Stocks Under Pressure as Yields Push Higher, 30 yr Bond Auction at 1 pm – Try the Rigatoni ai Tre Pomodori

Things You Need to Know

• Stocks Sold off and they are headed lower again today.
• Bond yields continue to push higher,
• $22 billion dollar auction on 30 yr money today.
• Oil up, gold down.
• Fed mins suggest patience.
• Try the Rigatoni ai Tre Pomodori

Oh look—stocks sold off! And if you’re really surprised, I’d say you’ve been living under a rock…The 10- and 30-year Treasury yields were rising, global bond yields were rising, oil was rising…and European markets were under pressure. That set the tone. Futures were weak, stocks opened lower and then got slammed—the Dow down more than 600 points before 11 am. Another reminder that the cost of money matters.

By the end of the day, though, it wasn’t the disaster it threatened to be. Stocks finished lower, but well off their morning lows. Here’s how it wound up…

The Dow lost 0.7%, the S&P gave back 0.2%, the Nasdaq slipped 0.2% and the Russell fell 1.3%. Smaller companies tend to be more sensitive to financing costs, leaving them more exposed when rates rise. The Transports lost 0.9%, with the early jump in oil adding pressure, the Equal Weight S&P gave back 0.8%, while the Mag 7 slipped 0.2%.

So, again, you can see how the heavyweight tech and tech-related names—even on a down day—continue to cushion the headline indexes. The S&P, Nasdaq and Mag 7 remain near their highs while much of the rest of the market reprices.

We discussed this yesterday, but let’s put it in perspective…The Dow is roughly 6% off its high and approaching its long-term trendline. The Equal Weight S&P is down 5.6%. It has tested and held that support—while the Russell is off 9% and sitting right on top of its long-term trendline. These declines are still within the range of ordinary market pullbacks – all below the conventional 10% correction threshold. But that doesn’t mean you aren’t feeling the pressure…individual names can be (and many are) down considerably more, and whether these trendline supports hold matters.

The Transports- though, are a different story…. they broke their trendline and have moved lower from there and are now down 19% knocking on the door of a full-blown bear mkt….. And we won’t see any relief there until we see an end to the middle east conflict and oil moves lower – which at the moment is nowhere in sight….

But the real drama – was in the bond market…. The 2-year kissed 4.78%, the 10-year Treasury yield surged toward 5.36%, while the 30-year also touched its highest level since 2002 clocking in at 5.73%.

Then came the $39 billion 10 yr bond auction…. buyers choosing to settle for a 5.3% yield to lend money for 10 yrs…now that was 1.7 bps below what the 10-yr was yielding which was seen as a positive…. Stocks then moved higher, just not enough to go positive.

Now, yields backed off after the FED mins were released – suggesting just what we already knew…. all 12 members voted to hike, but they are also willing to let the data detail the next move with the bulk of them willing to be patient – suggesting just one more hike higher vs. the two that some analysts think. And the fed fund futures market agrees…suggesting only a 19% chance of an October hike, while it still suggests an 84% chance of a December hike.

This morning though, bonds are being tested again…. both the 10 -yr and 30 -yr yields are up…. The 10-yr yield is up 4 bps at 5.32% while the 30-yr is up 4 bps at 5.71%.

And just in case you haven’t noticed – conventional 30 yr mortgage rates are now 7.49% up 24% since the start of the year…

And then there was oil…. Brent settled at $100.20 while WTI closed at $88.28 – both just a bit lower. But fresh attacks in Saudi Arabia and the pending hurricane about to hit the Louisiana coastline threaten to send prices higher. This morning Brent is up $4 at $104.30 while WTI is up $3.50 at $91.80. In any event – we are not getting any relief from the energy sector.

Gold lost $50 yesterday to end the day at $4,110 – but not before testing as low as $4,067 – getting ever closer to the key $4,000 level. This morning, gold is up $12 at $4,122…. My guess is that it is only a matter of time for gold to break $4,000…because if bond yields continue to push higher, gold will continue to get pushed lower…and my sense is that bond yields are not coming down significantly any time soon.

And the VIX continues to tell us not to worry…. At 15.73 – it is below all 3 trendlines and that says that investors are NOT paying aggressively for downside protection – which says more about sentiment than it does about risk. I think that is a disconnect…. Think about it – sentiment down/risk up? It doesn’t make sense.

This morning – we learned that the US (Trump) no longer wants to deal with Iran – Marco Rubio telling us that they have ‘passed up multiple opportunities’, to come to the table. Diplomatic efforts led by Stevie Witkoff have stalled so the US (and Israeli) military is preparing to strike them again – The rumor is most likely before the mid-term elections.

There is no eco data to move the markets. But there is a $22 billion 30 yr auction – and considering what happened at yesterday’s 10 yr auction, we may be surprised.

And that brings us back to earnings – With oil up and borrowing costs up, corporate profits have a lot of work to do to support stock prices.…. remember what I said yesterday….

“FactSet is expecting profits to rise by 29.3% y/y, Bloomberg Intelligence expects them to rise by 25% y/y – either way – that’s not nothing….and it helps explain why some investors are looking past the much of the negativity.

So here is my concern – how much good news is already priced into some of those highflyers? Because when stocks hit records BEFORE the results arrive, then companies better deliver. They better not disappoint on any metric, not one…and the guidance will need to be robust, or the action will be at risk. And remember – they can have a great qtr. but if they are cautious going forward – expect to see a lot of RED. It’s called re-pricing risk.”

Today we heard from Samsung, TSM – both out of Asia and PEP – a truly American company….and the results and action detail exactly what I have been saying….

Samsung – Quarterly profits rose nearly nine-fold—a nine-fold INCREASE—and that STILL fell short of expectations. The stock dropped 2.4%. Taiwan Semi reported sales growth of 51% y/y—and that wasn’t enough to get buyers excited either.

Think about that for a minute…Enormous profit growth, enormous sales growth—and the stocks go DOWN. It sounds ridiculous until you consider what investors were expecting. The market reacts to the gap between results and expectations, not just whether the numbers look impressive. When the price already reflects a spectacular quarter, even strong results can leave investors disappointed.

And that’s my concern heading into earnings season—particularly in TECH, where many names remain close to their highs. There’s a lot of optimism in those prices, leaving less room for disappointment.

Look – The AI spending boom continues, even with financing costs elevated. I mean Tencent is reportedly considering issuing $5 billion in debt to fund its AI needs—and I’ll be interested to see what yield investors demand on that debt.

So yes, the AI opportunity remains substantial. But as the cost of money rises, the eventual payoff becomes more important. Investors want to see how all that spending turns into revenue, earnings and cash flow.

Then look at PEP this morning…They beat estimates BUT lowered guidance, citing mounting costs—and the stock is UP about 1.8%.

Why? Look at the chart! The stock is roughly 26% below its February high, trading around levels last seen in 2021. Investors have been punishing it for months. That suggests a lot of disappointment was already reflected in the price, giving buyers a reason to step in despite the weaker outlook. And that 4.8% dividend yield only adds to the opportunity.

That’s the distinction you need to understand…A strong report can disappoint when expectations are sky-high. A mixed report can attract buyers when the stock has already taken a beating. So as earnings arrive, Yes, watch the results, Yes, watch the guidance—and Yes, watch what investors have already priced in.

European markets are all lower. US futures are lower…Think global bond yields are higher, oil is higher and we are on the verge of earnings season….

Dow futures -575, S&P’s -50, Nasdaq is -270, while the Russell is -30 (think rates).

The S&P closed at 7,801 – down 17 pts. Futures suggest more weakness…The chart says watch the trendline at 7,680.

Now – you also need to watch the trendlines on the Dow and the Russell – because they are about to break as well…suggesting more re-pricing in the days ahead… For the long-term investor, it means reviewing what you own, why you own it and whether your allocation still fits your needs. A broken trend line deserves attention, but it doesn’t automatically invalidate a company’s earnings outlook or your investment plan.

If you own quality businesses, have the liquidity you need and can withstand the volatility, lower prices may create opportunities to add selectively. But a stock being cheaper doesn’t make it a bargain—you still have to assess the business and the price.

Remember – the day trader manages the moves min to min. The long-term investor manages the move and assesses whether that move changes the opportunity—or just the price.

Talk to your advisor…make sure you are comfortable with what you own…. try not to get emotional when making investment decisions…. Understand the difference between a cycle and a change in the thesis. Understand your cost and most importantly understand that paper losses are not realized losses…you only realize a ‘real’ loss if you sell it below your cost…….

If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190 or better yet – click on this link to connect. https://slatestone.com/contact-us/

I’m always happy to provide a complimentary portfolio review and risk assessment.

Take good care,

Kp

[email protected]

Source: Bloomberg, CNBC, Reuters, Wall Street Journal

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