This market’s been much like our Chicago weather over the last two weeks -- if you don’t like it, give it a day. Stocks snapped back smartly in a holiday-shortened week after getting pummeled to start April. Soothing comments from Fed chief Janet Yellen and a round of mixed earnings that failed to deliver the awful results flashed in pre-earnings warnings lifted the S&P 500 more than 2.5% last week; it’s now up some 1% for the year.
Risk perceptions were on the decline and, as a result, measures of market volatility came down sharply last week. As you might expect, the CBOE Volatility Index (VIX), the market’s “fear gauge,” fell but the surprise came in the velocity of the move, with VIX down over 20% for the week.
Bracing for Worse
Now we’re back to a full trading week, one packed with more earnings results. In fact, more than 30% of S&P 500-listed companies report, including marquee names
Earnings expectations came down sharply as Q1 unfolded. Current, revised expectations for a 4% year-over-year drop for broad-market earnings (according to Zacks Investment Research) compares to expectations for a 2.1% year-over-year gain for Q1 earnings when industry analysts put together their earnings predictions to start the year. However, Zacks points out that on aggregate, S&P 500 companies typically beat estimates.
Outside the S&P 500, several Dow components are reporting in coming days: AT&T (T) hits after the close Tuesday. Boeing (BA) and Procter & Gamble (PG) are due to release results Wednesday morning. 3M (MMM), Visa (V), Caterpillar (CAT), and Verizon (VZ) are slated for Thursday. That’s just a small slice of the dozens due to report.
Although earnings will set the tone, economic data shouldn’t be ignored. Up this week: the leading economic indicators report, which helps give a forward-looking snapshot. Manufacturing and housing numbers also dominate (see figure 3 below for the full line-up).
Yield to Bond Market Signals
With one eye on the VIX, market attention should also swing toward bond yields, which had been on the rise as the recovery in stocks sapped some demand for fixed income. As bond market prices fell, the yield on the benchmark 10-year Treasury note jumped to 2.72% last Thursday from 2.63% Wednesday. The daily chart of the CBOE’s 10-Year Rate Index (TNX) reveals that the decline suffered from April 4 through April 15 had largely been erased late last week (figure 1).
Figure 1: CBOE’s 10-Year Rate Index (TNX) tracks the yield on the Treasury’s 10-year multiplied by 10. It moves higher when bond prices fall. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.
Bond yields matter as an indicator for stock sentiment, but should rates rise too far, too fast, stock markets can suffer as investors will worry that borrowing costs could slow business and consumer spending too quickly.
Treasury bonds performed well in the first half of April and bond yields fell as skittish investors rotated out of equities and into perceived safe-haven instruments. In the same period, the VIX, which tracks volatility perceptions reflected in S&P 500 Index options, rallied to above 17 as recently as April 11. Then, as the S&P 500 scored a four-day winning streak in a holiday abbreviated week of trading, VIX plummeted back to 13.36 (figure 2).
Figure 2: VIX, which tracks volatility perceptions reflected in S&P 500 Index options, rallied to above 17 as recently as April 11, before falling anew. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.
The decline in VIX and spike in TNX reflect changing risk perceptions in a volatile earnings season. The bar was set progressively lower during Q1. Now, it’s up to Corporate America to deliver. If it does, the S&P 500 could make another run toward record highs before facing another test near month-end -- the April 30 Fed’s monetary policy announcement.
Good trading,
JJ
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