Wednesday, September 27, 2023
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Crazy Friday Caps Off a Wild Week on Wall Street

The week began with a huge rally. Then came three days of brutal losses. On Friday, despite lingering concerns about market bubbles, investors finished the week with a big win.

MANHATTAN (CN) — Friday’s market was a microcosm of the wild swings seen earlier in the week, with indices initially dropping sharply before gaining to close out the day’s trading on a high note.

Dropping about 150 points in morning trading, by the closing bell the Dow Jones Industrial Average pulled up its britches to gain 573 points, a 1.8% increase. The S&P 500 had a similar outing, gaining 1.9% for the day despite early losses.

The Nasdaq, which is just 30 points above where it started at the beginning of the year and which has suffered the worst of the three indices in recent weeks, also was able to stay in the black, gaining 1.5% for the day.

The day’s crazy trading mimicked the week’s wild swings. Monday’s markets were incredibly positive, with U.S. indices rocketing up 2% to 3%. As the week dragged on, however, persistent concerns about inflation, a rocky jobs outlook and bond yields all conspired to send investors back into bear mode.

The steepest drop came on Thursday, after Federal Reserve Chair Jerome Powell noted at a Wall Street Journal conference inflation would likely increase later this year but refused to commit to increasing interest rates. The comments caused investors, who have struggled to price in potential bubbles, to begin a fresh round of selloffs.

The comments also caused bond yields to increase, with the 10-year Treasury ending Thursday once again above 1.5%.

Bond yields have continued to vex equity investors, particularly those heavily invested in technology stocks. Yields for 10-year Treasury bonds, a key metric for the bond market, topped 1.6% on Friday before settling down to 1.5%.

According to Tom Essaye of the Sevens Report, the core issue with bond yields has been economic growth. “Due to economic re-openings, stimulus, and vaccine optimism, global investors are pricing in a huge jump in economic growth,” he wrote in a Thursday investor’s note. “That is why yields are rising. And, that expectation of better growth is causing the unwind of last year’s flood into tech shares.”

Tech stocks were a lifeline for many investors during the early days of the pandemic, as lockdowns actually benefited those companies. Further, Essaye says, investors may be kicking Big Tech to the road now that the economy is improving and moving into “cheaper” sectors.

“The looming reopening of the economy and acceleration in economic growth means investors can get exposure to earnings growth in sectors that aren’t as richly valued as tech,” he wrote. “In a growing economy, financials, industrials, energy, and materials sectors can enjoy earnings growth, and those sectors trade at a much lower valuation than tech.”

On the employment front, even as overall jobs are coming back, some sectors continue to lag and the economy is 9.5 million jobs short of where it was pre-pandemic. The Bureau of Labor Statistics reported Friday the United States added 379,000 jobs last month, with the unemployment rate remaining around 6.2%. 

Warily eyeing these green shoots emerging in the economy, experts see stubborn job problems clogging the pathway to the finish line. Newly filed unemployment claims rose again, with initial claims for the week of February 27 reaching 745,000, an increase of 9,000 from the previous week.

“At this pace, it will take about four and a half years to get back to where the labor market would have been without the pandemic,” wrote Nick Bunker, economic research director at Indeed’s Hiring Lab. “Millions of Americans out of work do not have that time.”

A similarly disappointing jobs report from ADP earlier in the week found that private sector employment gained 117,000 jobs in February, nearly half of what many had predicted. Most of the job increase was seen among medium businesses.

The services industry posted a gain of 131,000 jobs, but leisure and hospitality represented only 26,000 of that number. The severe winter weather also played a part in the stagnant job gains, experts say. 

“The labor market continues to post a sluggish recovery across the board,” ADP chief economist Nela Richardson said in a statement. “With the pandemic still in the driver’s seat, the service sector remains well below its pre-pandemic levels. However, this sector is one that will likely benefit the most over time with reopenings and increased consumer confidence.”

Other metrics also show a concerning lag. The Bureau of Labor Statistics noted that productivity fell by 4.2% last quarter, the largest drop since 1981. Some experts think the drop is only temporary, though.

“Looking ahead, we expect productivity to strengthen in coming quarters and remain well supported as the economy experiences a mini boom in activity and the labor market lags the overall economic recovery,” Lydia Boussour at Oxford Economics said. “Stronger productivity gains should buffer companies’ bottom lines against rising input costs and further boost profit growth this year amid an expected surge in companies’ sales.”

The disparate relationship between Wall Street and Main Street has some concerned a bubble is in the works.

A survey of nearly 400 investors by DataTrek found most believe several bubbles have infiltrated the stock market, particularly in Big Tech stocks and large-cap companies. Most of the respondents are not terribly perturbed by the prospect of bubbles, however, with 41% worrying about current bubbles a moderate amount. About 29% worry about the bubbles “a lot” or “a great deal,” while 30% worry only “a little” or not at all.

Hedge fund billionaire Ray Dalio also notes that about 5% of the top 1,000 companies in the United States, in particular emerging technology companies, are in “extreme bubbles.” 

In an analysis posted to his LinkedIn account last month, Dalio noted that the current market “is reminiscent of the ‘Nifty Fifty’ in the early 1970s and the dot-com bubble stocks in the late 1990s, both of which I remember well.” He also said the market actions track with the bubble stocks of the late 1920s.

Follow @NickRummell
Categories / Economy, Financial

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