Stocks pared gains to end slightly lower Thursday, after the Dow and Nasdaq Composite reached fresh record intraday highs earlier in the session.
The three major indexes were little changed even after the Labor Department’s weekly jobless claims report showed Thursday morning that initial claims spiked to the highest level since August last week. ING Regional Head of Research Americas Padhraic Garvey and Brian Levitt, Invesco Global Market Strategist joined Yahoo Finance Live to discuss.
– At just under two, minutes or just around two minutes to go in the trading day. All three of the major averages in the red the S&P the biggest decliner, off just around 4/10 of a percent. We want to bring in Padhraic Garvey. He is ING’s Regional Head of Research Americas. And we also have Brian Levitt, Invesco Global Market Strategist. Brian, let me just toss it to you first. Ahead of the bell here, we’re looking at losses, market losing a bit of steam here. What do you attribute some of the selling pressure today to?
BRIAN LEVITT: Well, I mean, we saw a– a weaker jobless claims number. So we– you know, there’s obviously some concern about the– the pace of this recovery and the sustainability of an economic recovery. It’s also you see some concerns about a move higher and interest rates. Investors perhaps worrying a bit that if rates move too quickly to the upside that that could put some pressure on equity multiples. My opinion, I would view this as just some churn in the market after a very large advance.
Things had gotten a little bit extended on a– on a near-term basis. But investors should keep their eye on the larger narrative. And that larger narrative is an economy that is likely to continue to recover as the year progresses, policies likely to be accomodative.
– We hear ya.
BRIAN LEVITT: And so I view it as an optimistic backdrop for assets.
– Yes, Padhraic and Brian, hold on one second, because, Jared, we’re only about 50 seconds to the closing bell. What are you paying attention to?
– Well I’m looking at a little bit of a sell off right now. And we are heading into options expiration tomorrow. Could have something to do with that. Also negative seasonality for the second half of January. So you can see new session lows right now in the S&P 500, but only down about a third of a percent. Russell 2000, though, is still holding on to gains up over 2%, really has been the index of the year.
All right. Now let’s take a look at the NASDAQ 100 heat map, where we see the mega caps under pressure here. Apple’s off more than 1%. So is Amazon, Microsoft and Tesla, Facebook the worst, down about over 2% right now. Just looking at the sector act– the sector action as we head into the bell here, energy in the lead, up 3%.
– All right, Jared. We got a closing bell here. And let’s see where we’re going to settle. It looks as if once things are done at the closing bell, the S&P 500 will settle down about 14 points. The Dow’s going to be off roughly 67, 68 points. The NASDAQ will be off about 16 points. But it looks as if the Russell 2000 is going to be a gainer, up about 50 points. And as you heard Jared say, energy is the big gainer today among the sectors, up 3%. Just want to let you know, though, over the last 52 weeks, energy is negative 28%.
Let’s go back to our guests to talk about where we are headed. I want to bring Padhraic in because you– you talk about in your latest note the effects of real negative interest rates. And that’s not going to change anytime soon. There’s not going to be this rush to raise interest rates by central banks and improve yield. So what as an investor do I need to pay attention to?
PADHRAIC GARVEY: Yeah, it’s– it’s not good, to be honest, to have those large negative real rates. There’s been a lot of talk about inflation expectations rising. And for example, if you look at the two-year inflation expectation on the TIPS market versus conventional, it’s at 2.3%. Fantastic. But the reason we’re there is because the two-year real yield is minus 2%. The five year is minus 1.2%.
So it’s– it’s nice to be talking about reflation. But these large negative real yields don’t really paint a very positive picture about the future. And as I said to you guys at the beginning of this year, we may be risk on this week. But be careful out there because this is a very, very frothy market. There are huge headwinds ahead. I think the Fed is fully aware– aware of that fact.
– Brian, go back to what you were saying before you were– that we need to almost look at this broader market narrative here rather than paying attention too much to these day-to-day gains or losses. But what do you think is priced into the market at this point? Because I think there’s still a lot of debate out there about as to whether or not vaccinations, for example, are already priced in?
BRIAN LEVITT: Yeah. And obviously, in– in the near term, the markets are gonna trade whether or not things are better or worse relative to expectations. And to the extent that the vaccine rollout does not go as rapidly as some of us suspect, then there– there may be some disruption to– to this market advance. But– but my view is that if you– if– if you think about where we are, this is an economy that is– is growing well below its productive capabilities.
We’re– for my opinion, that suggests we’re in the early stages of an economic recovery. And the economic recoveries tend to play out over longer periods of time until there’s some excess, until there’s some rise in inflation, until there’s a Fed tightening. And from my opinion, we’re– we’re a long ways away from that.
So it doesn’t mean it’s always going to be easy. There’s going to be challenges. Remember 2009 through 2011, 2012, 2013? There was nothing ideal or nothing great about that environment. But markets advanced because– because overall conditions were getting better. I–I suspect we’re in a similar environment. Will we run into some headwinds? Sure. But we’re in the early stages of an economy that’s struggling to get back to its productive capabilities.
– Padhraic, if you take into consideration what Brian just said, there was an article in “Bloomberg” that talked about people who might want to have a little security but take some risk through corporate bonds and the higher yield bonds but longer duration may now be setting themselves up for losses because we’re starting to see that ratio between duration pull back some. Is this a threat? Is this a real threat for those people who are doing that?
PADHRAIC GARVEY: I think it is. I– I really do. If you look at the– the current spreads environment, it’s incredibly tight. I mean, it’s hard to believe that we’re currently going through a global pandemic. Whether you’re looking at high yields or investment grade corporates, we’re pretty much at the tides of the decade cycle, never mind the recent cycle. And the thing is when corporate spreads get so tied to treasuries, it really hurts when treasury yields rise because there’s very little protection in the spread.
The whole point of having a spread is to protect you and give you that extra return. So there is a real risk going forward that if that 10-year Treasury yield was to go up to 125, 140, it could cause some consternation on the credit markets. So we’re watching that. We do think is quite frothy out there.
The only part of the corporate universe that has shown positive returns so far this year has been high yield, mostly because it has a higher spread. But we still don’t think there’s enough spread there to offer full protection. So enjoy it while it lasts. But it’s a risky trade.
– Hey, Brian, real quick, the IPO action that we’ve seen over the last two days, today we had Poshmark and Petco. Yesterday we had a firm. We saw these massive one-day pops, similar to what we saw as we wrapped up 2020. Does this worry you at all? You were talking about frothiness in the market. This could be a clear sign.
BRIAN LEVITT: Well, it’s worrisome from the perspective of certain pockets in the market or individual names. I think that there are pockets of the market where things have– have gotten a bit exuberant. When I look at the broad aggregate market, I have less concerns than I do for some of these individual IPOs.
I mean, yeah, multiples are elevated compared to long-term history. But you tend to see that in the aftermath of sharp recessions because markets respond first. And so if you think of a price earnings ratio or a price sales ratio, obviously there’s a numerator and there’s a denominator. And if the markets go first, that means the numerator expands relative to the denominator, and your– your multiples start to look a little bit out of whack.
But what it comes down to, then, is what type of economic recovery are we going to stage, and what does that mean for the denominator? And does– can these companies, particularly some of these structurally advantaged companies, grow and to– grow back into their multiple, which I [AUDIO OUT] that they [AUDIO OUT]. The other thing is we’re in a very low-rate environment. And in a very low-rate environment, it is likely that we need to get used to paying higher multiples for companies that are able to generate true earnings and revenue growth.
– Jared, I want to bring you back into the conversation because you’re actually looking at something that could indicate some heightened short-term volatility, at least over the next few days maybe.
– Yes, I alluded to it just before the bell. We have Opex tomorrow, its options expiration. Huge amount of calls being bought this month, especially in some of those high-flyer names, the tech names that have done so well, but also in the indices. And seasonality favors the bears in the second half of the month. So I just want to look at the Wi-Fi interactive here to a couple of posts.
I’m gonna talk about seasonality first here. This comes from Almanac Trader. “Over the last 21 years, only NASDAQ has posted a four-month average gain. Dow, S&P, Russell, they have all started January positive, only to surrender early month gains by the end of the month.” Excuse me here. “Weakness has historically accelerated just after midmonth around the 11th trading day.” Guess what? Tomorrow is the 11th trading day.
Here is the seasonality for the NASDAQ. You can see it’s up in the first half of January, followed by down in the second half. So combined with the options expiration situation, we could see some weakness in the second half of the month here, guys.
– All right. Thanks, Jared. We also want to give our thanks to Brian Levitt, Invesco Global Market Strategist, as well as Padhraic Garvey, ING’s Regional Head of Research Americas.
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