The S&P futures are down 15 points, the Nasdaq 100 futures are down 21 points, and the Dow Jones Industrial Average futures are down 210 points. That disposition effectively guarantees that it will be a down open for the stock market.
There are four primary reasons why the negative orientation has taken root:
- The lackluster response to earnings news from heavyweight companies
- The increase in market rates
- The inability to sustain large gains yesterday, which is driving contentions that a near-term top at least has been reached; and
- Budding inflation concerns tied to the pickup in average hourly earnings growth seen in the January Employment Situation Report
Don't blame Amazon (AMZN), though. It's up 5.7% and trading in a league of its own after another impressive earnings report. Conversely, Alphabet (GOOG) is down 3.2% after disappointing, and Apple (AAPL), which had dropped 6.4% since January 18, is down 0.7% after a mixed report.
Dow components Chevron (CVX) and ExxonMobil (XOM) are both down more than 2.0% after reporting their earnings results. Visa (V) is down 2.2%, and Merck (MRK) is little changed, after topping expectations.
Earnings results, therefore, are not really driving the negative bias in the futures market. It is the lackluster response to the earnings results from heavyweight companies that is holding some sway over the futures market, because it reinforces the thinking that the stock market has gotten ahead of itself and is due for a pullback.
On that note, rising interest rates are doing some of the pulling. The yield on the 10-yr note has stretched to 2.83% while the yield on the 30-yr bond has moved up to 3.05%. The 2-yr note yield of 2.18% is 30 basis points higher than the S&P 500 dividend yield.
As market rates go up, the competitive headwind they pose for highly-valued stock prices does as well.
Market rates can be deemed relatively low still in historical terms, yet it is the direction, the speed, and the narrative surrounding the bump in market rates that can make upward moves at this juncture problematic for stocks that have been running for so long without the obstacle of rising interest rates.
Rising rates, therefore, promise to introduce increased trading volatility as equity investors reconsider their exposure to stretched valuations that have been rationalized, and predicated, on the persistence of low interest rates.
The January Employment Situation Report hasn't helped the interest rate narrative.
Job growth was solid again, but the focal point was the 0.3% jump in average hourly earnings. That was in-line with the Briefing.com consensus estimate, but after taking revisions into account, it left average hourly earnings up 2.9% year-over-year -- the highest growth rate since May 2009.
There has been a burgeoning assumption that the strengthening economy and the tight labor market are going to invite higher wages and wage-based inflation pressures that have been dormant for years. The key takeaway, then, is that the January report has given some data-based life to that assumption and has offered a reasonable basis for the Federal Reserve to move ahead with a rate hike at its March meeting.
Rising wages are a good thing for the economy, but what is good for the economy isn't always good for the stock market if it drives up rate-hike expectations.
The notable headlines from the Employment Situation Report are as follows:
- January nonfarm payrolls increased by 200,000 (Briefing.com consensus 180,000). Over the past three months, job gains have averaged 192,000 per month
- December nonfarm payrolls revised to 160,000 from 148,000
- November nonfarm payrolls revised to 216,000 from 252,000
- January private sector payrolls increased by 196,000 (Briefing.com consensus 175,000)
- December private sector payrolls revised to 166,000 from 146,000
- November private sector payrolls revised to 217,000 from 239,000
- January unemployment rate was 4.1% (Briefing.com consensus 4.1%) versus 4.1% in December
- Persons unemployed for 27 weeks or more accounted for 21.5% of the unemployed versus 22.9% in December
- January average hourly earnings were up 0.3% (Briefing.com consensus 0.3%) after increasing an upwardly revised 0.4% (from 0.3%) in December
- Over the last 12 months, average hourly earnings have risen 2.9%, versus 2.7% for the 12 months ending in December
- The average workweek in January was 34.3 hours (Briefing.com consensus 34.5) versus 34.5 hours in December
- January manufacturing workweek ticked down to 40.6 hours from 40.8 hours in December
- Factory overtime was unchanged at 3.5 hours
- The labor force participation rate was 62.7% in January, versus 62.7% in December