- Main U.S. indexes red; chip index, NYFANG hit harder
- All major S&P 500 sectors down: tech weakest group
- Dollar up; gold ~flat; crude, bitcoin decline
- U.S. 10-Year Treasury yield falls to ~1.93%
Feb 18 – Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at firstname.lastname@example.org
SUPPLY CHAIN ISSUES NOT GUMMING UP INDIVIDUAL INVESTOR PLANS (1307 EST/1807 GMT)
As part of the most recent American Association of Individual Investors (AAII) Sentiment Survey read more , AAII asked its members to share their thoughts about how supply chain issues are impacting their investing decisions.
Register now for FREE unlimited access to Reuters.com
AAII reported that about 60% of respondents said supply chain issues are having little to no impact on their decisions since many are long-term investors, and supply chain issues are perceived to be a short-term problem.
Against this, 12% of respondents stated that supply chain issues are negatively impacting their investment decisions.
Around 9% cited a specific stock impact, mentioning their own strategy of moving toward or shifting away from certain kinds of stocks.
Meanwhile, 8% of respondents said that the supply chain is having a positive impact on their decisions, “presenting them with buying opportunities.” Roughly 3% of respondents have mixed feelings about how supply chain issues are impacting them and 2% of respondents are neutral. Only 2% of respondents mentioned “a specific bond impact arising due to supply chain issues.”
From the survey, here are a couple of investor quotes on the matter:
“I am thinking more about investing in energy and financial stocks. There already is a substantial investment in their supply chain (hydrocarbons, money and credit). Maybe I should look at utility stocks along with certain real estate investment trusts (REITs).”
“I think the supply chain issues are transitory, but I am not sure how to invest based on that belief except to discount those issues in figuring the long-term value of assets.”
YIELD CURVE INVERSION MIGHT NOT BE AS SCARY AS THOUGHT (1300 EST/1800 GMT)
One of BofA’s key themes has been that the economy can withstand a normalization of Fed policy. A bearish counter-argument is the risk of a yield curve inversion, signaling a recession is likely.
According to a BofA Economic Weekly research note, yield curve inversions have been a relatively good predictor of recessions. However, the BofA analysts also say that upon closer inspection, inversions are not as reliable as is thought.
“Inversions often happen well before the recession and the signal ‘turns off’ before the recession arrives.”
In fact, BofA notes that there have been several false signals over the years. Additionally, they say that the 2019 inversion did not predict the Covid-induced recession in 2020, since the economy was strong ahead of the pandemic.
BofA adds that there may be a stronger argument for discounting an inversion in the current cycle given that the long end of the U.S. Treasury curve is “heavily distorted.”
BofA says that the Fed has deliberately depressed the long end of the curve with its asset buying program. At the same time, very low bond yields off U.S. shores are exerting downward pressure on U.S. yields.
“The upshot is that the term premium has now dropped into negative territory. The yield curve can now invert even if the market expects no rate cuts from the Fed. This was also the case in 2019,” which leads BofA to conclude that expectations of a flat funds rate is not a good predictor of recession.
“Here we suggest investors heed Chair Powell’s advice. The curve is not irrelevant, but it must be interpreted carefully. A big inversion of the yield curve would be a troubling sign, but there is nothing magical about zero.”
GLOBAL MACRO, CREDIT-FOCUSED HEDGE FUNDS SHINE DURING BUMPY JANUARY (1234 EST/1734 GMT)
January was a sharply volatile month for nearly all markets, and this was reflected in divergences between the performance of various hedge fund strategies.
Hedge fund data provider PivotalPath’s Dispersion Indicator stood at 6.3% in January, its third highest reading since 2009.
Global macro strategies were the strongest performers, as per PivotalPath, with an index tracking them up 2.3%.
“Systematic strategies including Macro, Managed Futures, and Equity Quant were able to capitalize on the flattening yield curve, rally in the energy complex, and other factor trends,” PivotalPath’s report says.
The Wells Fargo Investment Institute, which recently upgraded their view on macro hedge funds to “favorable,” expects continued strong performance.
“Inflation, divergent economic growth and monetary policy, and of course geopolitical risks — U.S. tensions with Russia and China — all have the potential to increase volatility but more importantly to generate cross-asset trends that are ripe for macro trading,” Wells Fargo’s Justin Lenarcic wrote in a note on Monday.
As bond markets adjusted to expectations of a hawkish Federal Reserve, credit-focused hedge funds outperformed. PivotalPath’s credit index was positive for the month, led by the Structured & mortgage-backed securities and Relative Value sub-strategies, both of which generated returns of about 1%.
Overall, hedge funds did post smaller losses than other sectors of the market. PivotalPath’s Composite Index, a measure of overall hedge fund performance, lost 1.3% in January. In comparison, the S&P 500 (.SPX) lost 5.2% and the Nasdaq (.IXIC) tumbled nearly 9%.
Unsurprisingly, equity-focused funds were the worst performing strategies last month, with notable losses in small-caps and sectors including technology and biotech.
CHIP STOCKS DROP; INTEL TUMBLES AFTER TURNAROUND PITCH (1215 EST/1715 GMT)
Wall Street’s semiconductor stocks took another hit on Friday, with Intel slumping to its lowest level in over a year, and the main chip index set to end a tumultuous trading week close to where it began.
Intel dropped 5.5% after a turnaround pitch from its senior executives late on Thursday failed to impress investors. Intel in recent years has fallen behind Taiwan Semiconductor Manufacturing Co in leading-edge manufacturing technology and lost market share to Advanced Micro Devices (AMD.O) and Nvidia (NVDA.O).
At least three brokerages cut their price targets on Intel following its presentation.
“To deal with its loss of transistor leadership, share loss to both competitors and customers, and lower margins, INTC plans to spend its way into a turnaround,” Jefferies analyst Mark Lipacis wrote in client note. “We don’t think investors will afford the stock a higher multiple until INTC produces concrete evidence these investments will generate a return.”
The Philadelphia Semiconductor Index (.SOX) is off around 2% and is on track to end the week down about 0.1%. The index on Wednesday was briefly up 6% for the week, but uncertainty about a potential war between Ukraine and Russia helped deflate those gains. Worries about rising interest rates have also hurt growth stocks.
Intel’s stock is now at its lowest level since November 2020. It has fallen 27% since February 2021, when Pat Gelsinger took over as CEO, winning the support of investors and analysts expecting the Intel veteran to navigate the company out of its manufacturing troubles.
Also weighing heavily on the SOX index on Friday, Nvidia and Micron Technology (MU.O) are both falling about 4%.
WHAT HISTORY SAYS ABOUT GEOPOLITICS AND THE MARKET (1100 EST/1600 GMT)
As the world anxiously monitors tensions between Russia and Ukraine and reactions by other countries including the United States, Glenview Trust Co’s Chief Investment officer Bill Stone examined market moves around past geopolitical crises for clues as to what investors might expect.
Stone looked at 29 different geopolitical crises starting with WWII and found that on average, stocks were higher three months after a geopolitical shock, and following 66% of events, they were higher after only one month.
“The odds that stocks will be higher increases as time passes after the event. In addition, stocks sometimes jump sharply after a crisis, so getting out of the market could have significant opportunity costs,” Stone cautioned.
Of course there have been outliers in the form of more severe spill-overs into the economy and financial markets. For example during World War One, the New York Stock Exchange (NYSE) was closed for about four months, and stocks fell by approximately 20% once it reopened.
And then following the 9/11 attacks in the United States, financial markets did not reopen until September 17, when the S&P 500 fell almost 5% in a day.
So while investors should be prepared for additional volatility, history does seem to suggest that stock declines associated with geopolitical fears are generally “a temporary setback and an opportunity to buy at discounted prices.”
But Stone – who is also careful to mention the horrible human toll of these events – advises that investors keep enough low-risk assets like cash and high-quality bonds to support living expenses during unexpected disruptions.
Here is Glenview’s list of historical events and market reactions:
U.S. STOCKS STEP GINGERLY IN EARLY TRADE (1006 EST/1506 GMT)
U.S. stock indexes are little changed in early trade on Friday as investors keep a wary eye on developments in Ukraine heading into a long weekend.
This after U.S. Secretary of State Antony Blinken agreed to meet Russian Foreign Minister Sergei Lavrov next week, provided Russia has not invaded first, which appears to have somewhat calmed markets globally and dented demand for safe-havens. read more
Most major S&P 500 (.SPX) sectors are green so far, though changes are relatively modest across the board.
Communication services (.SPLRCL) and real estate (.SPLRCR) are among the top risers. Energy (.SPNY) and tech (.SPLRCT) are on the losing side.
Here is your early trade snapshot:
BULLS LOOK LIKE AN ENDANGERED SPECIES (0915 EST/1415 GMT)
Bullish sentiment in the latest American Association of Individual Investors Sentiment Survey (AAII) fell to its 29th lowest reading since the survey started in 1987. With this, pessimism increased, while neutral sentiment decreased.
AAII reported that bullish sentiment, or expectations that stock prices will rise over the next six months, fell 5.1 percentage points to 19.2%, well below the historical average of 38.0%. Optimism was last lower on May 25, 2016 (17.8%). Bullish sentiment is unusually low for the sixth consecutive week and below its historical average for the 13th consecutive week.
Bearish sentiment, or expectations that stock prices will fall over the next six months, popped by 7.7 percentage points to 43.2%, staying above the historical average of 30.5%. This is bearish sentiment’s 13th consecutive week above the historical average. It is also the fourth time in the past five weeks that pessimism is unusually high.
Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, slipped by 2.6 percentage points to 37.6%. This is the ninth time out of the past 11 weeks that neutral sentiment is above its historical average of 31.5%.
AAII noted that for the sixth consecutive week, bullish sentiment is “unusually low.” AAII added that “historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following an unusually low reading for bullish sentiment.”
With these changes, the bull-bear spread slid to -24 from -11.1 last week read more :
Meanwhile, Barclays analysts are taking note of bullish sentiment’s sub-20% reading saying it has only happened on 31 occasions since 1988.
“So 30 out 31 times after the AAII BULL index fell below 20, equities went up over the next 6 months,” Barclays strategists said.
“So if history is any guide, based on the current AAII BULL index level, the chances of equities falling from here are very low,” they add.
(Terence Gabriel, Joice Alves)
NASDAQ COMPOSITE: SPUTTERING THRUST (0900 EST/1400 GMT)
Amid recent Nasdaq weakness, one measure of internal strength is on the back foot again. That said, given that it is not far from its recent lows, traders will be watching its behavior closely. read more
Indeed, the Nasdaq New High/New Low (NH/NL) index, which topped at 96.4% in January 2021, and had been diverging for eight months into the Nasdaq Composite’s November peak, plunged to just 6% on January 28:
Late January’s 6% trough can be considered historically low and potentially washed out. Since the Great Financial Crisis, sub-10% readings have ultimately been closely associated with major IXIC lows.
With the Composite’s subsequent rally off its late-January low, the measure did improve to 22.2% on February 11. However, amid renewed jitters over the past week or so, the NH/NL index has turned down again. The measure ended Thursday at 17.6%, putting it just below its 10-day moving average at 18.6%.
And since this measure does not have a tendency to flat-line for long, but instead form V-bottoms and abrupt tops, traders will be watching to see if it will establish a higher-low vs a Nasdaq Composite lower-low, as it did in early 2016, and early 2009, or if it will break the recent trough and fall closer to zero, as it did in late 2011 and late 2018.
In March 2020, the measure simply reversed higher off its 1.2% trough, and did not look back.
FOR FRIDAY’S LIVE MARKETS’ POSTS PRIOR TO 0900 EST/1400 GMT – CLICK HERE: read more
Register now for FREE unlimited access to Reuters.com
Terence Gabriel is a Reuters market analyst. The views expressed are his own
Our Standards: The Thomson Reuters Trust Principles.