Honeywell, Japan, And Bond Yields Spoil Dow’s Party

[Chart courtesy of MarketWatch.com]

Moving the markets

The Dow Jones Industrial Average was on a roll this week, hitting new highs on hopes of a strong economy, tame inflation and solid earnings. But the party came to an abrupt halt on Thursday, when the index reversed course and plunged into the red. What happened?

One culprit was Honeywell, whose shares dropped after the company reported lower-than-expected revenue and cut its full-year outlook. Another was the 10-year Treasury yield, which jumped above 4% for the first time since 1999, spooking investors who fear higher borrowing costs and lower profits.

But the main trigger for the sell-off was a rumor that Japan might adopt a policy of yield curve control (YCC), which means capping long-term interest rates by buying bonds. This sent the dollar tumbling against the yen, which in turn pushed up the US bond yields.

The irony is that the US economy is actually doing quite well, as evidenced by the latest data. The second-quarter GDP growth came in at 2.4%, beating expectations and showing no signs of a recession. The inflation gauge also eased to 2.6%, down from 4.1% in the first quarter. And Meta Platforms, formerly known as Facebook, posted stellar results and guidance, lifting its shares by 5%.

The Federal Reserve also seemed to strike a balanced tone on Wednesday, when it raised its key interest rate to 5.25%, the highest level in 22 years. Fed Chair Jerome Powell said the central bank could either hike or pause depending on the data, leaving some room for flexibility.

But none of that mattered to the market on Thursday, as investors focused on the rising bond yields and the potential impact on corporate earnings and valuations.

Precious metals also took a hit, as gold and silver prices fell sharply after the strong GDP report. The data suggested that the Fed’s tightening campaign has not slowed down the economy as much as expected, raising the possibility of more rate hikes in the future.

So, what’s next for the market? Will it bounce back or continue to slide? That may depend on how the bond market behaves, and whether Japan will indeed adopt YCC or not. Stay tuned for more updates.

“Buy” Cycle Suggestions

The current Buy cycle began on 12/1/2022, and I gave you some ETF tips based on my StatSheet back then. But if you joined me later, you might want to check out the latest StatSheet, which I update and post every Thursday at 6:30 pm PST.

You should also think about how much risk you can handle when picking your ETFs. If you are more cautious, you might want to go for the ones in the middle of the M-Index rankings. And if you don’t want to go all in, you can start with a 33% exposure and see how it goes.

We are in a crazy time, with the economy going downhill and some earnings taking a hit. That will eventually drag down stock prices too. So, in my advisor’s practice, we are looking for some value, growth and dividend ETFs that can weather the storm. And of course, gold is always a good friend.

Whatever you invest in, don’t forget to use a trailing sell stop of 8-12% to protect yourself from big losses.