Lower rates can be good for stocks, but not all of them

Stocks fell yesterday, snapping a 4-day winning streak on continued Fed policy fears and some weak earnings in the banking sector. The Nasdaq managed a close in the green as tech names caught a bid.

It’s technical. We have been a bit obsessed with interest rates over the past, say, 18 months. And for good reason! They not only dictate borrowing costs but also, as we are learning painfully, have a big impact on the value of our stock portfolios. I have covered the reason why interest rates have a powerful impact on growth stocks many times. If you are curious, you can read about it in my monthly newsletter “Why are my growth stocks falling?” at this link: https://www.siebert.com/blog/2022/09/01/why-are-my-growth-stocks-falling/ . The Fed raised the Fed Funds Rate starting last March but it was threatening to do so as early as November of 2021. That prompted bond traders to sell causing Treasury Bond yields across the yield curve to go higher. Initially, the entire yield curve shifted higher. As the Fed began aggressively raising rates early last year, the yield curve flattened and then inverted. Though many stock investors would never admit it in public, the seasoned ones are well-aware of the bond market’s high success rate for not only predicting economy health but also in predicting equity markets’ performance.

Stocks have performed well since we turned the calendar to 2023. The S&P500 is up by +3.95% and the Nasdaq Composite is up by +6.01% year to date. Wow, now that is somewhat different than that bitter pill that we all swallowed last year in which the growth-heavy Nasdaq was beaten senseless on the regular. Could bond yields have something to do with the recent gains in stocks? You bet they could. Looking further back, we can see that the S&P gained some +8.5% since mid-October of last year. During that same period, 10-year Treasury Note yields fell from around 4% to around 3.5%. Remember that bond prices move in the opposite direction of yields, so that fall in yields was a bond rally. Longer maturity yields fall when bond traders are expecting economic strife. The bond market began to anticipate a rougher landing and even possibly, a recession resulting from the Fed’s aggressive policy. Now, on to the big question: will yields continue to fall and pave the way for further gains in the stock market?

Of course, that depends on many factors, principal of which is the Fed and the market’s anticipation of the Bank’s next moves. But maybe we can glean something from the charts. Let’s take a look, shall we? Below is a price chart of the 10-year Treasury Note generic future. You will notice how the price fell significantly since the late summer of 2021 and throughout 2022. The price hit bottom in November of last and began to climb. This is what helped our stock rally along. There are two other important indicators to look at on this chart. The first is the Fibonacci Retracement lines which show that there is a resistance point right above the current level. If the Notes can break through that 23.6% retracement line, we could see more rallying. We can also see the yellow-colored 200-day moving average just above the current price. That too will serve as resistance which, if penetrated, would be bullish for bonds… and stocks. Finally, you will note that the 50-day moving average just crossed over the 100-day moving average for the first time since… wouldn’t you know it, November of 2021. So, according to the charts, we are close but not quite there yet. If futures can break out, the future for stocks can look a bit brighter.

WHAT’S SHAKIN’

The PNC Financial Services Group Inc (PNC) shares are lower by -3.65% in the premarket after it announced that it missed EPS targets by -11.76. The company managed to beat Revenue estimates by +0.88% which it attributed to higher interest rates, but it expects interest margins to decline in the current year. Dividend yield: 3.70%. Potential average analyst target upside: +11.1%.

Moderna Inc (MRNA) shares are higher by +7.56% in the premarket after the company announced that its mRNA-1345 vaccine for treating RSV was 83.7% in its Phase 3 trials. The company is due to announce its Q4 earnings on Feb. 24. Potential average analyst target upside: +11.4%.

YESTERDAY’S MARKETS

Stocks fell yesterday in response to continued fears of Fed policy. The S&P500 slipped by -0.20%, the Dow Jones Industrial Average dropped by -1.14%, the Nasdaq Composite Index gained +0.14%, and the Russell 2000 declined by -0.15%. Bonds slipped and 10-year Treasury Note yields added +4 basis points to 3.54%. Cryptos jumped by +10.4% and Bitcoin gained +0.87%.

NEXT UP

• Retail Sales (Dec) are expected to have fallen by -0.9% after a -0.6% decline in November.
• Producer Price Index / PPI (Dec) is expected to come in at +6.8%, down from the prior month’s +7.4% reading.
• Industrial Production (Dec) may register a -0.1% slip after falling by -0.2% in November.
• NAHB Housing Market Index (Jan) is expected to remain steady at 31.
• Federal Reserve Beige Book will be released at 2:00 PM Wall Street Time.
• Fed Speakers today: Bostic, Harker, and Logan.