Stocks were under pressure again Wednesday on weak jobs data and a continued selloff in long-term Treasury bonds. The private ADP employment report for April missed expectation and fell to its lowest level since January 2014.
That casts a pall over Friday’s critically important U.S. jobs report.
Further evidence that the jobs market has hit a soft patch — in the context of the very poor Q1 GDP growth numbers we’ve already seen — is further bolstering hopes the Federal Reserve will be forced to push back its rate hike timing to September or possibly even early 2016.
That in turn is weighing on long-term bonds as the specter of a continuation of ultra-easy monetary policy is boosting inflation expectations, lifting the 10-year Treasury yield past 2.2% (up from a low of 1.7% in February) and back above its 200-day moving average for the first time since early last year.
In the end, the Dow Jones Industrial Average lost 0.5%, the S&P 500 lost 0.4%, the Nasdaq Composite lost 0.4%, and the Russell 2000 lost 0.3%.
Big tech was hit hard, with Microsoft Corporation (NASDAQ:MSFT) off 2.8%, Intel Corporation (NASDAQ:INTC) down 1.3% and Hewlett-Packard Company (NYSE:HPQ) down 2%. Herbalife Ltd. (NYSE:HLF) gained 16.5% on a big Q1 EPS beat and full-year EPS guidance raise.
Crude oil gained 0.4% to close at $60.93 a barrel after the Department of Energy reported the first inventory drawdown in inventories since January.
Greece remains in the headlines — a story that just never seems to die — as focus turns to yet another deadline at another meeting of European bureaucrats.
This time, focus is turning to an upcoming meeting of the Eurogroup on May 11 for a new bailout agreement that address issues such as debt sustainability, fiscal reforms, and more. The European Central Bank is upping the stakes by postponing a decision on whether to deepen the collateral haircuts on Greek debt the country’s banks use to raise funds — using the Sword of Damocles tactic. A harsh decision could result in a bank run and possibly precipitate an exit from the euro.
While the situation in Europe remains largely on the backburner, traders have been much more worried about what’s happening with long-term interest rates. Fresh comments from Federal Reserve officials didn’t help sentiment.
Fed chairman Janet Yellen chimed in that equity market valuations are “quite high” and that high-yield bonds are looking frothy as yield spreads over Treasury bonds compress. She also warned that the Fed’s eventual rate liftoff could trigger a sharp rise in long-term interest rates.
If you were thinking of buying a new car or a new home, Yellen seems to be suggesting now’s the time to act to lock in cheap financing.
Atlanta Fed President Dennis Lockhart told reporters that all upcoming policy meetings are in play for possible interest-rate hikes and added that he was not overly concerned about the stock market. He said that the April jobs report will say a lot about the pace and health of the economy’s bounce back in the second quarter from the weakness seen at the start of the year. While he reiterated its expectation for a hike at midyear, he admitted the current expectation from the futures market for a September liftoff was reasonable.
Long story short: It seems that for the first time since 2013, we’re on the cusp of a sustained rise in borrowing costs — one that looks set to happen no matter what the Fed does. The rebound in energy prices are playing a role, as is the rebound underway in economies throughout Europe and Asia.
Whether the economy and the stock market can tolerate more expensive credit is a question we’ll learn the answer to very soon.
In response, I’ve recommended clients adopt a more neutral stance heading into what’s normally an underperforming month of the year (“Sell in May” and all that). I’ve recommended my Edge subscribers respond by booking profits in their existing positions, including a 9.4% gain in the Market Vectors Oil Services (NYSEARCA:OIH) added on April 6, and look to profit on the rise in the VIX via the VelocityShares 2x VIX (NASDAQ:TVIX).
Edge Pro subscribers have added a call option position on the iPath S&P 500 Short-Term VIX (NYSEARCA:VXX) and closed positions including a 117% gain in their May $16 Bank of America Corp (NYSE:BAC) calls. The CBOE Volatility Index (VIX) — known as Wall Street’s “fear gauge” — has popped up and out of the downtrend channel it’s been mired in since the beginning of the year.
That’s a sign options traders are starting to pay up for put option protection against a market pullback. Check out my recent article for a few reasons why the stock market looks particularly vulnerable here.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
