WASHINGTON, April 24, 2018: We had an opportunity to play hooky in Williamsburg, Virginia over the past weekend. And we made the most of it by covering the annual Williamsburg Taste Festival. (Articles forthcoming.) It was just as well as stocks continue on their merry, bi-polar way. Case in point: Markets ignored the past week’s stream of generally much-improved earnings reports. They’ve chosen instead to fixate on the inevitable breaching of the dreaded 3 percent yield on the U.S. ten year bond, something that’s just occurred.
Earnings Scout CEO Nick Raiche, commenting earlier Tuesday to CNBC noted the following. (No link, as cited article has been rewritten).
“‘We are recording the best growth in any quarter since 2010.’
“‘What we like best about this earnings season is the collective sales growth rate of 10.58% for the companies that have reported,” Raich added.
“‘Additionally, 2Q 2018 estimates are inching higher for companies that have reported so far, and overall 2H 2018 estimates, which many felt were too high, are inching higher.’
“Corporate earnings this season have mostly outperformed analyst expectations thus far. Of the S&P 500 companies that have reported as of Tuesday morning, 83 percent have posted better-than-forecast earnings, according to FactSet.”
But no matter. It’s 3 percent ten year bond rate freakology that seems to be in control today. Now, since we’ve just gotten back in town, we frankly have no idea whether that magic number was exceeded some time late Monday or on Tuesday morning. But that 3 percent ten year bond rate designates the trip switch the bears have long awaited, Now that it’s been breached, they’re hammering stocks hard after a nicely positive Tuesday open.
As of 12:45 p.m. ET, the Dow was down 282.33 points – a 1.15 percent drop. The broader-based S&P 500 – the average the pros generally track as a market barometer – is off 21.57 for a 0.81 percent loss. And the tech-heavy NASDAQ is down an appalling 96.31 points for a whopping 1.35 percent decline on the day.
(UPDATE: As of 1:15 ET, the Dow has plunged further. It currently stands at 24047.08, down nearly 1.65 percent)
Intriguingly, the Russell 2000 average, an average we rarely cite here, is only down 3.17 points, barely a 0.2 percent loss on the day thus far. The Russell 2000 tracks the bottom 2000 stocks in the lesser-known Russell 3000 index, which covers a broad universe of common stocks. Since the Russell 2000 is carved out of the 3000’s lower tiers, it represents stocks that investors regard as “small cap.” That’s true even though some of these allegedly small cap stocks can be pretty big companies.
But to the point. As a key index of smaller cap companies, the Russell 2000 tends to trade differently from the Dow or the S&P 500, particularly in times of market stress.
Given current international trade issues and tariff questions, it’s the larger-cap stocks – the companies that deal substantially in global trade – that tend to get whacked harder than small caps. That’s because, rightly or wrongly, small cap companies depend more on internal rather than external business. Thus, traders view them as less-affected than large-cap companies when nasty trade issues arise.
This, in turn, is why, on a nasty day like today, smaller cap stocks like the ones in the Russell 2000 tend to perform better than their big brothers and sisters on the Dow and the S&P 500.
But it’s not trade that’s front and center today. It’s that interest rate pop in the ten year bond rate. After hitting the 3 percent target, the ten year bond dropped back down into the lower 2.9 percent range. But as we write this article, the rate currently stands at 2.981. Since bond trading closes earlier than stock trading, that means the bond bullies are making a push for a 3 percent close.
Fact is, both bond bears (aka, bond vigilantes) and stock bears once again wish to make a point and trade on it. The Fed will shortly raise interest rates once again, probably in June. And markets are anticipating that move by pushing current 10 year bond rates above the 3 percent mark. Historically, this always has an unpleasant effect on stocks. And that’s what’s dominating today’s market action, not anything else. For now, at least.
Ten year bond blues. Time to invest?
Only risk takers and the foolhardy risk their money in markets like this one. The whipsawing is just too treacherous to time. Stocks can and will turn on the proverbial dime. So each purchase, or sale for that matter, remains a real crapshoot in this environment.
That’s why we persist in our current strategy of paring down our positions in individual stocks. Next, we move some of that money, in tiny increments, into representative ETFs that remain fairly safe. Next, we move the rest of the cash into a relatively high-yielding, sort-of money market fund. There it will stay, awaiting buying opportunities.
We think the Fed is getting ahead of itself with these relentless and somewhat unnecessary interest rate hikes. Aside from fuel prices, which run in a different universe, we see little inflation to guard against.
But the Fed has a tradition of engineering unnecessary recessions. Doing so would certainly help the Deep State (i.e., America’s Socialist Party) regain control of Congress this fall. So maybe that’s their real motivation. But who knows? Just watch that ten year bond rate. The higher it goes, the more nervous markets will get.
(Final Trade: The Dow closed down 423.32,Tuesday, off approximately 1.73 percent on the day.)