What's Driving September's Market Anxiety?
The Dow Jones Industrial Average declined for a fifth straight day Friday as economic uncertainty loomed.
The blue-chip index shed 271.7 points, or 0.8%, to close at 34,607.72. The S&P 500 dipped nearly 0.8% to 4,458.58, and the Nasdaq Composite retreated about 0.9% to 15,115.49.
Apple was the biggest laggard weighing on the Dow, down 3.3%. The tech giant can no longer force developers to use in-app purchasing, a federal judge ruled Friday in a closely watched trial between Apple and Epic Games.
The S&P 500 and the Dow haven’t recovered since the poor jobs report last Friday, falling each day since, including all four trading days of this holiday-shortened week.
For the week, the Dow is down roughly 2.2% in its second negative week in a row. The S&P 500 is off about 1.7% for the week, while the Nasdaq Composite is 1.6% lower.
Investors are worried about persistent Covid cases slowing the economy just as hot inflation causes the Federal Reserve to take away easy policies.
“It’s been a week that’s really taken its cue from the delta variant,” said Jack Ablin, Cresset Capital Management’s founding partner and CIO. “Investors are wringing their hands over growth but are seeing higher inflation at the same time.”
The August producer prices index released Friday showed wholesale costs for businesses rose 8.3% on an annual basis, its biggest advance on record since at least 2010. The PPI accelerated 0.7% for the month, above the 0.6% Dow Jones estimate. The more important consumer price index for August will be released on Tuesday.
The Federal Reserve kicks off a two-day meeting on Sept. 21, and the Street will be watching for an update on the central bank’s bond-buying program. On Thursday, the European Central Bank left its monetary policy unchanged, but said that it will slow the pace of its asset-purchase program.
“The pace of policy changes will be gradual enough not to derail the economic recovery or the equity rally, while the differences between the more hawkish and more dovish central banks will create opportunities,” said Mark Haefele, UBS Global Wealth Management chief investment officer.
“We expect major central banks to remain supportive of growth, keeping rates lower for longer. This is positive for equity markets, particularly cyclical and value areas of the market,” he added.
President Joe Biden stiffened his stance on getting Americans vaccinated on Thursday, outlining a plan to mandate Covid vaccines for millions. Federal employees will be required to get a Covid vaccine and the president is asking the Labor Department to require employers with more than 100 employees to mandate vaccines or weekly testing.
“Ultimately, we see stocks finishing September strongly,” wrote Fundstrat’s Tom Lee in a note to clients late Thursday. “Delta variant organically looks to be slowing... White House plan really brings hammer to containing COVID-19.”
Even though Tom Lee is predicting a profitable period for investors in September, earlier this week, he also warned that a 10% correction could come in October:
Longtime market bull Tom Lee is predicting a profitable period for investors in September.
According to Lee, the S&P 500 is positioned to surge more than 100 points this month. However, he warns the positive momentum has an expiration date.
“We could have a really strong rally in September,” the Fundstrat Global Advisors’ co-founder and head of research told CNBC’s “Trading Nation” on Friday. “We didn’t think there was a window for a 10% correction for most of 2021. The window where we think you could start to have potentially a 10% pullback is October.”Lee attributes the vulnerability to growing fiscal and monetary policy risks — as well as uncertainty surrounding the pandemic and flu season.
“We get that much closer to tapering,” the CNBC contributor said. “That’s really when the debt ceiling rhetoric comes back, and if there are going to be concerns about the debt ceiling, the bond market could panic.”
When there’s upheaval in the bond market, it typically spills to stocks. But in the meantime, Lee indicates he would be a buyer.
He sees uncertainty regarding Covid-19 delta cases and its economic impact pushing the Federal Reserve to stay dovish for longer. According to Lee, it’s a recipe for new market highs.
“The U.S. is still in an underlying expansion. This is a risk on formula,” said Lee, who ran equity strategy for JPMorgan Chase from 2007 until 2014.
He cites a crude oil price comeback and bitcoin’s return above $50,000 as evidence.
Lee’s top market picks still involve trades most tied to the economic recovery. He particularly likes energy, and materials. He also sees opportunities in FAANG stocks, otherwise known as Facebook, Amazon, Apple, Netflix and Alphabet.
“My guess is that quite a number of investors thought we’d have a 10% correction in August,” Lee said. “So, money was taken off the table. Usually when people re-risk they start buying cyclical and epicenter ideas.”
Lee believes the S&P 500 could exceed 4,650 in September — 50 points above his year-end target. On Friday, the index closed at 4,535.43 and is about a quarter of a percent below its record high.
While Tom Lee likes FAANG stocks, Yahoo Finance's Brian Sossi reports that another well-known strategist is warning these stocks can get clobbered because of the Federal Reserve:
Investors in popular FAANG stocks have enjoyed a great run over the last year (especially the past month) as a combination of super low interest rates from the Federal Reserve and high growth from the individual tech companies has made an easy bull case.
But with the Fed on the cusp of beginning a tapering of its pandemic-era bond buying program — which could push up rates from the rock bottom that risk-taking traders have loved —the FAANG trade could be nearing a pullback.
"I think the tapering is one [part] of the equation that I think should ultimately hurt the valuations of those high multiple stocks if the back end [of the rate curve] starts to move with the tapering announcement officially," said Morgan Stanley chief investment officer and chief U.S. equity strategist Mike Wilson on Yahoo Finance Live.
The closely followed strategist says FAANG [Facebook, Apple, Amazon, Netflix and Google] stocks and other high growth names could also be hurt as more people return to offices.
"The other risk that people don't talk about much for those stocks is that these are some of the prime beneficiaries of the work from home phenomenon. I think people are being complacent around the payback for demand for secular growers. It doesn't change the secular growth story, but they are cyclical to some degree and there could be payback in the earnings estimates. I think that's the bigger risk than it is say valuation or rates," Wilson explains.
To be sure, the FAANG stocks have enjoyed an impressive run so any pullback would likely come as a surprise to hardcore fans of the group.
For instance, Netflix shares are near a record high after a one-month 17% surge on optimism around its upcoming content slate. Over the past year, the stock has logged a respectable 21% gain.Apple is up about 4% inside of a month, pushing its one-year gain to about 32% as excitement on the next iPhone builds. Facebook is up roughly 40% in one-year, or 5% in the past month alone with its financials continuing to be strong during the pandemic. Google has surged 85% in the last year, or 4% in a month as the company's profit outlook has improved.
The lone laggard has been Amazon, which is only up 7% in one year's time amid a tempering in online shopping after a big 2020.
"What's most interesting is the continuation of the digital transformation, and investors really realizing that when we see these tech stocks they seem to be a little bit resilient to a lot of the other pressures that are put on other sectors," said Plexo Capital founding managing partner Lo Toney on Yahoo Finance Live of the move higher in FAANG stocks.
But that resiliency may soon be tested.
No doubt about it, FAANG stocks have been on a tear over the past month, but that leaves them vulnerable to any negative surprise.
To wit, Apple's lucrative App Store business received a major blow Friday thanks to a federal judge’s decision in the company’s legal battle with Epic Games.
Judge Yvonne Gonzalez Rogers handed down the decision in the closely watched trial, and issued an injunction that said Apple will no longer be allowed to prohibit developers from providing links or other communications that direct users away from Apple in-app purchasing. Apple typically takes a 15% to 30% cut of gross sales.
The injunction addresses a longstanding developer complaint and raises the possibility that developers could direct their users to their website to subscribe to or purchase digital content, hurting Apple’s App Store sales, which grossed an estimated $64 billion in 2020.Apple stock dropped more than 3% in trading Friday.
Apple Erases Nearly $85 Billion in Value After App Store Ruling https://t.co/Nm02AOmJkY via @Yahoo
— Leo Kolivakis (@PensionPulse) September 10, 2021
Alright, so what now? Just keep buying the dips until the Fed cries uncle and starts tapering?
I'm not sure, long bond yields crept up a bit today as producer prices rose a record 8.3% from a year ago, but for the week, long bonds actually rallied as a slowdown is taking hold in the US.
Last week, I warned my readers there is more risk to this bull market than meets the eye.
My thinking hasn't changed. It's not the time to chase Chase Coleman and other elite hedge fund gurus, it's the time to worry about risks.
In his latest weekly comment, Francois Trahan of Trahan Macro Research examines what can go wrong with this Goldi-like market.
Institutional clients should take the time to read his entire comment but I will share this snapshot from the bottom of page 2 which is his focus this week:
Basically, there's a lot that can go wrong here but he leaves open the possibility that rates might decline further and COVID risks abate and that can propel risk assets higher.
For his part, Martin Roberge of Canaccord Genuity warns in his latest weekly wrap-up that it's time to look beyond the fourth wave:
Consistent with the news flow, our focus this week is on world central banks and their reaction function in face of the Delta variant. In all, we believe central banks have become increasingly impervious to rising new Covid-19 cases since governments look reluctant to choke growth with lockdowns. Meanwhile, inflation appears more persistent than first thought (more below). As we show in our Chart of the Week, fast rising new infections cases this summer did not dent business activity, leading to rate hikes from the Bank of Korea and the Bank of Mexico. Looking at the big picture, this appears like a global trend as we calculate that world central banks have delivered 50 rate hikes so far in 2021 against 9 rate cuts. With the ECB announcement this week, we believe it is just a matter of time before the Fed also announces a tapering of its QE program, perhaps as soon as at the September meeting despite weaker-than-expected nonfarm payrolls last week. The dot plot could also surprise with a sooner-than-expected lift off date for interest rates. As a reminder, the Fed is currently buying $80B worth of Treasuries and $40B of MBS each month. With housing prices skyrocketing over the past year, we believe the emphasis will be on reducing MBS purchases first.
Will the Fed taper sooner rather than later? In all likelihood, I think that's where this market is leaning toward.
One thing is clear, however, more strategists are warning a storm is brewing in the US stock market:
Strategists from almost all the top Wall Street banks have come out this week with a nervous message about the U.S. stock market.
The latest views hail from Deutsche Bank AG and Goldman Sachs Group Inc., and echo earlier pronouncements from Morgan Stanley, Citigroup Inc. and Bank of America Corp.
While investment banks tend to be measured in their outlooks, there are common threads that underpin their predictions that the market is vulnerable. Valuations are at historical extremes, stocks have rallied non-stop for seven months, the economy looks soft and the Federal Reserve is preparing to taper stimulus.
“The risk that the correction is hard is growing,” wrote Deutsche Bank equity strategists including Binky Chadha. “Valuation corrections don’t always require market pullbacks, but they do constrain returns.”
Wall Street Braces for Stumble in U.S. Stocks on Relentless Tear
Some of the market strain is already showing up. The S&P 500 has fallen about 1% in the past three sessions, though U.S. futures were indicated higher on Friday morning. The index has soared 100% since the March 2020 lows.
Here’s a rundown of commentary this week:
Binky Chadha, equity strategist at Deutsche Bank
“Equity valuations at the market level are historically extreme on almost any metric.” Trailing and forward price-earnings ratios, as well as valuation metrics based on enterprise value and cash flow, are all in the 90th percentiles, he said.
James Congdon, co-head of Canaccord Genuity’s research division Quest
“Global stock markets may be entering a period of turmoil.” He added that investors should favor stronger businesses with robust cash flows over weaker and more speculative companies.
Dominic Wilson, strategist in economics research at Goldman Sachs
“While the broad U.S. market outlook is solid in our central case, we think peak cyclical optimism in the U.S. may be behind us.” The strategists said hedges look attractive, especially on a shorter time horizon.
Andrew Sheets, cross-asset strategist at Morgan Stanley
“We are going to have a period where data is going to be weak in September at the time when you have a heightened risk of delta variant and school reopening.” The bank cut U.S. equities to underweight and global stocks to equal-weight on Tuesday.
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America
“The S&P 500 has essentially turned into a 36-year, zero-coupon bond,” she said. “If you look at the duration of the market today, it’s basically longer duration than it’s ever been. This is what scares me.”
The threat is that “any move higher in the cost of capital via interest rates, credit spreads, equity risk premia, that’s basically going to be a huge knock on the market relative to the sensitivity we’ve seen in the past,” she said.
A lot of nervous Nellies out there so don't be surprised if stocks keep climbing the wall of worry.
The market is all about positioning here. If the bulk of investors are worried and hedging their bets, it can easily run up more.
Still, one thing is for sure, you really need to pick your spots carefully in this market or you can easily sustain a massive blow.
Keep in mind all sectors were down this week, which isn't exactly a good sign:
But even though it wasn't a great week, some stocks delivered great returns:
This just tells me the market is shifting, passive investing won't cut it, you need top stock pickers here to add value.
Alright, let me wrap it up there.
Below, market bull Tom Lee is predicting a profitable period for investors in September but warns the positive momentum has an expiration date.
Also, Ellen Lee, Causeway Capital Management fundamental portfolio manager, and Tiffany McGhee, Pivotal Advisors CEO and CIO, joins 'Squawk Box' to discuss what to expect in September as the month tends to be the worst trading month and as delta cases rise.
Third, people should not be dissuaded from investing, Josh Brown says, even as analysts release more and more warnings about an impending correction. Jon Najarian also weighs in on whether the market's momentum will save it from a drop.
Fourth, CNBC's "Squawk Box" team discusses markets, investment strategy and more with Leon Cooperman, chairman and CEO of Omega Family Office.
Lastly, Ed Yardeni, Yardeni Research president, joins 'Squawk Box' to discuss why he thinks the underlying trend remains bullish for the market.
There, I ended it on a positive note. Have a great weekend everyone!
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