Stocks fell yesterday under the weight of rising Treasury yields. The Leading Economic Index fell for the eighth straight month this year just as economists are upping their forecasts for GDP growth.
No breaks to catch. Just a month ago you probably caught yourself saying something like, “self, things finally are starting to feel better in the market.” Come on, admit it. Come on, now. Don’t be ashamed, you were right to think that. Inflation has been creeping down slowly and the Fed, though still very much hawkish, is hawking about at lower altitudes. US GDP surprised everyone in a positive way, unemployment remains low, company earnings are not too bad with some notable positive surprises, and consumer confidence remains healthy. Seems like a nirvana-like scenario.
Of course, there is always another side of the coin. The economy, though growing, is still not fully fit. Last year’s draconian interest rate hikes have not quite taken full effect yet and the cost of shelter continues to skyrocket. Personal savings accumulated during the pandemic are depleting and near empty and consumer credit card debt is at nosebleed levels. Just check out the following chart to get an idea of the magnitude of credit card spending.
Many economists wonder just how long consumers can continue to spend, spend, spend, because if they stop… well, you know. Consumer spending makes up more than 2/3 of GDP. With household debt on the rise and the cost of living continuing to grow, many economists are still forecasting an economic pullback within the next year. ALTHOUGH, many are also revising their forecasts given the recent economic data. Even the Fed gave a nod to the economy with a cautiously optimistic statement or two in its last FOMC minutes. That means that the Fed may be less worried about keeping interest rates higher for longer, or even possibly raise interest rates even higher. You may think that is why stocks have been under pressure in the past few weeks. That is only part of the reason. Rising bond yields have really been the main culprit for derailing the recent tech rally. Why are bond yields rising if the Fed is soft signaling a hold?
It depends on which interest rates you are talking about. It is true that Fed Funds futures are only putting a 25% probability on a +25 basis-point bump in November (relatively low). However, the Fed has made it crystal clear that it intends to keep those rates higher for as long as possible. That means we need to look further out on the yield curve and adjust our forecasts for rates in the future… higher. That puts upward pressure on bond yields in longer maturities. Additionally, when bond traders perceive a healthy economy and elevated inflation, they push longer yields higher. That is precisely why 10-year yields hit levels not seen since 2007 yesterday. AND THOSE HIGHER YIELDS are keeping stocks under pressure. Do you know what makes those yields fall? Disinflation and perception of rough economic conditions. We would be OK with the first but maybe not so much the second. You see, in this case, too much of a good thing may be… a bad thing for your stocks. It is important to also note that equity markets have lower liquidity in these late dogdays of Wall Street’s summer, so moves are accentuated. Things may be a bit better for the economy, but stocks have to come to grips with higher yields for longer. But don’t worry, they will… they always do. Stay patient and stay focused.
WHAT’S SHAKIN’ THIS MORNIN’
Keysight Technologies Inc (KEYS) shares are lower by -10.83 in the premarket after the company announced a Revenue miss and lowered its current quarter guidance below analyst estimates. In the past 30 days 61% of analysts have updated their price targets 0 up, 8 down, and 5 unchanged. Potential average analyst target upside: +11.1%.
Applied Materials (AMAT) shares are higher by +2.38% after the company announced that it beat EPS and Revenue estimates by +9.78% and +4.35% respectively. The company also upped its current quarter guidance beyond analysts’ targets. 61% of analysts who cover the company rate it as BUY, 30% HOLD, and 8.3% as SELL. Dividend yield: 09.3%. Potential average analyst target upside: +11.1%.
YESTERDAY’S MARKETS
NEXT UP
No economic data today but next week will feature some more high-profile earnings along with more housing data, regional Fed reports, PMIs, Durable Goods Orders, and University of Michigan Sentiment. Check back in on Monday for a calendar and details.