Stocks Struggle Ahead of Jackson Hole

Fed Chairman Jerome Powell

The S&P 500 and Nasdaq Composite were relatively unchanged on Tuesday, with the enthusiasm from the prior session waning.

The S&P 500 rose by 0.2%, and the Nasdaq saw a 0.4% increase. Conversely, the Dow Jones Industrial Average trailed, declining by 61 points or around 0.2%.

Leading the S&P 500 higher, the communication services and consumer discretionary sectors showed strong performance. Lowe’s stock appreciated by 3.4% after the company reported mixed outcomes but reaffirmed its yearly guidance. Meanwhile, Hasbro stood out as the best-performing S&P 500 stock, surging over 7.5%.

The Nasdaq had its most significant increase for the month during yesterday’s trading, rising by 1.6%. Simultaneously, the S&P 500 grew nearly 0.7%. Both indices broke a four-day losing streak, with the Nasdaq recording its largest single-day surge since August. The Dow, however, decreased by 0.1%.

Remarkably, even as the 10-year Treasury yield reached its highest level since November 2007, both the S&P and the tech-heavy Nasdaq managed to post gains. Historically, tech stocks face challenges in a high-interest rate environment. The synchronized rise with the yields yesterday left Wall Street intrigued. Today, the yields saw a slight reduction.

“We’re seeing a positive return in the stock market, [which] we didn’t see last week,” said Katy Kaminski, AlphaSimplex’s chief market strategist. “We think rates are going to be higher for longer and maybe the stock market’s okay with it.”

However, not everyone on Wall Street is optimistic that the rally will persist.

“Typically, spikes in Treasury yields expose other areas of weakness. The rise in yields will make debt refinancing even more burdensome,” explained Megan Horneman, Verdence Capital Advisors’ chief investment officer. She added, “Another reason yields are rising is that investors are beginning to get realistic on the Fed’s path.”

“This is a risk to tech stocks and growth stocks with high PE multiples. Therefore, we expect additional downside in the equity market is likely,” Horneman further stated.

In other news, July saw a decline in home sales as prices surged. Sales were down 2.2% from June, more than the Dow Jones’ 0.2% estimated decrease. Sales summed up to 4.07 million, which was lower than the anticipated 4.15 million. The median sales price rose by 1.9% to $406,700.

Charles Schwab also announced plans for downsizing and some office closures, as revealed in a recent filing with the U.S. Securities and Exchange Commission. This applied further pressure to office REITs, as fears of a coming commercial real estate crunch continue to build.

Bank shares similarly fell considering regional banks carry the majority of commercial real estate loans, which are defaulting at an increased pace.

From a broader market perspective, J.P. Morgan’s chief market strategist, Marko Kolanovic, said in a note to clients this morning that earnings estimates are still too optimistic for most stocks.

“The consensus 2024 EPS growth rate of 12% appears too optimistic given an aging business cycle with very restrictive monetary policy, still rising cost of capital, lapping of very easy fiscal policy, eroding consumer savings and household liquidity, low unemployment rate, and increasing risk of a recession for some of the largest economies abroad (e.g., China, Germany),” Kolanovic wrote.

Despite this, he still anticipates a “soft/no landing” outcome for the US economy but warns investors to not become overly complacent. And while that might be valuable advice for buy-and-hold investors, short-term traders need something far more “tactical” to sink their teeth into.

Long story short, unless the S&P can put together a few more winning sessions, there’s no reason to flip bullish just yet. Don’t forget that Powell is about to speak at the Fed symposium at Jackson Hole on Friday at 10:05 am EST. If he leans more hawkish than expected, stocks should fall as yields rise further, putting every stock – not just tech – in an even deeper hole.



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