April 25, 2018.
The 10-year T-bond yield hit 3%, a level not seen in 4 years – and markets freaked out! It wasn’t just that 3% is a symbolic level, signifying that stocks are not as attractive as they once were. But over and beyond that, it’s the trifecta of stock markets now less attractive, corporations having to pay more to fund their growth and the fear that the Fed will up rates to quell inflation, which is signified by the very rise in bond yields. If the market was in its sweet spot for the last few years, things are seemingly changing. Earnings were rising, rates were low and inflation was at bay, taking away the Fed’s license to raise borrowing costs. But now, the market is getting its comeuppance, and it hasn’t been pretty. Earnings seem to have peaked, inflation has gone up, and the market has thrown a fit given the anticipation that simply doing business will be getting more expensive, from wage costs (Trump’s immigration policies) to the cost of raw materials (Trump’s tariffs and trade war). So, if anything, the road ahead is going to be rocky, choppy…take your pick, the correction might get worse with few positive catalysts in sight.
Market Summary: The market has now fallen for 5 consecutive days. Yesterday, the Dow fell 1.74%, the S&P 500 slipping 1.34% and the NASDAQ tumbling 1.70%.
George Goncalves, Nomura’s top rate strategist noted, “I think everyone can accept the idea that most rates are linked to Treasuries in one way or the other. What this means from a macro standpoint is the cost of money is getting much more expensive for a society that’s very levered and a country that’s very levered. Our cost of doing business is going to get more onerous.”
Apple (AAPL) has been one of the stocks of note in the market over the last few days. Its stock, down 7.1% in the last 3-trading days, has shed $63.9 billion in shareholder value. It was all sparked by its supplier, Taiwan Semiconductor Manufacturing’s guidance on Thursday morning, which fell short of the market’s expectations; the company blamed the mobile sector’s “weak demand.” If you thought that things were going to get better before they get worse, GBH Insight’s Daniel Ives wrote, “Heading into Apple’s much anticipated March (FY2Q18) quarter next week the Street has gone into ‘full panic mode’ as supply chain checks out of Asia indicate that June iPhone shipments are trending well below expectations.” Expect turbulence in the stock and any ripple effects in the tech sector as a whole.
Another key Apple supplier, AMS, which makes optical sensors for the iPhone X, announced that it expects Q2 sales to be down almost 50% from Q1 sales. The company’s head of investor relations, Moritz Gmeiner, noted, “We are not able to discuss the specific customer, but we are seeing significantly lower business from a large smartphones program and that is having a strong impact on the consumer business and the company as a whole.” Resultantly, Morgan Stanley projects that other semiconductor suppliers’ numbers for the June quarter will come out beneath expectations.
In after-hour trading yesterday, Texas Instrument (TXN) traded up over 4%, the semiconductor succeeding in beating the consensus on both the top and bottom lines. In contrast, Wynn Resorts (WYNN) tumbled 2% in post-market trading; it saw a big earnings beat, revenues falling a smidgen short of the consensus. Even though, the company’s dividend was raised by 50%, its stock took a hit. Essentially, in this market, a stock would seemingly have to go three for three, a revenue beat, an earnings beat, and a forecast that outstrips the consensus. Edwards Lifesciences (EW) saw just that; its earnings topped the estimate but revenues were off. Though full-year guidance was lifted, the road there seems rocky, the company 2nd and 3rd quarter guidance weak. The stock nosedived 7% in after-hour trading.
What does that mean going into today? Like always, your finger needs to be on the market’s pulse but beware! Even if on the face of it an individual company seems to have clobbered expectations, outstripping the consensus by a large margin, that doesn’t mean the stock will soar. The market has been unforgiving –this season more than others – given the deluge of stress factors, from rising yields – and possibly rates – to Trump’s rhetoric and a global business climate that would seem to make profits more difficult to come by. Hold on to your seat – and make sure to hedge, because volatility has come back and with a passion!
Obviously, keep your eyes peeled too on the 10-year T-bond yield. There’s a high likelihood that it will move inversely to the market given the latest fears.
Wednesday’s Hot Stocks: WYNN, EW, ILMN, TXN, TSS, SHP, CREE, IRBT
Have a great trading day!