Stocks fell today to finish off October on a low note. The Dow, S&P, and Nasdaq Composite all tumbled opposite rising Treasury yields. The 10-year Treasury yield jumped to 4.07% after dipping below 4.00% last week.
But bulls are still feeling pretty good after the major rally that started a few weeks ago. Dow stocks surged, pushing the index to its biggest monthly gain since 1976.
Tech stocks, by comparison, underperformed in response to bad Big Tech earnings and guidance. And though stocks are up big in the short term, investors are worried that they could retrace sharply if this Wednesday’s FOMC meeting doesn’t go well. That probably had something to do with today’s broader market loss and yield rally.
“Stocks are taking a breather after the big run last week,” explained Carson Group chief market strategist Ryan Detrick.
“Then, considering the always important Fed meeting and interest rate decision on Wednesday, a pause makes even more sense.”
A 75 basis point rate hike is more or less guaranteed for this Wednesday. And unless Fed Chairman Jerome Powell has a major surprise in store, the rate increase should match expectations.
Investors are more interested in the size of the coming December rate hike, which Powell is likely to discuss in his post-FOMC press conference, than the November rate increase. Anything that hints at a dovish shift could spark rampant buying.
“Wednesday’s message will be crucial for market expectations going forward,” said LPL Financial’s Quincy Krosby.
“With the question and answer segment for the presser, Chairman Powell will have to finesse his answers as if he were walking a monetary tightrope.”
The assumption of the last few weeks has been that Powell is about to pivot. There are a number of reasons for that, including crumbling bond market liquidity. Long-term Treasurys have grown increasingly illiquid, and to solve this problem, several analysts have floated the idea that the US Treasury would enact an “operation twist” – issuing short-term bonds to buy long-term, illiquid bonds – to provide liquidity.
If this happens, long-term yields will plummet, likely driving stocks higher while leaving the Fed’s rate hike plans unchanged.
However, the last round of Big Tech earnings may be telling the Fed that it needs to reduce the size of its rate increases. It’s clear that most corporations are anticipating slowed growth in 2023.
On the other hand, the Fed may also stick to its guns. If it does, Barrick Gold Corp. (NYSE: GOLD) could plummet in the face of rising yields and a strengthening dollar. GOLD closed below its minor bullish trend (yellow trendline) and 10-day moving average today after setting a lower high.
The stochastic indicator suggests there’s room to fall, too. For those reasons, it might make sense to take a bearish position on the stock with a trade trigger of $14.87, below today’s low, as the general market awaits Wednesday’s post-FOMC presser.