Soaring bond yields could halt the stock market rally

By Alan Valdes, director of floor operations at Silverbear Capital

Up triple digits one day, down triple digits the next … so much for complacency. Yesterday was the worst day for the Dow (^DJI, DIA) in two months, where earnings were the main driving force pushing the market down. Although some of the big S&P 500 (^GSPC, SPY) components beat on the top and bottom lines, it was the revenue and guidance that worried investors. Boeing (BA) also beat on its top and bottom lines, but net income slipped by 19% and the stock lost altitude closing down 3% to finish at $258.42 (but still up 65% for the year). Advanced Microsystems (AMD) reported strong growth of 26%, but that wasn’t enough to satisfy worried investors about the future, as they sold the stock down 12%.

The 10-year Treasury yield broke through a key mark for the first time since May. It surged above 2.40% on Tuesday, a mark it hit several times but could not break through until yesterday, climbing as high as 2.47%, but settling back down to 2.44%. This, more than anything else, could really slow this rally down or worse. Today, we get a batch of major earnings before and after the bell. Before the bell, we heard from Twitter (TWTR), Comcast (CMCSA), Ford F (F), and Bristol-Myers Squibb (BMY). After the closing bell, it’s just as busy with Alphabet (GOOGL), Intel (INTC), Microsoft (MSFT), Mattel (MAT), and Expedia (EXPE) all reporting.

Today we also got an announcement from across the pond as ECB President Mario Draghi disclosed the latest monetary moves for the central bank. Although traders were looking for a little more of a “hawkish” announcement from Draghi, he essentially kept to his dovish position of cutting monthly bond purchases from 60 billion euros to 30 billion euros. This will extend their QE stimulus to possibly at least September 2018 with no change in rates.

Government data was also busy today. U.S. weekly jobless claims totaled 233,000 versus analysts’ expectations of 235,000 — a 16 1/2 year low. For the 138th straight week, claims have been below 300,000, showing a sign of a strong labor market — the longest stretch since 1970. Also on the docket are pending home sales, which came in flat, the Kansas City Fed manufacturing survey, which rose to 23 from 17 last month, and one Fed speech, by Neel Kashkari.

It seems President Trump‘s list of picks for the Federal Reserve Chair has narrowed to two names after Politico reported current Chair Janet Yellen is out of the race. (Wall Street was skeptical of Yellen when she was first appointed, but she slowly won us over.) One candidate is Jerome Powell, who would essentially be a status quo pick, similar to the present chair, and whose appointment would not rock markets. The second is John Taylor, who is seen as a more hawkish nominee and a Wall Street favorite.