The Daily Breakdown takes a closer look at bond yields and specifically, how yields are impacting stock prices.
Friday’s TLDR
- Rising yields sink bonds and weigh on stocks.
- Earnings results sink Kohl’s and Salesforce.
- Abercrombie surges on its quarterly results.
What’s happening?
Stocks are pulling back and one thing I’m keeping an eye on amid the choppy action? Yields — and by yields, I mean the 10-year Treasury yield.
I’m watching yields because — at least for right now — a rise in yields is acting as a bearish catalyst for stocks, while falling yields equates to a bullish catalyst. This is not a one-to-one correlation and other factors obviously influence stock prices too, but this is the current relationship.
A few weeks ago, the 10-year yield was down in the low 4.3% range. Now it’s back above 4.6%. It’s no surprise that stocks have struggled to rally amid this spike in yields (and we’ll look at what this rally has done to bonds in a minute).
Bonds and yields may not be the most exciting thing to discuss for everyday investors — and for good reason. But right now, yields and interest rates matter quite a bit for the stock market.
With today’s GDP revision and tomorrow’s PCE report, both yields and rates will be in focus. Ideally, bulls want to see lower inflation, which will increase the odds of a Fed rate cut later this year and yields will decline (allowing stocks and bonds to rally).
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The setup — TLT
To help illustrate the above conversation, let’s look at TLT — the most traded long-term government bond ETF.
TLT may not be a trading candidate for most investors at the moment, but traders may consider throwing this one on their watchlist given its correlation to yields (and how falling yields can impact stock prices).
Look at the chart below, which highlights the recent trend lower and how we’re seeing the prior support areas from Q1 act as current resistance.
Now if yields move lower, TLT should see a move higher. If that’s the case, the ETF will be on watch to see how it handles resistance.
If it can eventually break out over resistance, a notable rally could take place. However, it will likely need the rate-cutting narrative from the Fed to really take hold and we’ll need to see a sustained move lower in yields.
On the flip side, the $87 to $88 lows from April will be on close watch for bulls. Below that and the $82 to $83 lows from Q4 — and the ETF’s lowest levels since 2007 — will be on watch.
What Wall Street is watching
CRM — Salesforce reported a disappointing Q1 result, generating revenue of $9.13 billion vs. estimates of $9.15 billion. But the bigger issue was guidance, with management’s earnings and revenue outlook falling below consensus expectations. Shares are taking a hit this morning in response.
KSS — Shares of Kohl’s are getting clubbed this morning, lower by about 20% in pre-market trading. The decline comes after the company missed Q1 earnings and revenue expectations, and as management slashed the retailer’s full-year outlook. Stocks like Macy’s and Nordstrom are slightly lower in sympathy this morning.
ANF — Abercrombie shares surged as the apparel retailer reported a 22% increase in Q1 sales, which topped $1 billion in the quarter and beat estimates by $55 million. Profits surged above analysts’ expectations, with earnings of $2.14 a share easily topping expectations of $1.72 a share.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.