By Mark DeCambre, MarketWatch
Next week 37% of the S&P 500 will report corporate results,
making it the busiest week of this earnings season
Government bond yields climbing and a shrinking gap between
short-term and long-term Treasury rates have prompted some
consternation on Wall Street, driving equity prices lower as
investors fret about what these dynamics mean for U.S. economic
growth entering its ninth year of expansion.
Fears about a so-called flattening yield curve have taken center
stage, with investors fixated on the gap between the 2-year
Treasury notes and the 10-year benchmark , which on Tuesday touched
the narrowest--41 percentage points--since more than a decade
(http://www.marketwatch.com/story/treasury-yields-mixed-ahead-of-economic-data-fed-speakers-2018-04-17).
The yield curve is often tracked as a measure of sentiment about
the economy's overall health. In a normal environment, the yield
curve steepens because investors tend to demand a higher yield for
lending further into the future, while a flattening curve is read
as a sign that investors are worried about the longer term outlook.
An inverted curve, where shorter-dated yields exceed those for
longer-dated debt, in a dynamic known as yield-curve inversion,
rings alarms because it has faithfully preceded all recessions
since 1960.
Read:Why stock-market investors should embrace a flattening
yield curve--for now
(http://www.marketwatch.com/story/why-stock-market-investors-should-embrace-a-flattening-yield-curvefor-now-2018-03-27)
The threat of such an inversion has even caught the attention of
Federal Reserve officials, with St. Louis Fed President James
Bullard saying that If the Fed goes ahead and raises rates and the
10-year rate "does not cooperate," the yield curve could invert
later this year or in 2019. Bullard added that the yield-curve
signal should be taken seriously
(http://www.marketwatch.com/story/feds-minutes-got-it-wrong-says-bullard-not-all-members-see-need-for-higher-interest-rates-2018-04-13).
Bullard isn't presently a voting member
(https://www.federalreserve.gov/monetarypolicy/fomc.htm) of the
policy-setting Federal Open Market Committee.
However, not everyone is freaking out about that
possibility.
Andrew Adams, analyst at Raymond James, in a Friday research
note argues that not every narrowing yield spread between the 2s
and 10s results in an inversion and that some of the best
stock-market performance has come amid such flattening yield
trends:
It is true that all recessions since 1960 have been preceded by an inverted yield curve (commonly defined these days as when the 2-Year U.S. Treasury yields more than the 10-Year U.S. Treasury), but the problem is that too many people have recently been expanding this relationship to a flattening yield curve as well. Yes, the yield curve has been flattening--the spread between the 10-Year and 2-Year has narrowed from 130 basis points at the beginning of 2017 to 48 basis points now--but crossing the inversion point is far from imminent. A yield curve as flat as it is now does not always lead to an inverted yield curve and even if it does, the lag time can be years before it occurs. What's more, some of the best stock market returns in history have come after the yield curve became flatter than it is now, including after 1984, 1988, 1994, and 2005 (see chart 2 on page 2; arrows in lower S&P 500 panel represent when the 10-2 spread first became as narrow as it is currently). In fact, the 10-2 spread was relatively flat for the entirety of the 1994-2000 period, the greatest stock market run in history. So, are we worried about the yield curve signaling a possible recession is on the way? No, not at this stage.
Here's a chart provided by the Raymond James analyst by way of
Stockcharts.com:
The fear of rising bond yields
However, it is the steady climb of the 10-year Treasury yield to
its highest level since 2014 on Friday
(http://www.marketwatch.com/story/treasury-yields-on-track-to-cap-weeklong-climb-2018-04-20)that
unsettled the markets, sending ripples through the U.S. dollar and
stocks, even as the yield curve steepened somewhat.
On Friday, selling pressure in U.S. equity benchmarks
intensified late in the day
(http://www.marketwatch.com/story/us-stock-futures-slip-lower-with-ge-earnings-on-deck-2018-04-20)
as the yield on the 10-year Treasury note hit a more-than-four-year
high.
The Dow Jones Industrial Average fell 201.95 points, or 0.8%, to
24,462.94 but ended the week 0.4% higher. The S&P 500 declined
22.99 points, or 0.9%, to 2,670.14 with 10 of the 11 main indexes
ending with losses. Consumer-staples and technology sector were hit
the most, falling 1.7% and 1.5%, respectively. The benchmark index
still posted 0.4% gain over the week, however. The Nasdaq Composite
Index dropped 91.93 points to 7,146.13, a decline of 1.3%. Over the
week, the tech-heavy index rose 0.5%.
Meanwhile, the dollar strengthened as the 10-year flirted with
the psychologically important 3% mark
(http://www.marketwatch.com/story/dollar-searches-for-catalyst-as-risk-sentiment-improves-2018-04-19),
which can drive demand from buyers looking to invest in the buck
with the promise of yields that exceed dividends for stocks.
Yields have been a pivot point for the markets since back in
February when the 10-year made another break toward 3%
(http://www.marketwatch.com/story/why-stock-market-investors-should-stop-worrying-and-learn-to-love-rising-bond-yields-2018-02-23)
before backing off. The higher borrowing costs it implies for
corporations and the competition that bonds would offer against
equities is part of the reason that investors have paused when
Treasury rates pitch higher.
Higher rates can be stomached by the market if they suggest that
the economy is genuinely improving, but can cause anxieties if
there are questions about growth.
Read: Dollar rebound not here to stay: analyst
(http://www.marketwatch.com/story/dollar-rebound-not-here-to-stay-analyst-2018-04-20)
Busiest week of corporate earnings ahead
Can corporate earnings calm investor nerves about yield curves
and rising rates?
That is the big question. "I think investors want to see more.
Next week, we'll have a broader swath of earnings from all sectors,
and we need to focus on the tech sector," Quincy Krosby, chief
market strategist at Prudential Financial, told CNBC during a
Friday interview
(https://www.cnbc.com/2018/04/20/interest-rate-worries-may-not-be-offset-by-good-earnings-news-in-the-week-ahead.html).
Lindsey Bell, investment strategist at CFRA, told MarketWatch
that nearly 80% of the companies that have reported so far have
beaten earning estimates, while about four out six companies have
outperform on sales. "Much better than historical standards of 66%
and 55%, respectively," she wrote.
Thus far, earnings growth is tracking at 17.5% year-over-year
for the index, better than the 16.3% expected at the start of the
earnings season.
However, that hasn't spurred Wall Street buying:
"Despite the positive results, stocks have not reacted
favorably. Companies that beat on both the top and bottom line have
only seen their stocks rise 0.5% on the day of the report, on
average. But companies that have missed EPS expectations and beat
sales expectations have endured a 4.4% decline on average on the
day they report results.
Looking ahead, next week 37% of the index will report results,
making it the busiest week of this earnings season, Bell said.
Specifically, 179 S&P 500 companies (including 12 Dow 30
components) are scheduled to report results for the first quarter,
according to FactSet data.
Companies reporting early include Google-parent Alphabet Inc.
(GOOGL)(GOOGL) on Monday after the closing bell, Dow components
United Technologies Corp.(UTX)Coca-Cola Co. (KO) Caterpillar Inc.
(CAT) 3M Co. (MMM) Verizon Communications Inc. (VZ) Travelers Cos.
Inc. (TRV) on Tuesday before the start of regular trade.
Economic Data
Monday
Tuesday
Case-Shiller house price index for February due at 9 a.m.
New home sales at 10 a.m., with 625,000 new properties
expected
Consumer confidence for April due at 10 a.m., with 126
forecast
Thursday (all reports at 8:30 a.m. unless otherwise denoted)
Friday
(END) Dow Jones Newswires
April 21, 2018 15:08 ET (19:08 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.