Market Volatility Ticks Higher In Advance Of Possible Government Shutdown

Key Takeaways

• Stocks Were Down 1.5% Tuesday
• Oil Prices Continue Pushing Higher
• Government Shutdown Looking More And More Likely

It was another turbulent day for stocks. The S&P 500 fell 1.5% while the Nasdaq Composite was down 1.6%. Both indices are well below both their 21 and 50 day moving averages with the S&P 500 just 80 points above its 200 day moving average.

The performance of the market had largely rested on the back of just a handful of stocks, commonly known as the Magnificent Seven: Alphabet, Amazon
AMZN
, Apple
AAPL
, Meta Platforms (Facebook), Netflix
NFLX
, Nvidia and Tesla
TSLA
. However, the recent pullback has taken a toll on some of these stocks. AI darling, Nvidia, is down almost 17% from its high of nearly $503/share. Amazon traded to nearly $146/share just a couple weeks ago, but has since fallen nearly 14%. Lastly, shares of Apple hit an intraday high of over $198/share around mid-summer and have since fallen over 13%. In fact, as of Tuesday’s close, 253 of the S&P 500 stocks are down on the year.

In the case of Apple, much of the fall is attributable to issues with China. Earlier this month, China issued a prohibition on government employees from using iPhones for work. Now, the Chinese government is also taking aim at app stores, enacting tighter regulations. Apple has yet to comply with those regulations and could see their app store banned.

Shares of Amazon are under fire following a Federal Trade Commission (FTC) lawsuit that was filed yesterday, accusing Amazon of monopolistic practices. Seventeen states joined the FTC in the suit alleging that, among other things, Amazon has engaged in anti-discounting measures if merchants offered their products at lower prices elsewhere. The suit also accuses Amazon of forcing sellers to use Amazon’s logistics to appear in Prime. News of the lawsuit sent the stock lower by 4% on Tuesday.

Meantime, the broad market is feeling the heat from a combination of higher oil prices, rising interest rates, and what appears to be a looming government shutdown. Since hitting a recent low of just over $77.50/barrel, oil prices have been steadily rising. On Tuesday, oil closed at $90.39 and in premarket, is higher by over 1.5% at nearly $92. The increasing price will likely have an impact on inflation. We’ll know more about the extent of that impact when the most recent Personal Consumption Expenditures (PCE) report is released on Friday. The PCE is the Federal Reserve Open Market Committee’s (FOMC) preferred gauge on inflation and plays a large role in what the Fed will do with respect to interest rates.

Speaking of interest rates, those continue to push higher. Yields on 2, 10 and 30 year bonds are all trading at levels we haven’t seen in over a decade. The 30-year bond is currently at nearly 4.6%. The 10-year is yielding 4.49% and the yield on the 2-year is just under 5.07%. If there is one positive to be taken from rising rates, it’s the steepening of the yield curve. Much of this year has been marked by an inverted curve where short term yields are higher than longer term rates. An inverted curve is often a warning sign for a recession. While the 2-year is still above both the 10 and 30 year, we have recently seen rates on the 30 year move ahead of 10 year rates. Also, both the 10 and 30 year rates are rising faster than the 2 year, which could mean we’ll see a normalization of rates.

Higher oil prices and rising interest rates aren’t the only clouds hovering over the market. As of this morning, it seems we are headed toward a government shutdown. While the Senate advanced legislation that would extend funding until mid-November, the House of Representatives remains divided and without reaching agreement by midnight, October 1^st, the government will shut down. That would result in 4.5 million people not being paid until a deal is passed.

Shares of Costco are indicated to open lower by around 2%. Costco reported earnings that beat on both the top and bottom lines; however, same store sales came in at a weaker-than-expected 1.1% vs. estimates of nearly 1.9%. Also in the retail space, Target
TGT
announced it will close nine stores in four different states following a string of thefts. The company said organized retail crime affecting both big and smaller companies has led to unsafe conditions for workers and shoppers. Target shares are unchanged in premarket. Snapchat announced they will lay off 150 people from their augmented reality department as a part of an ongoing reorganization. In premarket, shares of Snapchat are relatively unchanged. Lastly, Peloton co-found and Chief Product Officer, Tom Cortese is leaving the company. He will be replaced by Nick Caldwell. Shares of Peloton are up around 2% in premarket.

Finally, it’s worth noting that market volatility has been increasing with the recent selloff in stocks. On Tuesday, VIX closed just shy of 19. A VIX of 16 translates into an expected daily range of 1% for stocks. Therefore, the recent uptick in volatility means investors can expect markets to trade in ranges larger than +/- 40 points. That makes this a good time to check over a portfolio to make sure there are uncorrelated positions within it. As always, I would stick with your investing plans and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.