The View from 5th Avenue

More of the Same? – Nothing ever seems to be good enough these days. Today’s tape has been messy and volatile especially after a non-farm payrolls figure that caught many off guard. And it was good! But this is where Powell’s words yesterday were a concern, choosing to provide nothing in the way of a Fed plan were yields to rise too quicky. The promising job news had equities going better early on but the 10-year again flirting with the 1.60 level stemmed that move. Yields have eased as the day has progressed and equities have recaptured their footing some but the theme we’ve seen throughout the week is the same, namely tech lagging although at least it’s gone green on the day. Tesla has grabbed much of the attention, -14% on the week but Apple has now hit a 3m relative low. A close below that could have it under-performing by another 20%. Energy names the best as yesterday’s OPEC+ surprise continues to reverberate while defensives have more of a bid than we’ve seen of late. The violent nature of the week’s sell-off hasn’t resulted in the tidy +Value/-Growth we’ve become accustomed to. Rampant bullishness in terms of equity allocation by sell-side strategists as exhibited below hasn’t been this high in nearly 10 years and the last time it was triggered, stocks were a fair bit lower 12 months later.

Tech-tonic Shifts… Things are definitely starting to feel a little unstable around here. Once the beneficiary of being pulled higher by weighty Tech, US indices are feeling a little seasick as it’s been a rough ride this week dealing with some heavy doses of Rotation. After the Nasdaq Composite closed below its 13k support level yesterday, the index is again dictating the pace: it first rallied over +2% from early session lows, only to fall even further over the last 2 hours as the 10-year yield jumped from 1.48% to 1.54% in a matter of minutes as Powell spoke (more on that below). We’re not in full panic mode yet, but it’s getting ugly and cushions are running thin as the S&P and CCMP are now negative ytd, and the high-flying Nasdaq 100 is now in correction territory (worse than -10% from Feb peak).

Always an ATH somewhere – Inflation concerns are back and this is driving the 10-year yield higher once again, interestingly on the anniversary when it first broke through 1%.  Investors by now know that they must re-adjust their portfolios to higher yields (and higher expectations to inflation), and that means Tech once again legs lower.  The NDX 100 is now down 72bps ytd, while the more economically sensitive Russell is +13.4%.  Traders have become accustomed to watching Tech, and FANGMAN, lead the broader indexes, but fortunately there are other sectors in the S&P.  So while the Nasdaq is down 1.87% today, Financials (BKX +2.9%) and Energy (XLE +3.5%) have slowly lifted the other re-opening stocks higher.  If the Transportation Index (+82bps) closes at these levels, it will be an all-time high for it.

In Like A Lion… Apparently there’s an old saying “If March comes in like a lion, it will go out like a lamb” that has ties tracing back to the weather, zodiac signs, and even the Bible. It’s unclear if the adage will equally apply to the stock market, though we’re off to a good start as US equities are roaring back following Feb’s frazzled finale. There’s plenty of good news out on the re-opening front (JNJ’s vaccine approval, stimulus moving on to the Senate, Feb ISM beats, every Apple store in the US now reopened) but of course the real story today is the sell-off in Treasuries finally calming down (for now) with the 10-year yield consolidating below 1.5%. The pause (and some rest over the weekend) has allowed traders’ to catch their breath and reassess – that’s led to today’s action taking on more of a “buy everything back after a bad week” feel than any discernible reopening “theme” (SPYG +2.3%, SPYV +2.4%). When all sectors are pulling the same direction the result is obviously powerful: as of right now the SPX is on track for its best one-day performance since last June.

February Friday Fun – As markets head into month end, Treasuries have been somewhat tame today.  Granted the fun really occurred yesterday post the 7 year auction, but if anyone in the investment world was not aware of where yields were, they are now.  The 10-year move from 1% at the end of January to 1.46% today has put the easy new ATHs by stocks on alert, and now investors are calibrating their positions.  Tech has been a benefactor to the low rate environment, but it is harder to justify mega-tech levels as UST’s push higher.  As the Fed Heads have been saying, yields are still historically low, so what does that mean for the growth names?  Today however, the re-pricing of assets has halted, giving some respite (depending on your positions).  USTs are slightly lower, the Dollar a little higher, Commodities seeing some profit taking, and growthy tech seeing some sponsorship.  Whether this is just a short term stall from what markets have seen the last two weeks or a longer trend, remains the question.

Getting Hot in Here – And not the “everything is on fire” type of hot but rather the beads of sweat/clammy hands iteration. Trying to pick out the S&P “leaders” today was like trying to spot a chameleon as it was a sea of red, not one sector flashing green and it wasn’t really close. To say there was a fair bit of carnage would be appropriate as the Nasdaq had its 2nd day of more than 2% losses in 4 and while the last two days saw selling abate as the day progressed, that hasn’t been the case thus far. Semis and homebuilders are two of the “standouts” while the WFH stocks also get shellacked. Monthly rebalances could’ve been something to point to as portfolios looked to correct the outperformance of stocks month to date, but that would fly in the face of what we’ve seen from the bond market today (more below). Interestingly, today’s selloff comes just as bears looked to be in the fetal position, the AAII survey suggesting they’ve practically given up. The chart below was triggered from the move on Monday and highlights current market volatility; pretty rare and possibly worrying.

The Notorious BTD… Sometimes a boot and rally is all that’s needed to get the partying back on track. Yesterday’s wild comeback put to rest any doubt that the Buy The Dip mantra has faded, with the S&P fighting back to a positive finish after being down -1.8% for only the 11th time the last decade. That’s made is a lot easier for US indices to put on a repeat performance today: another break higher for Treasury yields sent equity futures lower before the open, but the damage never got serious as FOMO and Fed speakers have continued to help the market come to terms with the new reflation environment. That rebound has turned into a full on reopening celebration, with the S&P only a measly 25bps away from a new all-time closing high! Not much dip left to buy it seems…

Tech Trek… The initial panicky reaction this morning as investors fretted over a modest, if rapid, rise in yields, has since worn off a bit, thanks to cooler heads prevailing (many believe rates are far from being raised for various reasons). Putting the 10Y in perspective, it is at 1.35%, well below any level it traded at prior to the Covid crash of 2020— and financial conditions are still close to the loosest they have ever been. In that same vein, stocks bounced off their lows after Fed Chair Powell’s prepared testimony to Congress eased fears of a policy change. Powell said price pressures remain mostly muted and the economic outlook is still “uncertain.” Despite the reassurance, the Nasdaq is down 1.8%, as investors try to come to terms with the thought that in a rising rate environment, their math starts to change. Over the past six weeks, a record $19 bn has flowed into tech funds, according to EPFR global data. The S&P information technology sector is down for a sixth straight day, the longest losing streak since August 2019 and the Russell is down 2.3% in the past 2 days. Investors are also hastily taking profits in the pandemic winners whose valuations have reached historically high levels —Tesla and Apple have traded down 13% and 4.5% respectively, in the past 2 days (Apple down 11% this month). Could this be the beginning of market jitters or just a bit of a much expected rotation into cyclicals (energy and financials are two of the top performers today), while tech takes a backseat (for once).

Every Dow Has Its Day… New week, same theme and unfortunately for the S&P that likely means a 5th consecutive down day for the first time since the turbulent times of Feb 2020… Reflation remains in focus, and though Treasury yields are taking a bit of a breather, more positive news on the vaccine front has equities playing into the theme with a healthy display of Rotation (VLUE +40bps, MTUM -2.2%). The resulting weakness in the seemingly perennial Tech winners and strength in cyclical reopening names has made for a rare sight among the blue chip indices: the Nasdaq is (was) down -1.5% and the DJIA is green at the same time for just the 5th time in the last 10 years! Don’t count the S&P out from snapping its losing streak just yet either; already we’ve seen the buy-the-dip mentality from last week’s trading carry over to today, with the index comfortably off its -82bps low shortly after the open. Yield may be stealing a lot of attention, but old habits die hard when it comes to equities love…

Long Strange Trip … February 19th 2020: the S&P and Nasdaq both hit an all-time high as China signals more stimulus for its economy reeling from lockdowns, and investors regain confidence the fallout from the coronavirus will be relatively contained… Well Happy Anniversary everyone, what a long strange trip it’s been! Despite all that’s happened in the interim, the first bullet from that day’s View at Two: “Resilient or Delusional?” wouldn’t seem too out of place today. The latest obstacle for stocks of course is rising bond yields as reflation trade picks up steam, and while Treasuries have continued to sell-off today, US equities appeared ready to come to terms with that to end the week on a positive note. That’s looking less certain now; as the 10-yr yield has continued on to reach as high as 1.36%, the S&P has faded from its high of +42bps just before the EU close to trade in the red (just now back to unchanged). Regardless of where indices finish, the week seems destined to end with the same display of FOMO vs bubble fear uncertainty that’s characterized the dip-buying of the last few days…