Yesterday, stocks, YET AGAIN, could not hold on to premarket gains as a strong services PMI came in stronger than expected. Bond yields jumped on the strong economic number causing interest rate sensitive growth and tech stocks to fall.
Wiggle room. We have some time before Groundhog Day, but the market over the past 3 weeks appears to be playing out exactly like the 1993 Bill Murray movie in which Murray, the main character, cannot escape the replay of 1 single day until he figures out a way to navigate through some “personal” issues. The day starts like this. Investors come in refreshed and optimistic that the worst is behind us with runaway inflation. They accept that the Fed is raising rates – it is already factored into the market. They buy, hoping to pick up good stocks at a bargain (there are some really good companies on sale right now). All seems Ok until some small bit of news, mostly not new at all, causes the market to pull back. Yields jump, growth stocks lose altitude, traders begin to panic and sell, accentuating the downward move. Eventually the broader market follows tech into the red. Day over. Start again. Repeat. Let’s take a step back and look at what we know and what we knew using yesterday as an example.
Futures were positive yesterday morning after investors had a chance to digest last Friday’s Goldilocks employment figures. It appeared that the Fed’s good work is cooling the super-hot labor market, but not too much as to cause economic damage. Exactly what the Fed wants. At 10:00 PM Wall Street Time, the Institute for Supply Management released its Services Purchasing Managers Index / PMI for August which came in at 56.9, higher than last month’s 56.7 and higher than economists were expecting. The bond markets responded with selling across the curve pushing yields higher. Those higher yields caused selling in yield-sensitive growth stocks. Meager attempts at a recovery were unsuccessful and the major indexes all closed down for the day. So, yesterday’s trading thesis was: a better than expected PMI was assumed to be bullish for the economy and inflationary, therefore the Fed will have to raise rates faster, so sell Treasuries and sell growth stocks. Ok, that is reasonable. Now let’s dig in further, starting with that PMI. A PMI is based on a survey of purchasing managers (as its name implies). Managers are questioned about the state of their businesses. Things like backlogs, prices, employment, etc. They are asked if those specific items are better, worse, or the same as the prior month…only three choices. Looking down that list, we note that more respondents than last month saw Business Activity lower or the same. That theme of increases in same or lower were a common theme except in one area: Exports, in which 26.5% of respondents saw an increase in activity compared to 24.3% in the prior month. This, along with the cross-the-board increase in “same” responses was enough to move the PMI higher by +0.3. Another interesting outlier that was possibly missed by traders yesterday was the Prices category in which responses showed a decrease in “higher” and increases in “same” and “lower”. This can be an early sign that service providers will have less of an incentive to raise prices to consumers going forward. In, fact, if one looks closely at the number, it would be difficult to classify as a bad or a good number, but rather, just right given the current situation – another Goldilocks number. Widening our scope, we note that yield on the 2-year Treasury Note rose to around 3.5%, which really sparked all the selling in stocks. The yield on the 2-year attempts to determine where overnight rates might be in a few years. The good PMI sparked the selling, but is that 3.5% yield anything new? No, not if you follow Fed Funds futures, which have already been pricing in a 3.5% - 3.75% Fed Funds rate for year-end for some time. So, really, nothing new. Perhaps the move is simply the current state of the market’s volatility – justified by the mounting uncertainty around the economy, earnings, and the Fed’s next move… er, moves.
The VIX Volatility Index calculates the expected volatility of the S&P500 and is based on implied volatility of options on the S&P500 Index. The VIX was just below 20 in the middle of last month but recently spiked to around 26. You are probably not surprised to hear that the S&P500 Index has recently become more volatile, but if we do some quick math, we can calculate just how much volatility to expect. With a VIX at 26 we expect monthly moves of +/- 7.5% and daily moves of +/-1.6%. So, yesterday’s move was well within what we expect from the S&P on any given day… um, these days at least. Oh, there is also a Volatility Index for the tech-heavy Nasdaq 100 Index. That is around 33 which translates to monthly moves of +/- 9.5% and daily moves of +/- 2.04%. Are you surprised? Probably not. Volatility is here for now and it is not likely to abate until we have a better understanding of the Fed’s rate hiking path beyond December, and that will be determined by the Fed’s near-term success or failure as determined by the numbers. Pay attention to those if you want to better understand the daily ups and downs but stay focused on your long-term investment goals for real success.
YESTERDAY’S MARKETS
Stocks lost altitude once again yesterday after a solid services PMI caused bond yields to spike, sending growth stocks into a tailspin. The S&P500 lost -0.41%, the Dow Jones Industrial Average gave up -0.55%, the Nasdaq Composite Index declined by -0.74%, and the Russell 2000 Index dropped by -0.96%. Bonds declined and 10-year Treasury Note yields gained +15 basis points to 3.34%. Cryptos lost -1.86% and Bitcoin fell by -3.87%.
NXT UP