Earnings questions, potential recession mean more selling could be ahead
The Dow and S&P 500 have fallen for six straight days, with many of those seeing broad selling typical of so-called “washout” days.
That can sometimes be a contrarian buy signal on Wall Street, but many investment professionals are skeptical that the selling is over. One reason is that earnings expectations for next year still show solid growth, which would be unlikely in the event of a recession.
“We know that if we start seeing a turnaround in the 2-year yields … and if we start seeing a turnaround in the dollar, that gives us the ability to bounce from these extremely oversold conditions,” said Andrew Smith, chief investment strategist of Delos Capital Advisors in Dallas. “But I have a hard time reconciling in my mind that the earnings story is going to be as good as we expect.”
Additionally, the dramatic moves in the bond and currency markets means that “something broke” and it may be smart to wait for that information to shake out, Smith said.
On the positive side, Smith pointed to a strong labor market and signs of continued spending on travel as a sign that the U.S. economy may be able to avoid a major recession.
— Jesse Pound
U.S. 10-year yield closes in on key 4% level
The 10-year Treasury yield is edging close to 4%, a level it has not touched since 2010.
The U.S. 10-year is the benchmark yield that sets the course for home mortgage rates and other consumer and business loans. It has bounded higher this week, as U.K. gilt yields race higher and on expectations of an aggressive Federal Reserve.
The yield was at 3.96% in afternoon trading. The 10-year yield reversed an earlier decline and gained about basis points. (A basis point equals 0.01 of a percentage point)
“It’s definitely been impressive, and I just think no one is yet willing to step in and catch the falling knife,” said Ben Jeffery of BMO. He added a lack of liquidity has also been pushing up yields, which move opposite price.
Jeffery said the yield was also moving higher ahead of the 1 p.m. auction of 5-year notes.
He said the 10-year tested the 4% level in 2010. “The last time we were sustainably above 4% was 2008. There’s another technical level at 4.10% and then there’s not much of note until 4.25%,” he said.
— Patti Domm