towards the end of 2020, which could provide some support for the index, now down nearly 25% from its all-time high. the Russell 2000 (RUT) also slipped 1.69%, closing in on 2018 levels and down 25% from its all-time high as well.

the S&P500 (SPX) and the Dow Jones Industrial Average ($DJI) held up a little better, falling only 0.47% and 0.30% respectively. The S&P is around 14% off its all-time high while the Dow Jones is down just under 11%. Both of these indexes are also trailing around their March lows, which could be a good sign for the broader market.

Once again, rising yields appeared to dampen equities as 10-year Treasury yield (TNX) rose 57 basis points to 3.123%. The 10-year-old hasn’t seen this level since 2018.

The energy sector was the best performing group on Friday, followed by utilities and consumer staples. the Energy Selection Sector Index increased by 2.86%, the Utilities Select sector index gained 0.80% and the Consumer Staples Select Sector Index returned positive 0.11% just before the close. All other sectors were in the red.

Energy was also the week’s best performer, up more than 9%. Despite the huge volatility of the past week, the majority of sectors finished almost even for the week except for three. the Consumer Discretionary Select sector index and Core Consumption Select Sector Index were down about 1.5% each and the Real estate Select sector index fell about 3.75%.

CHART OF THE DAY: LABOR COST. Increases in government data on non-farm business sector/unit labor costs (blue) often precede a recession (grey columns). FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor, endorse or affiliate with TD Ameritrade. 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 out for

Troubling contradiction: Friday’s employment situation reports showed average hourly earnings rose 0.3% in March. Over the last twelve months, profits have increased by 5.5%. While this is great news for workers, it is one of the measures that Fed members are paying close attention to, as rising labor costs reduce corporate profits and may eventually lead to cost-cutting measures such as layoffs. Moreover, a higher salary leads to an increased demand for goods and services, which can also lead to higher inflation. So while we’re all glad workers are making more money, it can be a double-edged sword.

More soon? In a note to BofA Securities clients this week, strategists warned they did not believe the stock market had bottomed or that Treasury yields had hit their highs. They noted that every major asset class saw significant outflows in the week before the Fed meeting and that real estate investment trusts, or REITs, set a record $2.2 billion exiting the sector. Chief investment strategist Michael Hartnett said investors have suffered an “inflation shock”, are now starting to suffer a “rate shock” and will soon face a “recession shock”.

BofA wasn’t the only company this week to warn of a market slowdown. German Bank comics Economist Matthew Luzzetti said the firm doesn’t believe the Fed will achieve a “soft landing” due to high inflation and monetary tightening that could eventually lead to a recession.

They are the latest in a growing list of analysts expressing recession fears. Other recent bearish comments have come from Moody’s Analytics, which now sees a 1 in 3 chance of recession, Goldman Sachs GS with a probability of recession of 35%, and JPMorgan Chase JPM CEO Jamie Dimon mentioning in his annual letter to shareholders that conditions “could easily get worse”.

Retro Techno: When markets begin to tumble and economic data beats forecasts, investors begin to question economic and business fundamentals. As data becomes less reliable, fundamental pricing models begin to falter as assumptions keep changing. At times like these, investors often tend to turn to stock charts to decipher where stocks might land.

Technical analysis is the term used to describe the examination of stock charts. Personally, I’m not very technical, but I know a few and I can tell you that the cards are used in various ways. Some rely heavily on charts that go to great lengths to create and test trading systems. Others use charts as part of a broader analysis that may include economic, fundamental, and even ESG information. And then there are those who don’t use graphics at all.

One problem with charts is that there are many ways investors can interpret them, which can make them very subjective. This can lead to frustration if you are new to technical analysis, so be patient and take the time to educate yourself so you understand what people are talking about in the financial news. And remember that any forecasting tool can always get you caught in a storm.

Notable Calendar Items

May 10: Western Earnings OXYSuncor Energy SUand Sysco SYY

May 11: Toyota Consumer Price Index (CPI) and Revenues MTwaltz disney SAYand J.D.

May 12: Producer Price Index (PPI) and Brookfield Earnings BAM

May 13: Michigan Consumer Sentiment and Honda Earnings HMC

May 16: Take-Two Earnings TWO and James Hardie Industries JHX

TD Ameritrade® Commentary for educational purposes only. SIPC member.

Image from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investment advice.

Garland K. Long