What's Causing The Bond Yield Scare?

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Posted: Oct 05, 2018 12:45 PM
What's Causing The Bond Yield Scare?

Yesterday was one of those sessions that all bull market rallies need from time to time to simply to test resolve and shake out weak hands.  Major indices closed off the lows of the session suggesting smart money went to work. (There are some delicious values being created, especially in technology, but high Beta names are the worst to bottom fish for those with queasy stomachs.  Heck, even those with cast-iron stomachs can move too early.)

Still, there are still areas of concern.

I’ve been pointing to market breadth for several reasons, including a broad rally is most desirable and has the most potential to continue. 

Of course, there were more decliners and down volume than advancers and up volume, but the milestones were ugly.

NYSE

  • 49 new highs
  • 517 new lows

NASDAQ

  • 35 new highs
  • 183 new lows

The S&P 500 is fractured as well as 40% of the index is in the red for 2018.  Moreover, there has been severe carnage in many stocks (for those that are superstitious of looking for quirky investment approaches staying away from any company that begins with a “W” has been wise).

  • 209 stocks are lower 2018
  • 58 stocks are down more than 10%
  • 40 stocks are down more than 20%

Bond Yield Scare

Although higher yields triggered selling, a three-handle has never been associated with stock market tops in the past.

10 Year Yield

Be that as it may, there are glaring areas in the economy that are problematic and won’t improve with high interest rates. Stocks associated with housing and homebuilding were already taking it on the chin, but the selling has picked up speed.

Home Construction ETF (ITB)

All eyes on the jobs report and on wages this morning.  Anecdotally, and connecting the dots from other data sources, it leads me to believe median wages could increase more than 3% year over year.  That should be great news, but in February, the hint of higher wages on Main Street scared the heck out of Wall Street.

So, can more jobs, higher wages and a higher stock market all co-exist or would that be too much winning?   I think the answer is yes, but it remains to be seen.  Look for a lot of head fakes after the report.

Today’s Session

The headline number fell flat of expectations and well below what I thought was possible. That said, I think revisions over the next two months will take the September 134,000 number north of 200,000.  Note: the revisions to July (165,000) and August (270,000) came to +87,000.

The report should be music to the ears of Wall Street, as 2.8% wage growth is not too strong, but it is strong enough to maintain consumer spending trends.

The biggest question is how the Fed will interpret 3.7% unemployment as labor force participation increased at a slower pace than we modeled.

Dirty Fingernail Job Growth Continues

Goods Producing Jobs the Experts said were gone forever:

  • Construction 23,000 / 315,000 past year
  • Manufacturing 18,000 / 278,000 past year
  • Mining 6,000 / 53,000 past year