Stocks recovered from sharp sell off late morning to close out the day with moderate losses as investors grappled to weigh the impact on global growth of a U.S. Treasury yield curve that now has a 10 basis point negative slope from 90 days out to 10 years on the duration scale.
The benchmark 10-Year Treasury Yield (US10YBY) rallied 2.36%, it is lowest yield since the last calendar week of 2017. Strikingly, the 10 year German Bund, not only continues to trade with a negative yield, but for much of the day, had an even slightly more negative yield than the Japan 10 year Bond.
Stocks, after a moderately weaker opening, hit an air pocket just over 90 minutes into the day, and 20 minutes later Market Averages had deficits of well over -1%. While stocks began to recover shortly after the end of the trading day in Europe, we could NOT identify heavy selling from the Continent and the UK, as the driver of the late morning decline in the U.S. market.
We mention this, as Money Flows from the EU theatre deserve close scrutiny, as the Continent is the epicenter right now of Slowing Global Growth, highlighted by the negative PMI #s from both France and Germany within the last week, and of course seemingly never ending uncertainty over the Brexit drama.
Back in the U.S., stocks spent hours in a stair step pattern of gradual repair. It took most of the afternoon for investors to get comfortable that we’d avoid a “day long deluge” of selling with a “close on the lows” finale similar to last Thursday.
By the closing bell, Major Market Averages settled with results that tilted to to the downside, as the S&P 500 (^SPX) and NASDAQ Composite (^IXIC) showed losses of -0.5% and -.06% respectively, while the Dow Jones Industrial Average (^DJI) lost only -0.1%, aided by reflex rally in Boeing Co (BA).
Market breadth held very well, with declining issues outpacing advancers by only 250 issues, while Down Volume led Up Volume by 2 to 1 as there was profit taking in a collection of mega-cap technology names.
Relative Strength is always an interesting study on days of big declines and or wide ranging price swings, and there was plenty to look at Wednesday. I almost had the feel of year end type of buying that would typically that would attract some of the worst performing sectors.
Plenty of retailers were beneficiaries. Most retailers had miserable performance in 2018, and many stocks in the sector have had high volatility this quarter, as both macro data and individual earnings have been very inconsistent.
Retail stocks that jumped of the screen included but were not limited to Macy’s Inc. (M) at +$0.42 or +1.7% to $24.35. Nordstrom, Inc. (JWN) +$0.92 or +2% to $44.85. Kohl’s Corporation (KSS) +$1.04 or +1.5% to $69.94 and Urban Outfitters (URBN) +$0.82 or +3% to $28.85
Homebuilders have acted well all quarter, despite inconsistent data on the housing market. Pulte Group (PHM) +$1.40 or +5% $28.81, Toll Brothers, TOL, +$0.58 or +1.6% to $37.03, KB Home (KBH) +$0.65 or +2.7% were stand-out performers Wednesday.
Technically, the Home Builders are one of the strongest looking sectors this quarter, likely projecting optimism for further earnings growth, and housing affordability from lower mortgage rates.
On the flip side, banks and asset managers continue to feel the headwinds of lower rates and a flat to fractionally inverted yield curve. In the Technology space, it was simply a case of well deserved profit taking after a stellar quarter of out-performance.
We’d expect a little less volatility the next 2 days as the first quarter winds down and investors look to both protect their gains QTD while continuing to position for the rest of the year.