PsychoMarket Recap – Monday, October 4, 2021
After an encouraging day last Friday, the stock market sank once again as market participants continue to closely monitor developments out of Washington and wait for upcoming economic and earnings data to gauge concerns over supply chain disruptions and inflation. Tech stocks once again came under pressure as the benchmark 10-year Treasury yield continues to rise. The Nasdaq (QQQ) close the day 2.1% lower, which means the tech-heavy index is now roughly 8% below its previous all-time high. The S&P 500 (SPY) closed 1.29% lower, the Dow Jones (DIA) closed 0.92%, and the Russell 2000 (IWM), which tracks the performance of small-caps, fell 0.91%.
We’ve seen previous episodes of rising rates, both earlier this year as well as when the Fed first announced intentions to begin tapering quantitative easing in the not too distant future. Each of these episodes caused a hiccup but didn’t derail the broader bull market. According to Edward Jones, yields went from below 1% to 1.75% during the first three months of this year, a period that included pullbacks in the S&P 500 of 3.7% for four days and 4.2% for 12 days. However, during that entire three-month stretch in which rates were rising, the stock market rose more than 7%. In this current spate, 10-year rates have jumped from 1.30% on September 15 to as high as 1.54% last week, reflecting a renewed concern over inflation pressures and reduced Fed stimulus expectations
Stocks are struggling to regain their footing after the September selloff, given that many of the concerns that sparked last month’s drop remain. Congressional lawmakers have yet to come to an agreement on a solution to raise the debt limit to prevent a potential government default sometime mid-October. Failure to do so would be catastrophic for the US economy. As a reminder, Congress successfully averted a government shutdown last week. The House approved a bill late on Wednesday suspending the debt limit through December 2022. The Senate could vote on it as early as this week Senate Majority Leader Chuck Schumer said, but Republicans are expected to block it again as they have twice before. This is an evolving situation. In my humble opinion, I think the Republicans are playing political games with the debt ceiling and will pass it last minute, similar to the spending bill to avoid the government shutdown.
Put simply, a default by the US would be an economic and political disaster that must be avoided. I cannot fathom the government willingly plunging the US into an unprecedented financial crisis for political reasons, though one can never guess the future. According to a report by Moody’s Analytics, one of the three big along with Standard & Poor's and Fitch Group, approximately 6 million jobs would be lost and the unemployment would spike dramatically, US GDP would decline, and there would be an irrevocable stain on the faith and strength of US financial markets. “Internationally, the United States will have for the first time undermined the full faith and credit of its own currency — a blow to our standing in the world and a boon for our adversaries such as China who are arguing to the world that the US is on the decline”
The report goes on to say, “Global financial markets and the economy would be upended, and even if resolved quickly, Americans would pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized and that a time may come when they would not be paid what they are owed when owed it. To compensate for this risk, they will demand higher interest rates on the Treasury bonds they purchase. That will exacerbate our daunting long-term fiscal challenges and be a lasting corrosive on the economy, significantly diminishing it.”
Here is a link to the full report, I encourage you to read it
Looking ahead, the September Jobs Report will be released later this week. Market participantsd are hoping to see payroll gains accelerate after a shockingly disappointing August report, which shoed just 235,000 new payrolls gains verses more than 700,000 expected. Consensus economists anticipate that 475,000 payrolls returned in September, and that the unemployment rate fell to 5.1%, or the lowest since March 2020.
Highlights
- Facebook (FB) underperformed the market after major outages and disruptions of service were reported across the company’s suite of products.
- Amazon (AMZN) is suffering its worst streak of underperformance in roughly two years and has turned negative year-to-date.
- GlobalFoundries, which was created by the divestiture of the manufacturing arm of AMD reportedly filed for a US IPO.
- Tesla (TSLA) unexpectedly topped estimates for third-quarter deliveries, despite the global semiconductor shortage that is affecting all automakers. Comparatively, Ford (F) deliveries were down 27.4% in the third quarter. While one can’t make direct comparisons due to scale differences, still very impressive to see Tesla (TSLA) successfully navigate the shortage.
- A group of Tesla investors filed a court filing to argue that Elon Musk to repay the company $9.4 billion for the benefits he received after Tesla bought SolarCity, which Musk partly owned.
- Factory orders were up 1.2% in August month-on-month, according to Commerce Department data on Monday. This came in faster than the 1.0% rise expected, according to Bloomberg consensus data, and represented a fourth consecutive monthly advance.
- Qualcomm (QCOM) and investment partnership firm SSW Partners announced an agreement to purchase automobile technology company Veoneer (VNE) Monday morning for $37 a share, which values the company at $4.5 billion
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