- Equity Index Futures Trim Premarket Losses on ADP Nonfarm Employment Report
- Investors are Selling Bonds and Tech Stocks in Favor of Value Stocks
- What Can the Selloff in Bonds Tell Us About Investor Sentiment?
While equity index futures are still pointing to a lower open on Wednesday, they did trim some losses after the ADP Nonfarm Employment report showed strong gains in December. More than twice as many workers as expected found jobs last month, particularly in leisure and hospitality, trade, transportation, and utilities. Much of these gains may have occurred before the Omicron variant really hit the scene so we’ll have to wait and see if they stick.
Later today, the FOMC Meeting Minutes will be released and investors will have insight into what the Fed has been discussing, particularly related to tapering and future interest rate hikes.
One company that struggled to grow on Tuesday was Scott’s Miracle-Gro (SMG). Scott’s fell 2.79% after providing guidance saying it would maintain its full-year earnings outlook, but its Hawthorne cannabis division expects a 40% decline in sales. The company cited the slowdown in the cannabis market and issues with the supply chain.
The ISM Manufacturing PMI was lower than expected, suggesting that manufacturers are seeing fewer orders. December was the 19th straight month of increases, but the slowdown may actually be a welcomed reprieve because it may provide relief to an already strained supply chain.
The JOLTS report also showed a decrease in job openings in November. The Great Resignation continues as the “quits” rate remained high. In the light of Wednesday’s ADP report, it may be that workers were simply quitting one job to take another job. Friday’s Employment Situation report could provide greater insights to these job market developments.
Many stocks turned bearish after the manufacturing and job opening announcements; the S&P 500 (SPX) was positioned for a new all-time high, but it turned negative after the reports came out. Once again, investors were focusing on value stocks prompting the S&P 500 Pure Value Index ($SP500PV) to rally 2.26% on the day.
It was a tale of two cities on Tuesday with investors buying energy stocks and selling technology stocks. Energy stocks led all sectors for the second day in a row, followed by financials and industrials. Caterpillar
Vaccine stocks are kicking off the new year in a bad way as Pfizer
Investors were selling technology stocks with Tesla
The tech-heavy Nasdaq Composite (COMP:GIDS) fell 1.33% on Tuesday, while the Technology Select Sector Index ($IXT) was down 1.10%. Chinese tech stocks were hit much harder with Pinduoduo (PDD) falling 11.19%, JD.com (JD) decreasing 6.04%, and Baidu (BIDU) slipping 1.72%.
As investors focus on valuations, they also focus on risk. Last year, China started cracking down on various market sectors, including gaming, real estate, gambling, and more. On Tuesday, Chinese regulators announced plans for a security review of various internet platforms.
Breaking Bonds: Bond yields may rise for a couple of reasons, like when the Fed increases short-term rates, when the Fed stops buying bonds in the open market, and when investors choose to sell bonds in favor of other assets. The Fed hasn’t raised rates yet, but it is tapering its bond-buying programs, which allows yields to rise. However, the recent moves appear to be driven mostly by investors selling bonds.
Investors appear to be selling bonds in favor of value stocks. One reason investors may be favoring value stocks over bonds is because many of these value stocks have higher-than-average dividend yields. This means many value stocks offer potential price appreciation on top of quarterly dividend income.
Vote of Confidence: Many investors buy bonds as part of a well-allocated and diversified portfolio. They’ll often buy bonds when they’re bearish on stocks or if they’re uncertain about the economy. The recent selling of bonds could be seen as a vote of confidence for stocks and the economy. Of course, there’s still the influence of the Fed and pushing rates higher later in the year. Many investors may be looking to sell bonds before rising rates push bond prices lower. But it’s helpful to remember that the Fed is talking about raising rates because of the strength of the economy.
Stock Selection: A problem that might come with value investing is that it takes some analysis. In my January Outlook, I pointed out that if 2022 is the year of value investing, it could also be the year of the active manager. This is because investors may not find the same kind of success with index investing as they’ve seen in the past because some indices have become overweighted in a few stocks, and if those stocks lose popularity, they could be a major drag on the index.
According to Yardeni research, as of December 10, FAANGM stocks, which include Facebook, now Meta (FB), Amazon (AMZN), Apple (AAPL), Netflix
TD Ameritrade® commentary for educational purposes only. Member SIPC.