After The Close - The major market equities resumed their strong May for most of Wednesday, following yesterday’s broad-based pullback. And while 10-year note yields rose again today, likely contributing to the paring of gains in the home stretch, traders were encouraged enough by a slate of strong earnings reports (more on that below) to look beyond the same development that drove the major indexes lower on Tuesday. While the Russell 2000 was the best-performing composite, the large-cap averages registered full-day gains, as well, with the NASDAQ leading the way.

The earnings front was headlined by Macy’s (M). The department store blew away quarterly estimates, helping to lift many in the retail and consumer sectors. In fact, along with the basic materials group, cyclical consumer goods was among the stronger industry composites by the closing bell. NIKE (NKEFree NIKE Stock Report) rose to all-time highs, leading the Dow Industrials due in large part to its exposure to Macy’s. On the other hand, fellow blue chips Home Depot (HDFree Home Depot Stock Report) and 3M (MMMFree 3M Stock Report) saw Tuesday’s struggles carry into today’s session, as the former’s disappointing quarterly sales performance has introduced some uncertainty to the building supply sector.

As for oil, the price of domestic crude stayed around its breakeven line for the majority of the session, before pushing $0.18-a-barrel higher on the way to setting three-and-a-half-year highs. The recent rally and, more significantly, the continued strength of the dollar slightly offset encouraging supply fundamentals for most of the day, however. Namely, the Energy Information Administration reported that stockpiles fell by 1.4 million barrels last week. And while this beat the consensus forecast, investors were hesitant to push the per-barrel price even higher due to the U.S. currency’s rise. Looking ahead, global demand for domestic crude oil is expected to remain healthy.

Overall, the session belonged to the bulls. Advancing shares outnumbered declining issues by a roughly two-to-one margin. Earnings are likely to remain the dominant storyline in the short term, with the retail sector’s Best Buy (BBY), Lowe’s (LOW), and Target (TGT) scheduled to report next week. Over the subsequent weeks and months, we expect speculation over the Federal Reserve’s monetary tightening strategy, as well as elevated yields, will add some pressure to the resilient bullish push. Stay tuned. – Robert Harrington

At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.


Before The Bell - Following a strong series of sessions last week, and a fast start to the new five-day span on Monday morning, before a mixed close ensued, Wall Street began the second trading day of the week with losses. Several issues were at play here. First, do-it-yourself retailing giant, The Home Depot (HD Free Home Depot Stock Report), reported solid earnings for its latest quarter, but came up a little short on the revenue line. That sent this Dow Jones Industrial Average component to an early loss of about 2%. At the same time, a solid showing in retail sales (discussed below) contributed to a sharp jump in Treasury note yields.

In all, that one-two punch combined to pummel the market from the opening bell. In fact, after the first 90 minutes of trading, the Dow had fallen to a loss of 220 points, with that composite settling in with a deficit of 200 points as we passed the 90-minute mark of the session. Losses of some note also were tabulated by the S&P 500 Index and the NASDAQ. The small-cap indexes were hit less sharply. Overall, though, it was a rude awakening for the recently triumphant bulls. The climb in Treasury yields also provided an excuse to take profits in an extended market.

As noted, there also were economic metrics to consider. Specifically, the morning saw the Commerce Department report that retail sales had increased by 0.3% in April. That rise matched expectations. But the March result was revised to show a greater rise of 0.8%. Gains in the most recent month were led by furniture and home furnishing stores, clothing and accessories dealers, and the Internet. As to the strong economic showing, it led to a jump in Treasury yields, with the 10-year maturity climbing to 3.06%--a seven-year high. That jump in yields, along with new violence in the Middle East, hurt the equity market. 

The market's selloff steepened as we ended the morning and moved into the afternoon, with the backtracking reaching some 240 points in the Dow just after lunch. The precipitating factor, we sense, was a further jump in yields on the 10-year Treasury note, to just under 3.09%. The companion 30-year maturity moved up past 3.21%. The equity losses, meantime, were especially severe, with the NASDAQ being the big loser. Looking at the afternoon, there were 11 stocks down for every five that were gaining on the NYSE as we moved inside the final two hours, while all 10 of the sectors were lower, led by telecom, technology, and health care.

The climb in the 10-year Treasury note's yield is especially troubling as that debt instrument is used in setting mortgages and other major loans. Meantime, the losses mounted from there, with the Dow's deficit soon surging past 270 points, in a selling push on those higher yields. Our sense is that traders are now guessing that the Fed could hike interest rates not only in June and September, but also in December -- that would be four increases for the year. A trio of rate hikes also is likely in 2019. So, there is a flip side to optimism about the economy and earnings.

The selloff would then continue into the close, although the averages did manage to made a last-minute stand that enabled the bulls to pare the final deficits to a modest degree. One late positive is that the yield on the 10-year Treasury note edged down from 3.10% to 3.08% by day's end. Still, the jump in rates was significant, and had a dampening impact on the equity market throughout the session. At the close, therefore, the Dow's loss was still 193 points; the S&P 500 was lower by 19 points; and the NASDAQ, on the selloff in tech, was down by 60 points, after having been off by 90 points earlier.  

Looking out on a new day, and sensing that interest rates, in particularly the yield on the 10-year Treasury note, will be a major determinant in the day's action, we see that stocks were lower in Asia overnight. In Europe, though, the leading bourses are carving out a slightly higher path so far today. In other news, Treasury note yields, which ended the session at 3.08% yesterday, are at 3.06% so far this morning, while oil prices are nominally lower in early dealings. Finally, the U.S. equity futures are showing little direction in the early going.  - Harvey S. Katz, CFA

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.