MW The stars may be aligning for a repeat of last August's stock selloff, warns JPMorgan
By Barbara Kollmeyer
Critical information for the U.S. trading day
It's been a dreary April, with a 4.4% drop for the S&P 500, and a fall of 2% this week. It's also in the grips of the longest slide since January, with a fear gauge on the rise.
Still, earnings season has barely begun and hopes remain that corporates do some heavy lifting here.
Onto our call of the day, which brings a tale of summertime caution from bearish-as-usual JPMorgan strategists, who say the recent march higher in bond yields should not be dismissed so casually.
From as low as 4.1% at the start of the year, the 2-year Treasury yield BX:TMUBMUSD02Y is hovering at 4.9%, and tapped 5% this week after Fed Chair Jerome Powell backed up market views that rate cuts would take longer.
"Most of this increase in the 2-year UST yield between January and the beginning of April was largely ignored by equity and credit investors in a similar fashion to May-July 2023," write a team of strategists led by Nikolaos Panigirtzoglou in a note to clients published late Wednesday.
"The risk is that the 2yr UST yield consolidates at around 5%, the 'high for long' narrative of last August-October, which at the time had triggered fears of eventual hard landing and had hit risk assets, is repeated going forward," they say.
Panigirtzoglou and his crew recall how the 2-year Treasury yield traded around 3.8% last May, then reached 4.9% by the start of August - all that was largely ignored like the current climb in yields. It was only once the 5% level took hold that a selloff for stocks and credit began.
From August to October 2023, stocks corrected about 10%. The S&P is currently 4.4% off a March 28 record high of 5254.35.
They flag a crucial difference this time though - investors started April with far more elevated exposure to risk assets compared with last August. Here's their chart showing equity allocation by nonbank investors at the start of April, and now at the highest since 2007:
Here's another chart showing short interest positions on some of the biggest exchange-traded funds for U.S. stocks - the SPDR S&P 500 ETF SPY and Invesco QQQ Trust Series QQQ, which tracks the Nasdaq-100 NDX. The record low short interest on those ETFs reveals "how little protection there is in U.S. equities and tech stocks in particular," said the JPMorgan strategists.
Of course, we are talking about the most bearish bank on Wall Street right now, forecasting the S&P 500 to end the year at 4,200, the same as their 2023 call, which obviously was off base. If JPMorgan is right, the index has a 16% correction to go from here.
In a separate note, JPM summed up its current advice to clients, which is a preference for commodities over stocks - but energy over gold due to the latter's recent run. The bank also likes Europe over U.S. stocks for valuation reasons.
The markets
Stock futures (ES00) (NQ00) (YM00) are inching up, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y steady. Gold (GC00) is also up, oil (CL.1) is down 1% and the dollar DXY is lower after some supportive G-7 comments for the yen $(USDJPY.FOREX)$ and South Korean won $(USDKRW.FOREX)$.
The buzz
Blackstone $(BX)$, D.R. Horton $(DHI)$ and Discover Financial $(DFS)$ are reporting early, with Netflix $(NFLX)$ due after the close.
Read: Netflix is getting ready to body-slam the competition with live sports-entertainment content
Taiwan Semiconductor Manufacturing $(TSM)$ (TW:2330) beat profit expectations as sales climbed on AI chip demand.
Duolingo shares $(DUOL)$ popped 6% on news the online language app will join the S&P Midcap 400 MID index.
EBay $(EBAY)$ is climbing after a double upgrade from Morgan Stanley, with Etsy $(ETSY)$ getting a downgrade from the bank.
Alphabet's $(GOOGL)$ Google announced a new round of layoffs, with some jobs set to move overseas.
Weekly jobless claims and a Philly Fed manufacturing survey are due at 8:30 a.m., with existing home sales and leading indicators at 10 a.m. Fed Gov. Michelle Bowman will speak around 9 a.m., New York Fed Pres. John Williams at 9:15 a.m. and Atlanta Fed Pres. Raphael Bostic at 11 a.m., then again at 5:45 p.m.
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Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
TSM Taiwan Semiconductor Manufacturing NVDA Nvidia TSLA Tesla HOLO MicroCloud Hologram AMC AMC Entertainment DJT Trump Media & Technology GME GameStop NIO Nio AAPL Apple AMZN Amazon SMCI Super Micro Computer
The chart
"Today, we saw NVIDIA testing and nearly breaking support at $850. That is a significant level because if it goes, the entire market will follow," says Michael Kramer, founder of Mott Capital Management, in reference to Wednesday's action that saw Nvidia drop 3.8%. "One would think that if Nvidia goes, the other Fab4 would likely go too, and the fact is that the Fab4 represents 80% of the gains so far this year in the S&P 500."
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-Barbara Kollmeyer
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April 18, 2024 06:51 ET (10:51 GMT)
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