U.S. equities drifted lower on Thursday in calm, controlled fashion in the wake of Wednesday’s decision by the Federal Reserve to start the process of “quantitative tightening” in October. As I said yesterday, this is a huge deal since it marks beginning of the end of years of bond-buying stimulus programs that have bloated the Fed’s balance sheet from around $800 billion to some $4.4 trillion now.
Equity investors just cannot be bothered right now, as sentiment is off-the-charts extreme. But bond traders are apparently quite worried: The Treasury yield curve has flattened to a level that marked the beginning of the previous two recessions. This suggests that the fixed-income market — which much larger and arguably more reliable than stocks in pricing in macroeconomic developments — is sniffing out trouble ahead.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.5% and the Russell 2000 lost 0.1% to close out the day. The decline ended four straight days of gains for large-caps. Treasury bonds were little changed, the dollar was mixed, gold lost 1.6% and crude oil gained 0.3%.
Click to Enlarge Breadth was negative with 1.4 decliners for every advancing issue. Volume was very light, with volume at just 87% of the NYSE’s 30-day average. Industrials led the way with a 0.3% gain while consumer staples were the laggards down 1%.
Newsflow was light, with the most notable news being word Advanced Micro Devices, Inc. (NASDAQ:AMD) is working with Tesla Inc (NASDAQ:TSLA) on a self-driving processor. But shares dropped 2.4% and 2%, respectively.
And Nvidia Corporation (NASDAQ:NVDA) — which has been soaring on AI/self-driving uses for its graphics chips — fell 2.7% in sympathy. Alphabet Inc (NASDAQ:GOOG) announced a $1.1 acquisition in cellphone/VR maker HTC.
The most notable action was in Apple Inc. (NASDAQ:AAPL), which fell 1.7% to fall further away from its 50-day moving average, on lingering concerns about iPhone 8 demand, production issues weighing on iPhone X availability, and confirmation of LTE connectivity issues for the New Series 3 Apple Watch.
Conclusion
Click to Enlarge While the rest of the market persists in a low-volatility daze, bond traders have pushed down the difference between five-year and 30-year Treasuries to levels not seen since late 2007, and 2001 before that. This is exactly the opposite of what the Federal Reserve is looking as it accelerates the policy tightening that began with the December 2015 interest rate liftoff.
While we are far from a “yield curve” inversion that is seen as one of the strongest market-based recession warnings, the rollover represents a vote of “no confidence” in inflation and GDP growth trends by the folks over in fixed income.
Indeed, the Atlanta Fed’s GDPNow indicator falling hard from a high of 4% to just 2.2% now. And the Fed’s preferred inflation measure, the price deflator for the Personal Consumer Expenditures index less food and energy, is moving in the wrong direction as well: Down to 1.4% from a high of 1.9% last October.
Stock bulls would do well to pay attention to the warning.
Check out Serge Berger’s Trade of the Day for Sept. 22.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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Anthony Mirhaydari is the founder of Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
