Stocks had a mixed close yesterday with gains being led by economically sensitive shares. Bond yields continued to climb on economic optimism spoiling recent gains in tech shares.
N O T E W O R T H Y
A tale of two indexes. It is true that no two indexes are created alike. Sometimes it may seem that way, however. When the market is booming and the froth is at its frothiest, it is easy to make a sweeping statement like “stocks are on the rise.” Similarly, when fear is in the air and nerves get tested, it sure seems like all indexes are falling in unison. In any average session, if one watches the subtle behavioral difference between indexes closely, much can be learned about the quality of market moves. In yesterday's session, you didn’t have to watch too closely to pick up on the driving themes.
Let’s start with some basics. The Dow Jones Industrial Average seems to be, for no real reason that I can discern, what most average people think of when talking about stocks. Fair enough, it has been around for a long time, and it is a fairly balanced index with a tilt toward cyclical industrial stocks. The S&P500 is a cap weighted index of the 500 largest US stocks. Though those 500 stocks are from all sectors, it is dominated by technology, healthcare, and consumer discretionary, with tech weighing more than twice that of the next largest sector. In fact, the top 6 companies represented on the S&P make up some 25% of the index. In the Nasdaq Composite Index, those same 6 companies make up more than 40% of the index’s weight. The Nasdaq Composite is dominated by technology and communications, which together make up roughly 61% of the index. Communications includes internet content-based companies like Alphabet/Google, Meta/Facebook, and Netflix amongst others. So, at a high level, the Dow is closely tied to value and cyclicals, the Nasdaq Composite is tightly correlated to growth and tech, and the S&P is somewhere in the middle but tends to lean toward the Nasdaq. That said, the largest weighted stocks in each index are common to all three, so naturally their performance is loosely tied to one another. On any given day it may be difficult to notice these subtleties, but yesterday the differences were quite clear.
On Monday, the first trading day of the year, all three indexes traded higher, though the Nasdaq outperformed. Also noteworthy on Monday was a sharp rise in 10-year Treasury yields which gained +11 basis points. That is a large single day move for Treasury notes. As discussed above, the Nasdaq, which is dominated by growth stocks is typically more sensitive to interest rate moves, so it was rather peculiar for the Nasdaq to rise by +1.2% on Monday with such a large swing in bond yields. Remember the weightings? Apple makes up around 10% of the Nasdaq Composite while Tesla makes up another 4.5%. Both of those stocks rallied on Monday with Apple gaining +2.5% (almost closing in $3 trillion market cap territory) while Tesla jumped by +13.53% after a record quarter of unit deliveries. That helped the Nasdaq outperform the other indexes. However, if you look further down in the list of index members, you will see lots of red on Monday as growth shares, in general, underperformed in response to the rise in Treasury yields. By yesterday morning’s open, the Nasdaq was already under pressure from the prior day’s jump in yields. The OMICRON-variant is becoming less and less of a market mover as more and more traders believe that the current surge will have minimal effect on the economy. With the focus on COVID fading, markets are now focusing on inflation and the Fed rate hikes. Yesterday morning we got a series of economic releases. The first, JOLTS Job Openings, showed that vacancies dropped from month to month. This was perhaps interpreted as firms being less desperate for labor. That is good for the economy but may also check a box for the Fed which has constrained its rate hiking to labor market health. Labor market healthy = rate hikes. The next series of numbers came from the Institute for Supply Management (ISM). Those numbers showed that prices paid for raw materials used in manufacturing fell significantly in December hinting that supply challenges may be easing a bit. More good news for the economy. With the Fed poised to raise rates with hopes of tamping down consumption and inflation, good economic data supports more aggressive tightening… hiking. Healthy economy = more inflation = rate hikes and higher long-maturity yields. We know that the Nasdaq is very sensitive to rises in interest rates, so Monday’s yield gains and yesterday's strong economic numbers became the reason for the index’s sharp selloff relative to the S&P’s narrow losses and the Dow’s gain. Oh, and it probably didn’t help that 10-year Treasury yields rose by another +2 basis points, yesterday. Starkly different daily performance is not normal, though it is becoming more prevalent as we get closer to an inflection point in Fed policy. So, the next time someone asks you how the market did today, you need to answer, “which market are you talking about?”
THE MARKETS
Stocks had a mixed close yesterday as tech and growth shares took a drubbing in response to expected rate hikes and higher Treasury yields. The S&P500 slipped by -0.06%, the Dow Jones Industrial Average rose by +0.59%, the Nasdaq Composite Index dropped by -1.33%, the Russell 2000 gave up -0.16%, and the S&P500 ESG Index fell by -0.21%. Bonds traded lower and 10-year Treasury yields gained +2 basis points to 1.64%. Cryptos gained +1.52% and Bitcoin added +0.49%.
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