Wall Street trading rattled by wild Treasury moves
A renewed bout of volatility in the bond market impacted stock trading, with investors also awaiting earnings from a handful of big techs. Oil sank as Israel appeared to hold off on a broader ground invasion of Gaza.
After several twists and turns, the S&P 500 closed at the lowest since May.
The gauge fell for a fifth straight session – its longest slide this year, while holding above the key 4,200 mark.
That’s a technical support and represents a 50% retracement of the rally off the lows seen in the banking turmoil in March.
The Nasdaq 100 outperformed, with Microsoft Corp. gaining ahead of its results and Nvidia Corp. up 3.8% on news it’s using Arm Holdings Plc technology to develop chips that would challenge Intel Corp. processors in personal computers.
Treasury 10-year yields slumped from 5%. The dollar fell.
The world’s biggest bond market has faced intense volatility amid expectations the Federal Reserve will keep rates elevated and the government will boost bond sales to cover widening deficits.
Exactly how the inter-relationships between growth, interest rates and the Fed are working right now is uncertain, according to Jason Draho, head of asset allocation Americas at UBS Global Wealth Management.
That means: Markets are likely to stay choppy until there’s more clarity, he added.
“With the peak level for the 10-year yield still anyone’s guess, the U.S. equity market should remain under pressure since breadth and relative strength readings have yet to hit extremes,” said Sam Stovall, chief investment strategist at CFRA.
“As a result, one thing is certain: October will add to its reputation as the most volatile month of the year.”
While the rise in rates usually makes stocks look less attractive versus Treasuries, the spread between the earnings yield on the S&P 500 and the 10-year rate – the equity risk premium – does not look alarming, according to David Lefkowitz, head of US equities at UBS Global Wealth Management.
While history suggests that a 10-year Treasury rate greater than about 6.5% tends to lead to lower valuations, it’s hard to know if this “tipping point” is still valid, Lefkowitz said.
It’s possible it could be lower because potential nominal growth in gross domestic product is lower than in the past, he noted, adding that the main risk to stocks is if higher rates lead to a pronounced economic slowdown.
“I don’t think the yield on the 10-year Treasury bond is going to rise that much above 5%,” said Dave Sekera, chief US market strategist at Morningstar.
“There are a lot of technical factors that are hitting the bond market right now. We still have the Fed’s ongoing quantitative tightening program, and we also have higher-than-expected US deficit financing needs. Also, I’ve been hearing reports of foreign investors and central banks selling, as well.”
Billionaire investor Bill Ackman said he covered his short bet on U.S. Treasuries, saying “there is too much risk in the world to remain short bonds at current long-term rates.”
Meantime, Bill Gross says he’s buying futures tied to the Secured Overnight Financing Rate and sees a recession in the fourth quarter.
The full impact of the most aggressive monetary-tightening campaign by global central banks in decades has yet to be felt and will remain a headwind for financial markets going into next year, according to JPMorgan Chase & Co.’s Marko Kolanovic.
To Phillip Colmar, global strategist at MRB Partners, if there isn’t a consolidation phase in bond yields, equities are going to struggle.
“Within that equity market, you have to be careful about what you pick because what people loved earlier were tech stocks, which are longer duration,” Colmar added. “They better deliver because you have a high interest rate environment and they’re priced for perfection.”
High bar
Investors looking to the earnings season for a dose of good news are hanging their hopes on big tech.
The five biggest companies in the S&P 500 – Apple Inc., Microsoft, Alphabet Inc., Amazon.com Inc. and Nvidia Corp. – account for about a quarter of the benchmark’s market capitalization.
Their earnings are projected to jump 34% from a year earlier on average, according to analyst estimates compiled by Bloomberg Intelligence.
Morgan Stanley’s Michael Wilson – among the most bearish voices on US stocks – said he “would not be surprised” to see further declines in the S&P 500 with “earnings expectations likely too high for the fourth quarter and 2024, and policy tightening likely to be felt from both a monetary and fiscal standpoint.”
With about a fifth of the S&P 500 members having reported, shares of companies that lagged analysts’ estimates on the earnings-per-share metric have seen their stock underperform the benchmark index by a median of 3.7% on the day of results, according to data compiled by BI.
That’s the worst performance in the data’s history going back to the second quarter of 2019.
“October can be a tough month for stocks, but more often than not tends to see the S&P 500 rise,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets. “Unfortunately, as of mid-October of 2023, US equities are still in a spooky place.”