Stocks swept lower on Tuesday following a sharp rally in bonds, states Jon Markman, editor of Strategic Advantage.
The benchmark S&P 500 (SPX) closed at 4,306, down 1.6%. Investors clamoring for the relative safety of bonds sent yields sharply lower across the board.
The 10-Year Treasury Bond (TNX) yield fell all the way to 1.7%, the lowest level since early January. Financial sanctions on Russian oligarchs and their businesses threaten the free flow of capital across Europe and the Americas. US bonds, bitcoin, and other liquid assets were in high demand on Tuesday.
In the process, stocks became a source of funds. This may change on Wednesday when Federal Reserve Chairman Jerome Powell meets with Congress. Investors expect Powell to show deference to the ongoing conflict in Ukraine. If the central bank chief is dovish about short-term interest rate hikes, stocks should rebound. Bulls still face important resistance for the benchmark at 4,460. Critical support is 4,222 on a closing basis.
The Nasdaq (IXIC) also finished 1.6% lower at 13,532.46 and the Dow retreated 1.8% to 33,294.95.
Breadth favored decliners three-two, and there were 321 new lows vs 214 new highs. Big caps on the new high list included Chevron (CVX), Raytheon (RTX), ConocoPhillips (COP), and Lockheed Martin (LMT). Once again, energy and defense stocks are leading the way.
Financials and materials shares were the weakest, with energy the only sector posting gains.
Rockets hit the center of Kyiv on Tuesday as Russian forces intensified their attacks, CNN reported.
West Texas Intermediate crude oil surged 9% to $104.33 a barrel, heading toward a 14-year high.
In economic news, the ISM manufacturing index increased to 58.6 for February from 57.6 in January. New orders and production index components gained, offset by small declines in the readings for employment and prices. All continued to signal expansion. The IHS Markit manufacturing PMI was revised slightly lower to 57.3 in February from the flash estimate of 57.5, but remained above the 55.5 reading in January. IHS Markit noted easing supply concerns and a sharp acceleration of new orders growth.
In company news, Target (TGT) posted fiscal fourth-quarter earnings ahead of Wall Street estimates, shrugging off supply chain pressures and higher freight and merchandising costs. Shares jumped nearly 10% to lead the S&P 500.
Lucid Group (LCID), a manufacturer of electric vehicles, cut its 2022 production outlook citing a parts shortage while announcing a nearly five-fold increase in capital spending to fund expansion plans as demand surges. Shares sank almost 14%.
I usually like February because it is my birthday month and the weather here in Seattle starts to warm up at the same time early spring flowers start to bloom. But this past February was a mess, with a weak earnings season, hawkish vibes from the Fed, the start of war in Ukraine, and a swirl of lower prices in growth and tech stocks.
Combined with a weak January, the year is off to a poor start in an epic way. With a decline of over 8% year to date, 2022 is on pace to be just the eigth year since 1983 that the S&P 500 was down 5% or more in the first two months of the year, according to Bespoke Investment Group data. Plus 2022 is also on pace to be just the ninth year since 1983 that the S&P 500 was down in both January and February. Looking at all years when S&P 500 was down 5%+ YTD through the end of February and down in each of the first two months of the year, the pattern for March has had a weak but not alarming negative bias. March tends to start off positive in the first couple of trading days but then sells off through the middle of the month, according to BI data.
But ultimately, March tends to be a back-end-loaded month with average gains of over 1%, the research shows. In years where the S&P 500 was down 5%+ in the first two months of the year, the S&P 500 averaged a gain of 1.1% with gains just over half of the time, while in years where it was down in both January and February, March's average gain was 2.2% with positive returns 75% of the time, according to the BI study.
Lastly, there is some overlap between years where the S&P 500 was down 5%+ YTD through the end of February and also down in both months. Those five years that overlapped were 2000, 2008, 2009, 2016, and 2020. In those five years, the S&P 500's average performance in March was a gain of 2.34% with positive returns 60% of the time, according to BI research.
If the past pattern plays out, the market will suffer a mild slide into mid-March and then recoup those losses and end the month with a decent gain.