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courtesy of Getty Images
courtesy of Getty Images
Key Takeaways: As the market recovers from Thursday’s sell-off, yields and stocks both rebound.
Concerns about the Delta variant and central banks’ future paths could still be a factor.
The week ahead is jam-packed with important bank profits, inflation data, and retail sales statistics.

The sinking bond market appeared to offer stocks a lift early Friday, much like a seesaw. Stocks were at their lowest point yesterday, while bonds were at their highest point.
For the time being, equities are rising in tandem with Treasury yields, which are rising as bonds fall. The 10-year yield has risen from its five-month lows and is now trading over 1.3 percent, relieving some of the concerns about an economic slowdown that dominated Thursday’s trading.
It’s vital not to get too excited about this early gain, because things might easily turn around in a market where prudence appears to be luring many investors to fixed income over stocks. We’ll keep an eye on interest rates today to see whether they may support the financial sector, which could help the S&P 500 Index (SPX) and the Russell 2000 Index (RUT) (RUT). Crude is up a little this morning, too, along with yields.
When it comes down to it, concerns regarding the Delta variety of Covid and the potential for a delay in reopening definitely explain a lot of what’s transpired in the last few days. People are concerned that international economies, such as Japan’s, are not reopening as quickly as expected, leading to speculation that foreign central banks will be slow to unwind stimulus programs. If the news that some nations, like as Australia, are tightening Covid procedures continues, it could frighten the market.
Even while immunizations in the United States have outperformed those in many other countries, the Fed does not function in a vacuum, and the United States is not immune to the Delta variety. If the European Central Bank or the Bank of Japan are forced to postpone tapering, it may affect how soon the Fed responds. On Wall Street on Thursday, there was a lot of chatter that the Fed wouldn’t start putting out a tapering timeline at the Jackson Hole meeting on August 26-28, but rather in September or later. We’ll have to wait and see what happens.
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Another factor that may be on people’s thoughts is a recent dip in Chinese economic indicators. China’s producer price inflation data, issued earlier today, showed a modest decrease from the previous month. Although it remained high, the tiny drop generated new concerns about growth in that area. According to The Wall Street Journal, consumer prices in China increased by only 1.1 percent year over year, indicating that domestic consumer sentiment remains sluggish.
On the plus side, the S&P 500 Index (SPX) dropped below 4300 on Thursday but rapidly recovered, returning above 4300, a critical psychological support level. If things start to go downhill from here, the SPX’s 50-day moving average could be a good place to look for support. That level is now around 4217. The 50-day has been tested numerous times up to this point in 2021, and the market has consistently recovered back.
While 4300 held, if the SPX could hold a region around 4340 today, that would be encouraging from a technical standpoint. That’s close to the end of July 6, so keep an eye on it. If the SPX could conclude the week with 4340 in the rear-view mirror, that would be a wonderful omen for bulls.
Even with Thursday’s decline, the SPX is still just approximately 1% below all-time highs set on Wednesday. Given how long the rise has lasted, it’s only reasonable to see some selling pressure at this time.
Big banks bore the brunt of the selling on Thursday. Bank of America (BAC) and JP Morgan Chase (JPM), both of which plummeted 2% yesterday, bore some of the brunt of the pain. Despite today’s rally, yields are back to where they were in February, and the yield curve (the difference between long and short-term rates) has narrowed significantly. This puts pressure on bank profit margins. When the largest US banks report earnings next week, it will be intriguing to hear their executives’ perspectives on the situation.
Next week, we’ll get some important inflation statistics (more on that below), so it may be on people’s minds. Inflation recently soared to heights not seen in decades, yet much of this was due to comparisons with the previous year’s lockout period. Some analysts believe inflation will remain high in the short term but will moderate in the months ahead.
Meanwhile, the bond market is telling us something we can’t ignore. In some respects, the nearly 50 basis-point decrease in yields since March’s highs is more concerning than the surge that brought us there. Concerns over inflation and overheating growth aided the rising trend, yet both are aspects of a healthy economy. Even as inflation fears grew, cyclical sectors including energy, financials, and small-cap equities profited.
If the bond market is correct this time, there is, arguably, far more to be concerned about. Unemployment remains at historic highs, and government stimulus has begun to wane. The Fed has already stated that it can only do so much to encourage economy, but it’s difficult to see another major push for stimulus checks. However, any progress on the bipartisan infrastructure proposal now could be seen favorably by Wall Street.
Today’s economic data and earnings reports aren’t expected to be particularly interesting. All of this will be revealed next week. Let’s see whether stocks can gain some traction heading into the weekend, or if the pressure persists. It’s also interesting looking at futures pricing on Sunday night to see what investors are expecting in the coming weeks.
Any statements from Fed officials are something to keep an eye out for today (and next week). It’s a bit of a quiet period right now, so any Fed news could be received with a huge reaction. This is essentially a guessing game as to what the Fed will do next and how to anticipate it.

ANYTHING BUT BORING IS THE DAY’S CHART. One issue some investors have had in the last month or two… [+] is that the market has been quite quiet on most days. As this chart comparing the day’s behavior in the S&P 500 Index (SPX—candlestick) and the Cboe Volatility Index shows, that wasn’t the case on Thursday (VIX—purple line). What’s particularly intriguing is how much VIX surged late in the afternoon as equities began to retrace their gains, and then how the SPX made a last-minute run higher while VIX sank significantly. Let’s see if yesterday’s late action carries over to Friday. S&P Dow Jones Indices and Cboe Global Markets are the data providers. The thinkorswim(R) platform provided the data for this graph. Only for the sake of illustration. Past performance isn’t a guarantee of future success.
S&P Dow Jones Indices and Cboe Global Markets are the data providers. The thinkorswim(R) platform provided the data for this graph.
Opportunity for all: There were few stock market ports in the storm yesterday, as nearly every sector and type of stock was battered. Days like those imply that individuals were looking for alternatives to equities to invest in, as evidenced by the fixed income surge and the dollar index’s strength (which hit a three-month high early in the day before a slight pullback). Gold had a good week earlier this week as well. It’s unclear what’s creating so much concern, though additional Delta variant reports aren’t likely to help.
The announcement that the Olympics in Japan would be closed to spectators put a damper on things, highlighting the fact that while the United States appears to be making headway toward normalcy, not everyone has. The crucial thing is not to let fear dictate your actions, especially if you’re a long-term investor. There’s no problem if you’ve been following your plan and have determined that selling some shares works in with it at this point. However, selling because you see other people selling or because you’re concerned about a virus return is giving in to your emotions. It’s not a smart idea to trade based on emotions.
Checking the VIX: This week, volatility rebounded from recent lows, with the Cboe Volatility Index (VIX) rising back above 18 after briefly approaching 20 on Thursday. The long-term average is closer to 20, so things aren’t out of the ordinary. In general, VIX appears to have discovered a sweet spot between 15 and 20. Also, declines to 15 in the last year and a half have some traders thinking it’s been a touch overdone. It usually bounced back and forth between 17.5 and 20.
At this point, a move solidly over 20 would be required to cause concern about the stock market’s potential impact. The market is also more concentrated on the daily flow of business news during earnings season, and is less likely to be tossed and turned by the waves of geopolitics or other outside forces. So, unless we see a VIX of 20 or higher, you might say that VIX is warning investors not to expect too much volatility in the near future.
Data on Inflation Straightforward: The beginning of Q2 earnings season on Tuesday and Wednesday means more than just that. They also provide essential consumer and producer price data for June, providing investors with the most up-to-date information on inflation. In May, both the core consumer price index (CPI) and the core producer pricing index (PPI) increased by 0.7 percent from the previous month. In May, the core CPI (which excludes food and energy) increased by 3.8 percent year over year, the highest level since June 1992. The concern heading into next week’s inflation report is whether the May figures constituted the year’s peak in pricing. Recent bond market activity suggests that some investors expect this to be the case. Since the May inflation report, the benchmark 10-year Treasury yield has plummeted more than 20 basis points, indicating that the bond market was in “buy the rumor, sell the reality” mode when it came to inflation fears.
TD Ameritrade(R) commentary is provided solely for educational purposes. SIPC member./nRead More

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