- U.S. indexes gain; small caps, FANGs, chips, banks outperform
- Materials leads major S&P sector gainers; energy weakest group
- Dollar, gold, bitcoin up; crude falls
- U.S. 10-Year Treasury yield rises to ~1.96%
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THE A'S HAVE IT: APPLE, AMAZON, AMGEN BOOST WALL STREET (1605 EST/2105 GMT)
Major U.S. stock indexes ended sharply higher on Tuesday, with the S&P 500 (.SPX) and Nasdaq (.IXIC) boosted the most by shares of Apple (AAPL.O) and Amazon.com , while shares of Amgen (AMGN.O) gave the biggest support to the Dow (.DJI).
Bank shares also climbed after U.S. 10-year Treasury yields climbed to their highest since November 2019. The S&P bank index (.SPXBK) advanced 1.9%.
Increasing expectations the U.S. Federal Reserve will soon start tightening monetary policy has driven yields higher.
Amgen gained 7.8% after the company announced a buyback of up to $6 billion and forecast earnings would more than double by 2030.
Apple ended up 1.8% and Amazon.com rose 2.2%.
Among the day's drags, Pfizer Inc (PFE.N) shares were down about 2.8%, while putting the most pressure on the benchmark index. Pfizer's shares fell after the drugmaker's full-year sales forecast for its COVID-19 vaccine and antiviral pills fell short of Wall Street estimates.
Here is the closing market snapshot:
STOCK SPLITS USUALLY BULLISH FOR COMPANIES-BOFA (1401 EST/1901 GMT)
In the wake of Alphabet's recent stock split announcement, BofA Securities strategists are out with a note saying that stock splits historically are bullish for the companies that enact them.
Google parent Alphabet Inc (GOOGL.O) last week, while releasing its quarterly results, announced it would undertake a 20-for-one stock split. read more Its shares jumped 7.5% in the following session.
Alphabet's surprise plan must still be approved by shareholders, but "the split announcement and more-aggressive buybacks suggest a management team that is becoming more shareholder-friendly," they wrote.
But they said based on data since 1980, S&P 500 (.SPX) stocks that have announced stock splits have significantly outperformed the index in the three, six and 12 months after the initial announcement. Stocks that have split gained on average 25% over the next 12 months compared with a gain of 9% for the benchmark index, they wrote.
"Some of the outperformance is likely due to momentum," they noted. "Companies that announce splits have likely seen sustained market outperformance and expect that outperformance to continue."
"Underlying strength in the company is a primary driver of elevated prices. Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy," they wrote.
Stock split announcements have become more scarce over the past decade, they added, and performance has not always been positive following a split.
But, they said, "since gains are more common and larger than losses on average, splits appear to introduce upside potential into markets."
THE CASE FOR HOPE (1301 EST/1801 GMT)
While the negative case for U.S. stocks is clear to DataTrek co-founder Nicolas Colas, he's pushing the case for optimism in his latest research.
Colas is not disagreeing with the negatives - that the Fed must raise rates quickly to cool inflation, that there is no precedent for Fed funds lift off from zero with balance sheet reduction in the same year. He's also not disagreeing that economic uncertainties will pressure stock valuations and that risks around aggressive policy changes are not fully priced in.
But, still he sees hopeful signs:
First, the consumer, he says, is "in great shape and should remain so through the rest of the year."
Why? Unemployment is at 4%, better than the lowest 70s, 80s and early 2000s levels, close to the 90s lowest level. With jobs abounding, he sees it dropping further.
Home values are up 19% versus a year ago, up 30% versus two years ago with 2/3 of Americans owning. (He doesn't go into the flip side of how prohibitively pricey it might be to buy.)
With Omicron fading he's also eyeing pent-up demand for leisure/travel spending.
Second, he looks at companies and cites large U.S. companies' "very high levels of profitability," which should continue in 2022 and beyond. He sees the S&P 500 earnings of $240 a share this year, which at a 18x multiple makes for a level of 4,560.
Also, in November mid-term elections, he sees Republicans taking House control and possibly the Senate and says "political gridlock reduces the risk of higher corporate/individual taxes and incremental regulation."
He also hopes for a vibrant 2022 M&A market with private equity and strategic deals. Neither investment grade or high-yield corporate spreads are gapping higher. China and emerging market equities look stable year to date. Rising oil prices may signal market confidence, although it's not clear how much from fundamental demand versus Russia/Ukraine worries. He also mentions a stable dollar.
Of course with this tug-of-war, he is predicting volatile stocks near-term. But ultimately, he says: "Things could be far worse. Without the positives we've outlined today, they likely would be."
WITH RATES RISING, POSITIONING IS KEY (1202 EST/1702 GMT)
Given prospects for rising rates in 2022, Saira Malik, chief investment officer at Nuveen, has some thoughts on positioning by asset class.
In fixed income, Malik says Nuveen is leaning toward credit, with broadly syndicated loans a top choice. She notes that in the last three Fed rate-hike cycles, loans outperformed U.S. core bonds by 283bps, on average, which was also substantially above the 81bps margin high-yield enjoyed.
Malik also expects munis to benefit from credit improvement as stimulus dollars underpin state and local governments.
Given that Malik expects a move higher in the U.S. 10-year Treasury yield to be driven by real rates, not inflation expectations, she thinks now is the time to "overweight inflation hedges," such as TIPS or gold.
As for stocks, Nuveen is favoring U.S. large cap value and U.S. small caps. With this, Malik says there are "compelling opportunities" in "certain beaten-down growth stocks." Additionally, Nuveen likes select non-U.S. developed markets.
Finally, Malik says that the market has not fully appreciated just how much the pandemic has reset certain industry cycles. Real estate, in particular, being one.
In this regard, Nuveen sees sector valuation opportunities in areas like housing and storage.
"For example, on a geographic basis, non-U.S. real estate could outperform due to comparatively delayed reopenings. Longer-term, higher rates may hurt asset values, but that will largely depend on the pace and primary driver of rate increases."
10-YEAR YIELDS TEST KEY LEVELS BEFORE SUPPLY, INFLATION DATA, 2% IN VIEW (1105 EST/1605 GMT)
Benchmark U.S. 10-year Treasury yields are pushing up key technical levels which, if broken, could send the yields over the key psychological threshold of 2% this week.
Yields have jumped as investors price for the likelihood that the Federal Reserve will hike rates faster than previously expected to tackle persistent inflation.
The 10-year yields rose to 1.970% on Tuesday, the highest since November 2019, when they hit an interim top of 1.973%. That level was the highest since August 2019.
"The technical backdrop continues to favor a challenge of 2.0% in 10-year yields this week," analysts Ian Lyngen and Benjamin Jeffery at BMO Capital markets said in a report on Tuesday.
"While the handle-change itself will prove meaningful support, the 2.057% level (peak from Aug 1, 2019) represents a compelling target," they added.
Several catalysts this week could push 10-year note yields through the 2% support level this week, with banks and investors setting up for a $37 billion auction of the notes on Wednesday, and highly anticipated U.S. inflation data for January due on Thursday.
Technical analysts at JPMorgan, meanwhile, noted that while 10-year yields have near-term supports at the 2.05% to 2.13% area, the longer-term trend line support from the Jan. 2000 cycle yield high is at 2.62%. That level also coincides with the 78.6% Fibonacci retracement level from Nov. 2018 and "represents our ultimate target for this bear market,” they said.
SIMMER DOWN, NOW: TRADE GAP, BUSINESS SENTIMENT SAY ECONOMY ISN'T THERE YET (1038 EST/1538 GMT)
On the heels of Friday's blow-out jobs report, which suggested the labor market is roaring back to robust health - and dragging the economy with it - data released on Tuesday provided a reminder that the crash of the pandemic recession continues to echo.
The gap between the value of goods and services imported to the United States and domestically produced goods and services exported abroad (USTBAL=ECI) grew in the last weeks of 2021 to $80.7 billion, according to the Commerce Department. read more
While not quite as wide as the $83 billion trade deficit analysts expected, it capped a year of the largest annual trade gap on record, which jumped 27% to $859.1 billion in 2021.
Imports and exports both grew, by 1.6% and 1.5%, respectively, and while the services surplus grew 9.3% to $20.7 billion, this gain was handily offset by the growing goods deficit, which widened by 3.2% to $101.4 billion.
The record 2021 trade gap is widely perceived to be attributable to the uneven global recovery from the COVID crisis, and is seen easing in the months ahead.
"We expect imports to continue outpacing export growth early in 2022 before trade flows shift towards stronger export demand," says Mahir Rasheed, U.S. economist at Oxford Economics.
The closely watched U.S.-China goods gap yawned wider to $36.2 billion.
Small business sentiment dimmed in January as inflation prompted the percentage of owners that intend to pass the pain along to their customers by hiking selling prices reached the highest level since 1974.
The strongest headwinds held steady, with survey 23% of respondents citing labor quality, and 22% pointing to rising prices as their most vexing problem.
"More small business owners started the New Year raising prices in an attempt to pass on higher inventory, supplies, and labor costs," writes Bill Dunkelberg, NFIB's chief economist. "In addition to inflation issues, owners are also raising compensation at record high rates to attract qualified employees to their open positions."
But it wasn't all doom and gloom, with more companies reporting plans for capital outlays and improved inventories.
"Inventory rebuilding was a big driver of economic growth in the fourth quarter of 2021, adding nearly 5 percentage points to the quarter's 6.9% annualized increase in real GDP, and inventory rebuilding will stay a tailwind to growth in early 2022 as well," notes Bill Adams, chief economist at Comerica Bank.
It should be noted that the NFIB is a politically active membership organization.
The Dow was held aloft by healthcare (.SPXHC) and financials (.SPSY), while tech (.SPLRCT) and consumer discretionary (.SPLRCD) were the biggest respective drags on the S&P 500 and the Nasdaq, both of which were moderately red.
S&P 500 EASES EARLY, WITH PFIZER A DRAG (0955 EST/1455 GMT)
The Dow (.DJI) is holding onto slight gains.
Pfizer's shares are off after the drugmaker's full-year sales forecast for its COVID-19 vaccine and antiviral pills fell short of Wall Street estimates.
Here is the early market snapshot:
NASDAQ COMPOSITE: SMOOTH SAILING OR ICEBERG AHEAD? (0900 EST/1400 GMT)
Since hitting lows in late January, a number of Nasdaq internal measures have shown marked improvement. With this, the Nasdaq Composite (.IXIC) has cruised to a 5%-gain from its Jan. 27 closing low.
Indeed, if the Composite has left its worst behind, broad Nasdaq strength is likely to be a key aspect of any rally.
Of note, the Nasdaq McClellan Summation, which is derived data on advancing and declining issues, plunged to a low of -7,229 on Jan. 31. This was this measure's weakest reading since October 1998 read more :
With that low, the Summation slipped just below its late-2008 trough (-6,896), and a support line from late-2012 (~7,100). The line contained weakness in late 2018 and early 2020, essentially coinciding with major lows in the Composite.
Since its Jan. 31 low, the Summation has improved to -6,901 and in so doing has reclaimed both the support line, and its 10-day moving average (DMA) (-6,943). read more
One characteristic of the Summation's bullish turns off the support line in both late 2018 and early 2020 was that it did not look back. The measure improved 40-straight trading days (tds) off its late-December 2018 low and 35-straight tds off its late-March 2020 trough. This as the IXIC embarked on major advances.
The Summation has now risen four of the past five tds, including two-straight gains into Monday's close.
Therefore, it may be critical for the Summation to now mount a sustained rise. Breaking its recent low at -7,229 can see its bear-trend resume. In which case, the IXIC will be at risk of sinking again.
The measure's record low occurred in September 1998 at -8,905.
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