Stocks Claw Back Wednesday Morning Losses

Huge Stock Market Reversal

Wednesday was a very wild day for markets as the S&P 500 cratered 1.75% in the morning and then regained its losses and closed up 8 basis points. That makes it seem like Wednesday was a huge victory even though the market took a round trip. The Nasdaq outperformed partially because of Apple as it was up 0.39%. Apple was up 1.04%. The Russell 2000 fell 9 basis points as the KBW regional bank ETF fell 1.33%. That’s even though interest rates rose in the afternoon along with stocks. Regional banks probably fell because the yield curve has been flattening in the past couple weeks. It hit 8 basis points at one point on Wednesday which is a new cycle low.

Extreme Fear Back In The Market

Even though stocks recovered, the CNN fear and greed index fell 2 points to 25 which is extreme fear. The VIX fell 3.37% to 19.49 which is relatively low considering how much uncertainty remains. Because the Fed funds futures market continues to expect more rate cuts, gold has been rallying like crazy. It hit the $1,500 mark and is now up 17.12% year to date. If you think this is the start of a new cut cycle, buy gold.

The worst 2 sectors on Wednesday were the financials and energy which fell 0.76% and 1.21%. The financials don’t like growth slowing, more rate cuts, and the flattening yield curve. It’s probably the worst time in the cycle to own the financials. The energy sector has had a terrible year versus the market as it is down 7 basis points because of fears of weakening demand due to the decline in global growth.

Big Reversal In Treasury Yields Could Signal A Bottom

As I mentioned, treasury yields fell and rose with the stock market on Wednesday. At one point, the 10 year yield fell to 1.61%. It’s now at 1.74%. It’s not crazy to suggest that was a crescendo moment as investors have panic bought treasuries for the past few weeks. The 2 year yield at one point fell to 1.51% which would signal a few more rate cuts this year. It’s now at 1.6% which means the 10 year yield is about 14 basis points higher than the 2 year yield. Based on what Bullard stated on Tuesday, it’s not easy to see how the Fed cuts rates twice in September. At one point in the day, there was an over 30% chance of a double cut. That percentage has now fallen to 18.8% which is where it belongs.

Redbook Growth Improves

August is the heart of back to school season which is the 2nd biggest shopping season for consumers. That’s why the Redbook same store sales growth readings in August are important. In the week of August 3rd, same store sales growth improved to 5.1% from 4.5%. After a few relatively low readings, growth is back above 5% which signals good things for Q3 consumer spending growth.

The consumer needs to stay strong in Q3 since business investment growth might be weak. For all the fear about the economy shown in the treasury market, this Redbook report signals the consumer is fine. Unless these numbers are wildly off, which isn’t an impossibility, the economy shouldn’t fall into a recession in July. I’m aware we are in August, but the hard data from July isn’t fully out yet.

Refinance Index Explodes

The MBA refinance index was up 12% weekly after increasing 0.1% because interest rates hit a 3 year low. This helped the composite index reach 5.3% growth in the week of August 2nd after it fell 1.4% in the prior week. This week was another case of negative weekly growth in the purchase index, but gains on a yearly basis. That has a lot to do with comps.

The purchase index fell 2% weekly after falling 3% weekly in the prior week. Even so, yearly purchase applications growth rate improved to 7%. If you have a consistent job, it’s a better time to buy a house in 2019 than in 2018 for many areas as interest rates have fallen and price growth has fallen. Real estate is all about location. On a national basis, I expect home price growth to stop declining soon unless the labor market weakens further. If labor weakens, then we can easily see national price declines.

Job Openings Fall

Speaking of weakness in the labor market, the JOLTS report showed job openings and hiring both fell on a yearly basis. As you can see from the chart below, job openings haven’t increased since they peaked in November 2018. It’s interesting that even though this report is weak relatively speaking, it still beat estimates. Openings fell from 7.384 million to 7.348 million which beat the high end of the estimate range which was 7.325 million. It’s disconcerting that job openings have peaked because they peaked 8 months before the last recession. If this cycle works on the same timetable, a recession will start in August.

Openings fell 0.6% and hires fell 2.2% from last year. That’s the weakest hiring growth since February 2017. We have seen openings accelerate above hiring for some time. That wasn’t a huge issue because both were increasing. Now that both are falling, it’s time to take notice. The one good news from this report was that the quits rate stayed at 2.3%.


The huge swing on Wednesday was impressive. The panic buying in treasuries has been epic. Investors are freaking out about the possibility of the cycle ending after this impressively long run. I don’t see enough evidence to predict a recession in the next year, but the risk of a recession is elevated. If there is going to be a recession, I see a greater likelihood of it happening this year than next year. I think we could see a small cyclical bounce back next year. Plus, the trade war might be put on hold during Trump’s election.

Spread the love

Comments are closed.