U.S. stocks closed lower on Friday, 7th July 2023, relinquishing earlier gains in response to the release of nonfarm payroll data.
Nonfarm payrolls increased by 209,000 (compared to an estimated 230,000), marking the smallest advance since the end of 2020. The employment rate came in at 3.6%, down from 3.7% last month. Average hourly earnings were 0.4% (compared to an estimated 0.3%).
Just the day before, blowout ADP data pushed yields to 16-year highs, with the. 2-year yield climbed as high as 5.12% and 10-year yield above 4%.
This rise in interest rates weighed on markets and was cited as the reason for Friday’s lower close. This suggests the probability of the Feds raising e rates at the next meeting and possibly more thereafter.
Yields displayed mixed performance on Friday with the longer-tern 10-year yield increasing by 2 basis points to 4.06%, while the more rate-sensitive 2-year yield decreased by 7 basis points to 4.94%.
For the week, the Dow Jones dropped 1.9%, marking its largest weekly decline since March. The S&P 500 fell by 1.2%, and the Nasdaq Composite closed down 0.9%.
Here are the closing levels on Friday, 7th July 2023:
| Last | Change | %Change | |
| Dow Jones | 33,734.88 | -187.38. | -0.55% |
| S&P 500 | 4,398.95 | -12.64. | -0.29% |
| Nasdaq Comp. | 13,660.72 | -18.32. | -0.13% |
| U.S. 10Y | 4.06% | ||
| VIX | 14.83 | +0.00 | +0.00% |
The price action on Thursday and Friday showed the market’s desire to keep rising as short-term selloff were met with buying on dips.
Unfortunately, the rising of interest rates, not only in the U.S. but globally, indicate that there might not be enough buying power to push markets above recent highs.
The markets are now becoming increasingly aware of Fed’s potential for one or two more hikes and are losing hope of a rate cut later this year.
This realisation has been largely ignored for months, and the change in bond yields is starting to make an impact.
We have been reminded time and time again that higher interest rates have a negative effect on stock prices and the upcoming earnings will provide insights into stocks that are currently priced correctly.
The S&P is trading at more than 20 times earnings, and the Tech sector is trading at over 30 times earnings.
If earnings continue to grow, we will probably head back to higher levels as investors ignore bond prices like they did before.
However, if earnings disappoint, there is good reason for the market to correct further, potentially as much as 10%.
There is an interesting article on Bloomberg titled “Stock Market Short Sellers That Helped Fuel This Year’s Rally Are Finally Giving Up” highlighting the decline in short selling and the subsequent decrease in short covering, which has impacted market movements.
Source: CBOE, Bloomberg
This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.
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