Stock index futures point to a lower opening led by the Nasdaq 100. Take-Two is considering buying Zynga while Owens & Minor are considering buying Apria. ViacomCBS, SolarEdge, and Dell have all been upgraded by analysts. Results will unofficially begin on Friday. President Powell will testify before the Senate on Tuesday. Inflation could dominate the news cycle with the release of the Consumer Price Index this week. Can stocks and housing survive rising interest rates?
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Key points to remember
Can aid stocks’ unofficial Friday earnings kick-off turn the tide?
Will stocks turn bearish as interest rates rise?
Will rising interest rates cool the boiling real estate market?
JJ Kinahan, Chief Markets Strategist, TD Ameritrade
(Open from Monday market) Stock index futures are pointing to a lower open, with investors appearing to pick up where they left off last week. the Futures on the Nasdaq 100 index are the most down, more than 1% before the opening bell. Many investors are hoping that the unofficial earnings launch on Friday will help bolster stocks. With the first week of the new year under our belt, we’ll see if the favoritism for energy, banking and value stocks continues and if the sell off in tech and growth stocks will last.
A return to “Merger Monday” is moving some titles this morning. Game stock Take two (TTWO) is considering purchasing Zynga (ZNGA) for $ 12.7 billion in stock and cash. Take-Two is down 8.31% while Zynga is up 53% in pre-market trading. The announcement appears to have sparked a rally at another gaming company, Playtika (PLTK) which was also up over 8% in pre-market despite the lack of news on the particular stock.
Healthcare equipment and services company Owens & Minor (IMO) announced plans to buy health services company Apria (APR) for $ 1.45 billion in cash. Apria jumped 24.5% in pre-market trading while Owens & Minor fell 9.1%.
Analysts continue to hand out inventory upgrades. This morning ViacomCBS (VIAC) was upped to ‘buy’ from Deutsche Bank, resulting in a pre-market rally of 3.42%. SolarEdge (SEDG) was added to Goldman Sachs’ “Conviction Buy” list and increased its price projection from $ 28 per share to $ 448, causing pre-market trading to rise 2.4%. Dell Technologies (DELL) was outclassed for “outperforming” by Berstein, pushing the stock up 2.4% before the bell.
Investors look bearish on Lululemon (LULU) because it fell by around 6.5% in pre-market trade. The company adjusted its profit forecast to the lower end of the forecast range.
Riskier assets also continue to decline, with the Russell 2000 Index Futures down 0.61% and Bitcoin Futures down 2.53% in pre-market trade. In addition, in the futures markets, Oil price are also down 0.41%. the 10-year Treasury yield (TNX) is up 0.62% before the open, and the VIX (Cboe Market Volatility Index) is up around 12% and trading around 21 which is often a level of concern for many traders.
Many investors are hoping that the earnings season can help markets stabilize the fourth quarters. However, JP Morgan (JPM), Wells fargo (WFC), Black rock (BLK), and Citigroup (C) are some of the biggest names, and banks have already performed well. the S&P 500 Banks Industry Group Index rose 9.37% last week. However, earnings announcements should provide insight into inflation and how CEOs deal with omicron, get employees to work, and how the variant affects the way products and merchandise go to market.
Friday the 10-year Treasury yield (TNX) rallied for the sixth consecutive trading day and closed at a new 52-week high while flirting with the 1.8% level. The 10-year yield has now returned to pre-COVID-19 levels when the Fed first launched its economic stimulus program. However, investors still prefer energy stocks over all other sectors despite a drop in oil prices of more than 1%.
After energy, utilities and financials completed the top three sectors on Friday. Energy was also the best performing sector last week with the Energy Select sector index up 11.19%. Three other sectors posted positive returns last week, including the Sector financial selection index climbs 5.41%, Industrial product selection index up 1.25%, and Index of Selected Consumer Staples return of 1.30%.
The first three sectors tend to be sensitive to inflationary conditions either through rising commodity prices, harvesting commodities, or as part of a causal relationship where rising commodity prices lead to inflation. , which drives up interest rates. Later this week we will have another update on inflation with the Consumer Price Index (CPI) and the Producer Price Index (PPI) for the United States and China. Investors will hear Fed Chairman Jerome Powell testify before the Senate about his second appointment; he will likely be faced with many questions regarding inflation.
It’s important to note that just because interest rates are rising doesn’t necessarily spell disaster for stocks. While rising rates have hurt growth stocks, there is a history of stocks and interest rates rising together. According to BlackRock, going back to 1995, in months when the 10-year Treasury yield rose more than 50 basis points, the S&P 500 posted price gains 3.2% above typical months. Additionally, another study comparing real rates (inflation-adjusted rates) to stock valuations found a positive relationship between the two variables. The study found that for every 50 basis point increase in the 10-year rate, one could expect a one-point increase in multiples. Of course, there is no guarantee that these relationships will continue.
That said, rising rates tend to influence different areas of the market. Recently, we’ve seen on several occasions that rising rates have boosted value stocks but hurt growth stocks. They boosted financial stocks but hurt tech stocks. If we were to see a prolonged period of rate hikes where Treasury yields rivaled dividend yields on utility stocks, we would likely see utilities, as well as any other high yielding stock, fall.
Of course, we can look back and see examples where rates have gotten extremely high, leading to a recession. The most notable example would be 1982, when Federal Reserve Chairman Paul Volker tried to fight stagflation and the federal funds rate exceeded 20%. However, this was relatively short lived. Overall, higher rates do not necessarily cause the stock market to fall as much as they tend to cause sector rotation.
Housing market: Rising interest rates also have less of an effect on home prices than you might think. Of course, this is also another complex relationship that has a lot of factors. Historically, rising rates have tended to cause people to try and quickly close a house to fix a rate. Rising rates often have a short-term deterrent to home prices, but as buyers get used to the new conditions, buying will eventually pick up.
If you compare the S & P / Case-Shiller House Price Index to the 10-year yield on the thinkorswim® platform, you can see that there are many times that house prices and yields go up and down together.
Good in the hood: Housing also tends to be very localized. While some parts of the country could experience booms, others could experience recessions. Most are probably somewhere in between. Let’s take a look at some examples using data from the National Association of Realtors. During the 2007 housing bubble that was burst by the credit crunch, Cape Coral-Fort Myers, Florida experienced a 50.8% change in house prices between the fourth quarter of 2007 and the fourth quarter of 2008 Buffalo-Niagara Falls, New York, saw almost no change in house prices, rising only 0.08%. While Dover, Delaware saw a 6.5% increase in house prices.
Our house: The relationship between house prices and personal income is perhaps a better indicator of the evolution of house prices. When the purchase price of a home takes too much of a family’s budget, something has to give. Unfortunately, the current national home price-to-income ratio is higher than it was in 2006, before the housing bubble burst.
However, this is also best seen at the local level. In November 2021, a study by Clever Real Estate found that New York, San Jose, San Diego and Los Angeles were among the cities with the highest price-to-income ratios. But Pittsburg, Cleveland, Oklahoma City, and St. Louis were among the lower towns.
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