Shift Direction

With Q1 wrapping up in the coming days, so will any remaining Q4 2020 earnings reports. Q4 results were significantly stronger than the street had been expecting. In fact, according to FactSet, nearly 80% of the S&P 500 companies that have reported have beaten earnings estimates. Additionally, nearly as many companies (75%) beat revenue forecasts. The overall earnings beat in the fourth quarter annualized was 4% and revenues (annualized) rose by roughly 3.172%. The healthy corporate results posted by corporate America for Q4 in conjunction with constructive guidance have provided a degree of buoyancy to markets – at least through the first 5 weeks of Q1.

Since mid-February equity markets have shifted focus from the deep value presented by the initial reaction to COVID-19 and opportunities unique to that trade, to rising interest rates. That shift in focus has brought with it a level of skittishness and misdirection not evident in markets for over a year. In the year leading up to that mid-February shift in focus, all four major equity market indices had rallied sharply, established multiple record highs, and have allowed for the Nasdaq Composite and Russell 2000 to massively outperform the broader market.

Those two indices, in particular, have since been subject to significant institutional selling pressure this quarter. The 10% pullback I called for in December for January finally showed up in the Nasdaq Composite in February – and with vengeance. Over the past 5 trading days, for example, the Dow lost 0.48%, the S&P 500 lost 0.77% and the Nasdaq lost 0.79% while the Russell 2000 shed 2.77%. As of Friday’s close, the Nasdaq is 7% below its 52-week and record closing high. The S&P 500 is off a more modest 2% from its record close and the Dow Industrials, despite losing 234.33 points or 0.71% on Friday, are 2% off its record close.

With a closing yield of 1.732% on Friday, it is not difficult to see what the concern about – particularly given the fact the 10-year yield closed at 1.13% on February 9th. With Friday’s close at 1.732% the 10-year stands within 1% of its 52-week high after climbing more than 50% in little more than a month and a half. For my money, the lion’s share of the trade higher in yield is behind us for the time being. The Fed has made it abundantly clear that it has no intention of raising rates in the near term either. We may see a modest move higher from here but it will be just that, modest and brief in the near term.


Ultimately, it is entirely possible, if not likely, that the 10-year yield may settle in at 1.50% in the coming days and weeks.

This week’s economic highlights:

In something of an unusual occurrence, Fed Chair Jerome Powell will be speaking for three successive days this week – Monday, Tuesday, and Wednesday.

We receive existing home sales data on Monday morning for February. January’s annualized rate was a healthy 6.690 M. Econoday consensus for February is a bit weaker, 6.500 M. The Y/Y rate of change as of last month was a rather stunning + 23.4%. Not unexpectedly given existing home sales consensus figures for February, new home sales for February are also expected to dip from January’s 923K to 875K. Still robust by any standard and still with room to run given the current interest rate landscape, COVID-19 rollout, consumer confidence, economic rebound taking hold, and net migrations out of metropolitan areas.

Durable goods orders for February, due out Wednesday, are also expected to reflect a bit of a slowdown from January’s unexpectedly robust pace. New orders M/M in February are expected to drop to 0.9% from January’s 3.4%. Ex-transportation, 0.7% vs. 1.4%. Core capital goods. 0.6% vs. 0.5%, or relatively flat. The EIA Petroleum Status Report for the week ending 3/19 is released Wednesday as well. Last week saw a modest build across all three verticals.

The final 2020 Q4 GDP reading is released Thursday. No deviation from the previous results is expected. Weekly jobless claims for the week ending 3/20 are expected to reflect modest gains. The previous week’s initial claims fell by 45K. We round out the week with trade-in goods data for February as well as personal income and outlays. In as far as the latter, Econoday consensus estimates are all over the lot. Broadly speaking, however, the consensus is expecting personal income M/M data to reflect a sharp contraction versus January.

Flickr photo: by Phillie Casablanca

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