(AMZN 20:1 + TSLA Buyer’s Remorse) > (10 bp Rising Rates)


Chief Strategist at Interactive Brokers

There are a few different cross-currents in today’s trading.  Any of them has the potential to move equity markets in various directions, but as of now, traders are more focused on the positives than the negatives.

On the minus side, bond prices across the yield curve are quite a bit lower.  Two-year yields are up over 7 basis points, while those in the 5-30 segment of the curve are 9-10 basis points higher.   The 2-year yield is flirting with 2.75%, while 10-years are solidly above 3%.  It is not totally clear why bond traders are in such a grumpy mood today.  It could be nerves ahead of Friday’s CPI report, which is expected to show a 0.1% decline in the headline number to a still-high 8.2%, and 5.9% reading for core CPI vs. last month’s 6.2%. 

While it is understandable that traders could be nervous ahead of a key inflation reading, it is likely that they are also reacting to the positive economic effects of China’s beginning to lift some of the most stringent lockdown restrictions.  The lockdowns that resulted from that country’s zero-Covid policy had a deleterious effect upon economic activity (how could they not?), so it is logical to believe that Chinese reopening would recreate demand for goods and services that had been depressed.  Bonds don’t like stronger economies – they lead to higher inflation and interest rates.  Even though we knew that China would need to lift its lockdowns at some point, bond traders didn’t mind the drag on activity that those lockdowns brought.

Stock traders, on the other hand, love a stronger economy.  They were displeased to hear negative economic commentary last week from the likes of Jaime Dimon and Elon Musk (though he walked back his statement), and have been concerned about how China’s lockdowns are affecting the global supply chain crises.  Yet the S&P 500 sector with the largest upward move at noon today is Communications Services.  The most important component of that sub-sector is Alphabet (GOOG, GOOGL), which is up over 2%.  For that, we can credit individual investor psychology about stock splits.  GOOG/GOOGL will be splitting 20:1 next month, just as Amazon (AMZN) did today.

We have written at length about why we are somewhat dismissive about stock splits as a driver of stock prices (see here and here, for pieces about GOOG and Spotify (SPOT), respectively).  The short version is that the old impetus for making stocks affordable to individuals is greatly diminished in an era of odd-lot and fractional share trading.  We do, however, recognize that splits can have a profound effect on the affordability of options.  It is possible that the increased popularity of call option speculation is enough to outweigh the reduced impact of stock affordability.  More likely is that the old psychological concept that stock splits are beneficial to a company are enough to create a self-fulfilling prophecy.  When it comes to investing, perception can become reality.  If enough investors believe that something is meaningful – whether important or even true – it can propel a stock for a period of time.  That appears to have been driving AMZN for the past few sessions and is driving GOOG today.

We also see the latest expression of Elon Musk’s buyer’s remorse.  Today he announced that Twitter’s (TWTR) refusal to share information about spam is a breach of their merger pact.  TWTR stock fell about 3% on that news, but rebounded somewhat after the company stated that it is willing to cooperate with Musk.  TSLA stock was originally boosted by this latest attempt to find a valid reason to quash the deal, but it is now up less than ½%.  It is quite possible that investors are becoming tired of the constant reversals from Elon Musk – a point we raised about six weeks ago when we asked “At What Point Do We Reach Peak Musk?”  As of now, that point appears to have been about six weeks ago.

The longer I write, the more this market fades.  Perhaps the allure of getting 20 singles for a $20 bill is beginning to wear off in the face of higher interest rates.

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