- Major U.S. indexes end up; DJI leads
- Banks, small caps, transports, NYFANG all outperform the SPX
- All major S&P sectors green with industrials out front
- Dollar up; gold, bitcoin fall; crude up >5%
- U.S. 10-Year Treasury yield rises to ~1.43%
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WITH A TILT TOWARD VALUE, U.S. STOCKS SNAP BACK (1601 EST/2101 GMT)
The Dow Jones Industrial Average (.DJI) led Wall Street’s main indexes higher on Monday, as economically-sensitive groups like energy and banks charged back, while fear about the Omicron variant eased.
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With this, U.S. 10-year Treasury yield reclaimed the 1.40% level, while value (.IVX) significantly outperformed growth (.IGX), as well as momentum. The IVX rallied about 1.5% vs about a 1% rise for the IGX. The iShares USA Momentum Factor ETF (MTUM.Z) actually closed slightly red on the day.
The growth/value ratio, which ended at a fresh record high just last Tuesday, has now fallen for four-straight days. Although early in the month, the ratio is on track for its biggest monthly percentage drop since February.
The S&P 500 (.SPX) managed to close back above its 50-day moving average. Despite slight intraday penetrations, however, the DJI and Nasdaq Composite (.IXIC) both failed to finish back above this closely watched intermediate-term moving average.
Here is Monday’s closing snapshot:
OMICRON OR FED? JUST GO DEFENSIVE, WHOEVER’S TO BLAME (1341 EST/1841 GMT)
While Omicron definitely started a market ruckus, Michael Wilson at Morgan Stanley is out with a note arguing that the latest COVID-19 variant is secondary to the real culprit which he names as the Fed and its more aggressive response to the “on Fire” data.
However, even after the resulting decline, P/Es are higher than 2 months ago “with unfinished business on the downside due to the mid cycle transition rather than Omicron.”
He argues that Chair Powell’s pivot to a faster taper was the key driver over the past two weeks as tapering is tightening asset prices, if not the economy.
But he sees the faster taper as appropriate with very high inflation data and a red hot labor market. Wilson cites Powell’s erasing of the word transitory as “taking more responsibility for the high inflation that is plaguing many consumers and small businesses.”
And with a White House more focused on inflation than the stock market, “it’s possible we won’t see the same pressure on the Fed to back off if markets continue to wobble like they did in late 2018 for the same reason.”
Wilson is looking for valuations to come down before getting bullish, noting that MS target multiples are still >10% lower than current levels. Also he’s looking for “better visibility” for the first half earnings growth deceleration he’s expecting.
About valuation, he says some people may be surprised that the median forward P/E multiple for the S&P 500 is still near historical highs at nearly 20X, just below the cap-weighted index’s forward multiple of 20.5X.
With 70% of S&P 500 industry groups trading in the top 25% of historical forward P/E levels going back to 2010, even including the last week’s volatility with all but 5/24 groups trading above the 15.9x average S&P multiple back to 2010.
Wilson says “this strengthens the case for a market multiple de-rate and puts the focus on stock selection.”
As for stock picking, he favors large cap defensive quality stocks with reasonable valuations with a list leaning heavily on consumer staples, health care and utilities stocks with fewer industrials and one just tech stock thrown in. His staples include defensive classics such as cigarette companies Altria (MO.N) and Phillip Morris International (PM.N), Colgate-Palmolive (CL.N) and Walgreens Boots (WBA.O) and WalMart (WMT.N).
In healthcare he had Covid on his mind with Merck (MRK.N) and Pfizer (PFE.N) as well as Baxter International (BAX.N) in medical devices. His industrials were literally defensive with Northrop Grumman (NOC.N) and Raytheon Technologies (RTX.N) on the list. Utilities included American electric Power Co (AEP.O) and DTE Energy (DTE.N). In tech, VMWare (VMW.N) was the chosen one.
TOUGHER YEAR AHEAD FOR U.S. MUNI MARKET – BARCLAYS (1215 EST/1715 GMT)
After a “very strong” 2021, the U.S. municipal bond market faces a weaker 2022 as fixed-income assets grapple with high inflation and possible rate hikes by the Federal Reserve in next year’s second half, according to Barclays analysts.
The $4 trillion market where states, cities, schools, and other issuers sell debt has gotten a boost from massive federal aid and the economic recovery from the COVID-19 pandemic.
“Nevertheless, we are a bit concerned that the peak in credit quality may have already been reached, helped by federal funding that is unlikely to be available in the coming years, while spending has increased to its record and it might not be easy to curb it when additional funds are not available,” the analysts wrote in a credit research report.
They added that they don’t see much potential upside next year despite an outlook for market technicals remaining largely supportive and with municipal credit currently in “very good shape.” Ratios between tax-exempt munis and taxable U.S. Treasuries, as well as credit spreads, are expected to move somewhat higher in 2022, according to Barclays.
“We therefore expect municipal returns to be subdued next year, when investors will likely be happy just with earning carry on their bonds, if that,” the report said.
UTILITY SHARES GET THEIR POWER ON (1130 EST/1630 GMT)
As Omicron concerns have made investors more wary they’ve been buying bonds and taking a keener look at more defensive stocks, causing sleepier sectors like utilities to wake up in a hurry.
The S&P Utilities index (.SPLRCU) gapped up today for the first time since Oct. 19, and is last up nearly 2.5% on the day and on track for its biggest one-day percentage gain since early March.
If it holds its ground for the session, it would also post a fourth straight day of gains for the first time since early July.
Within the sector there isn’t a single stock in the red so far on Monday, with the biggest gainers Southern Co (SO.N) and NRG Energy (NRG.N), both up more than 4%.
Of note, the recent decline in U.S. Treasury yields may be helping to boost the sector. The U.S. 10-Year Treasury yield has declined nearly 30 basis points over just eight sessions, putting it in the 1.40% area.
Meanwhile, according to Refinitiv data, the utilities sector boasts a 3.1% dividend yield, potentially making it an attractive alternative. The overall S&P 500 dividend yield stands at around 1.8%.
With Monday’s gain, SPLRCU now stands down about 3% from its February 18, 2020 all-time high:
(Sinéad Carew, Terence Gabriel)
U.S. STOCKS MIXED, GROWTH SHARES STUMBLE (1000 EST/1500 GMT)
Major U.S. indexes are mixed in early trade Monday. This as Omicron and taper fears continue to simmer in the background.
In any event, investors are favoring banks, energy and economy-linked stocks against technology and growth-heavy shares. The S&P 500 banks index (.SPXBK) is up more than 1.5%, while the Philadelphia Semiconductor index (.SOX) is off more than 2%.
As a result, the S&P 500 growth (.IGX)/S&P 500 value (.IVX) ratio is declining for a fourth-straight day. The ratio is now down more than 4% in December, which puts it on track for its biggest monthly drop since a 5.4% slide in February. That February drop was the biggest monthly percentage decline for growth relative to value since May 2002.
Here is where markets stand in early trade:
DOW INDUSTRIALS: POISED TO CLAW BACK MORE LOST GROUND (0900 EST/1400 GMT)
Given CBT e-mini Dow Futures’ premarket gains, the Dow Jones Industrial Average (.DJI) appears poised to bounce more than 200 points early in Monday’s regular trading session.
This as more economically-sensitive stocks show strength, while big-cap tech struggles.
On Wednesday of last week, the DJI ended below its 200-day moving average (DMA) for the first time since July 13, 2020. In so doing, the blue-chip average threatened to close below its 40-week moving average (WMA) for the firs time since July 10, 2020.
However, a broken weekly log-scale resistance line from 1929, which has been acting as support over the past 6 months or so, once again contained weakness read more :
The line was around 34,000, while the Dow’s low last week was 34,006.98. The DJI was then able to rally and end Friday at 34,580, or slightly above the 40-WMA, which was at 34,557.
Despite the bounce, weekly momentum continues to deteriorate. The MACD has fallen to its lowest level since mid-August 2020. Therefore, unless momentum turns favorable, any further bounce in the Dow may prove short-lived.
The 10-WMA is now resistance at around 35,340, which is slightly above last week’s Dow high at 35,287.91.
A weekly Dow close below the support line, which ascends to around 34,050 this week, can suggest potential for a much deeper decline, given that this line has consistently contained Dow declines since late May. read more
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Terence Gabriel is a Reuters market analyst. The views expressed are his own
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