Medicare Agent News: The Nasdaq's Terrible Day

Wednesday, September 29, 2021

The Nasdaq's Terrible Day

By Nicholas Jasinski | Wednesday, September 29

Review and Preview didn’t go out last night because of a publishing error. Apologies for the delay. Here’s last night’s edition. In the meantime, this morning, stocks are attempting a comeback from yesterday’s selloff. S&P 500 futures were pointing to a 0.4% rise at Wednesday open, Nasdaq futures were up 0.5%, and Dow futures were 0.3% higher.

Yielding to Pressure. Another day, another bond market-induced selloff in the stock market. Mirroring yesterday's action, the yields on U.S. Treasury securities continued to climb, weighing most on the more growth-oriented areas of the stock market. Those are the stocks that are expected to earn the bulk of their profits in the further-out future, making them more sensitive to higher interest rates, which make today's dollars relatively more valuable.

Technology shares led the S&P 500 lower today, down nearly 3%, while the index as a whole shed 2%. The tech-heavy Nasdaq Composite lost 2.8% and the Dow Jones Industrial Average declined 1.6%.

The yield on the 10-year U.S. Treasury note rose 0.05 percentage point today, to about 1.53%, as its price declined. That yield is up nine of the past 10 trading days, to its highest level since June. It has increased by nearly a quarter of a point in that time—a small move in absolute terms, but a large one in relative terms.

There are a few forces behind the bump in bond yields over the past several days. Most obvious is the slow-moving tantrum over the Federal Reserve's imminent tapering plans. The central bank's policy committee took a more hawkish tone at their last meeting, strongly suggesting that they would begin to reduce monetary policy support for the economy in the coming months by reducing their monthly purchases of Treasuries and other assets. All else equal, that will remove a big buyer from the Treasury market—prices have begun to fall and yields rise in anticipation.

Federal Open Market Committee members also updated their forecasts for future interest rates after their meeting last week, which showed on average that officials see the Fed's next hiking cycle beginning next year, as opposed to in 2023 previously.

Also contributing to the higher bond yields of late is a surge in energy prices. Natural gas prices have surged almost 22% over the past four trading days, to their highest level since early 2014. Brent crude oil, the international benchmark, briefly topped $80 a barrel today, its highest since late 2018, before declining slightly in the afternoon. West Texas Intermediate, the U.S. price, is up 10% in September, to more than $75 a barrel.

Gas and energy prices are inputs into nearly every good and service in the economy. It's just one more source of potential inflationary pressure these days, on top of supply chain bottlenecks, labor shortages, and more. When inflation is expected to increase, bond yields tend to mirror that rise. Investors are essentially demanding more nominal yield to make up for the reduced value of their future coupon payments after inflation.

Barron's Pierre Briançon and Avi Salzman have more on the latest energy market action here.

Finally, there's the latest Washington drama surrounding the U.S. federal government's debt ceiling. The national debt currently stands at over $28 trillion, and an act of Congress is needed to lift the cap and allow the government to borrow more to pay for already enacted spending. Whether or not the U.S. defaults on its debt—a worst-case scenario that would cause financial panic worldwide—is caught up in political wrangling over a pair of infrastructure bills, the government's next budget, and a litany of other partisan fights.

Congress needs to pass a new budget or a stopgap funding bill by Thursday to avoid a government shutdown beginning on Oct. 1. The Treasury says it can move money around and defer some payments until about the middle of October before the debt ceiling means the government won't be able to meet its obligations.

Barron's Evie Liu has more on the four deadlines Washington is currently facing here.

Taking a purely investor lens on the showdown, there appears to be a bit of a game of chicken afoot. The stock market isn't pricing in a U.S. debt default because it expects Congress to act. But lawmakers could be letting things get awfully close to the deadline because they don't feel the political pressure of a tumbling stock market. The higher bond yields of late could be pricing in some greater odds of a default, but not clearly nothing major either.

Here's Chris Harvey, head of equity strategy at Wells Fargo Securities, writing to clients today:

Is the market's benign reaction to a potential shutdown causing Congress to be too complacent? In other words, does the market need to sell off to shock politicians into action? Republicans appear to have no motivation to budge, and the Democrats are slowly realizing that (as the party with governing control) they likely will be blamed for any shutdown.

If substantial progress is not made by mid-October, we think the markets will get into the act. Until then, we need to see how much the Democrats are willing to risk 'political capital' on this issue. With President Biden's polls reaching a new low (Rasmussen, 9/27: 40% approval / 58% disapprove), we think the answer is not much.

Our best guess is the Democrats will reach an intraparty agreement by mid/late-October. This is when our Econ Group and others (including Secretary Yellen) believes the projected 'X date' window opens – i.e., the day the government actually can no longer fund its obligations.

In the meantime, the recipe seems to be for still higher bond yields, and generally stronger tailwinds for cyclicals and value stocks than growth leaders. Energy stocks could enjoy stronger earnings from higher oil and gas prices. Banks tend to do well in higher-rate environments, as they can charge more for their loans. That compares with still faster growing but pricier technology stocks, which face greater pressure on their valuation multiples.

Barron's Jacob Sonenshine has a few more ideas for stocks that can work in the current environment. Read his latest report here.