Powell Speaks Up, Markets Look Down

The futures were trying to make a comeback this morning, but have now turned slightly negative, after yesterday’s drubbing, especially in the tech and high growth stocks.  Investors didn’t seem to care that the 10-yr treasury yield was backed off again, down to 1.61%, or 3 basis points.  The yield is unchanged this morning.  Let’s see if we get a fourth day of declines.

The second day of testimony for Fed Powell and Treasury Secretary Yellen, didn’t add really add anything new.  They continued with the narrative that the U.S. economy will see strong growth in 2021.  As for the markets and assets, while valuations are elevated in some areas of the market, overall, the financial sector look healthy.

But this morning, comments from Fed Powell have spooked the markets again.  Powell said that someday the Fed will begin to remove all the stimulus it has put in during the pandemic to help sustain and boost the economy. Someday, not today, and it will be gradual.  In NPR’s “Morning Edition,” Powell stated, “As we make substantial further progress toward our goals, we’ll gradually roll back the amount of Treasuries and mortgage-backed securities we’ve bought.” He added, “We will very gradually over time and with great transparency, when the economy has all but fully recovered, we will be pulling back the support that we provided during emergency times.”

Nasdaq was the hardest hit yesterday, down 2%, while  S&P 500 made a huge reversal from being up 0.8% to down 0.6%.  Even the Dow, which held on to gain for most of the day, succumb to selling pressure in the final seconds of trading, as reopening stocks like airlines and cruise operators took a hit.   

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Energy was the best performing S&P 500 sector, as a 224,000-ton container ship that ran aground in the Suez Canal caused one of the worst shipping jams in years. About 30% of the world’s shipping containers pass through the 120-mile canal daily.  Experts say that it may take days, even weeks, before the vessel is cleared from one of the world’s busiest waterways.  This could cause not only massive delays, but ships may have to be rerouted, which could add cost to the shipment.  After oil’s big run up yesterday, WTI is giving up some of those gains this morning, down 2.35% to $59.74.

Communications Services, Consumer Discretionary and Technology were the hardest hit sectors. 

Breadth was negative, decidedly so on the Nasdaq, with decliners leading advancers 3-1.  Down volume far outpaced the up, and there were significantly more new 52-week lows.

After two months in office, at 1:15 pm ET, President Biden will give his first official press conference. Investors, and the public in general, will be eager to hear what he has to say, especially on things such as immigration, gun control, foreign policy, and if we garner anything more on tax increases and an infrastructure bill.  He is certain to highlight the Covid-19 $1.9 trillion rescue bill and blowing past his goal of 100 million vaccines administered in his first 100 days.

Portfolio Approach

There were no changes in the Hotline Model Portfolio yesterday.

Today’s Session

For the past six weeks, I have suspected that the market was under pressure strictly because of the spike in bond yields.  It’s been my experience, which we often discover later, that during periods of market stress, there were other reasons, mostly pent-up anxiety that comes with big moves.

The trigger was the velocity of the rise in the ten-year yield, which has been coming down. And yet, stocks remain under pressure.  In a market where movers surge no matter the label (growth, value, Crypto, bond yields), it shows investors have become traders. But these moves create harsher selling when the crowd moves on.

The ten-year yield is +144% the last six months, +5.60% in past month. It is now down from 1.75%. I think it has to settle closer to 1.52% before it's not the reason of the day to sell stocks when there is overall pressure.

Meanwhile, there was better news in initial jobless claims, which were down to 684,000 from 770,000. 

To see the chart, click here.

Continuing claims are also down to 3.87 million from 4.04 million. 

Finally, the final GDP read for the last quarter of 2020, which came in at 4.3% from 4.1%, is far in the rearview, but it is encouraging.  Consumption, however, edged lower, but so too did  measures.

To see the chart, click here.

Note: stocks were generally overbought short-term, and they are moving down on a shift in sentiment.  This means many will become oversold on a short term basis.  Resist emotional selling and ignore talking heads that scream the end is near, but have made exact same comments since 2009, and take victory laps with any pullback.

As for high beta names, those are more difficult to hold, but you really have to get back to whether you are an investor or trader.