Stocks Hit Monday as Rate Hike Fears Grow

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The narrative is shifting.

For weeks, rising expectations of a December interest rate hike from the Federal Reserve was considered a good thing. It reflected optimism from our policymakers. The economy was strong enough to risk the first rate hike since 2006 after holding rates near 0% since 2008. Job gains and inflation was, in their minds, expected to continue.

But after Friday’s blowout jobs report, with October payrolls posting the best result since last December, the realization that higher credit costs are coming are sprouting many fresh concerns.

In the end, stocks moved lower on Monday with the Dow Jones Industrial Average losing 1%, the S&P 500 losing 1%, the Nasdaq Composite losing 1%, and the Russell 2000 losing 1.3%. Treasury bonds were weaker, pushing up yields. The dollar was little changed, gold moved slightly higher and crude oil lost 0.4% to close at $43.87 a barrel.

dow jones industrial average

Defensive utility stocks led the way with a 0.3% gain while energy led the decliners, down 1.5%. Apache Corporation (NYSE:APA) shrugged off its sector weakness to gain 13.2% after Bloomberg reported the company rejected an unsolicited takeover offer. Norfolk Southern Corp. (NYSE:NSC) gained 11% after Bloomberg reported Canadian Pacific Railway Limited (USA) (NYSE:CP) is said to be considering a takeover of the company.

Priceline Group Inc (NASDAQ:PCLN) dropped 9.6% after domestic gross bookings missed consensus and guidance. Hertz Global Holdings Inc (NASDAQ:HTZ) fell 12.6% after missing on Q3 revenue, operating earnings and earnings on weak commercial volume and competitive pricing.

These concerns, for now, are manifesting more strongly in the fixed-income market — particularly in high-yield bonds. This, along with upward pressure on the U.S. dollar and more commodity price weakness, could spell big trouble for both debt-funded buybacks and corporate earnings growth going forward.

The end result: Disappointment with earnings-per-share results.

Already, according to FactSet data, the third quarter earnings season is set to feature a 2.2% decline in S&P 500 profits — the first back-to-back quarterly decline since 2009. It’s also on track to be the third consecutive quarter of revenue declines since 2009. For the year, earnings are expected to decline 0.6% while revenues are expected to fall 3.3%.

All of this comes at a time of high valuations. According to Birinyi Associates, the S&P 500 currently trades at 23 times trailing 12-month earnings. This is up from 20X in September and well above its 15.5X historical average.

As time goes on, the December liftoff looks more and more like a done deal. The chatter is already shifting to what comes after. Chicago Fed President and noted policy dove Charles Evans said today that he was not predisposed to dissent against a rate hike in December — despite preferring a mid-2016 liftoff — as long as officials signal a slow and gradual path of subsequent rate hikes.

Because of all this, the market looks set for its first significant pullback since the rally out of the September lows began. I am recommending clients focus on defensive positions such as the Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX) which gained nearly 10% for Edge subscribers today.

For the more aggressive, the Nov $19 iPath S&P 500 VIX Short-Term Futures TM ETN (NYSEARCA:VXX) calls recommended to Edge Pro subscribers gained nearly 50% today.

VXX stockAnthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/stocks-hit-monday-as-rate-hike-fears-grow/.

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