US stocks opened lower on Tuesday, signaling another day in the doldrums as healthcare insurers tumbled and investors faced the chance that an interest rate cut will come later than hoped.
The Dow Jones Industrial Average (^DJI) slipped almost 1%, or over nearly 400 points, setting the blue-chip index back from a bid to reach the key 40,000 level. The S&P 500 (^GSPC) shed 0.8%, while the tech-heavy Nasdaq Composite (^IXIC) fell 1.2%.
US bonds continued to struggle, as the yield on the benchmark 10-year Treasury (^TNX) rose to around 4.38%, hovering at its highest levels of 2024.
Stocks have made a lackluster start to the second quarter after racking up a string of records in the first months of 2024. Hotter-than-expected manufacturing readings, which came alongside increases in prices paid, have given weight to growing doubts the Federal Reserve will cut rates in the first half of the year as the US economy shows surprising resilience.
In economic news, the new data from the Bureau of Labor Statistics showed job openings were roughly flat in February while hiring ticked up slightly. The market will also listen out for commentary from Fed officials Michelle Bowman, Loretta Mester, and Mary Daly for clues to whether its inflation problem could derail the three rate cuts planned.
A pullback in health insurer stocks dragged on the markets early on Tuesday, after US regulators surprised the industry by failing to boost payments for private Medicare plans as usual. Humana (HUM) shares fell about 10%, while CVS (CVS) shed almost 6%.
In single stock moves, Tesla (TSLA) stock stumbled about 6% after the company delivered fewer cars than expected in the first quarter.
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Bond yield moves may be a “head fake”
A hotter than expected prices paid index inside the March ISM release appeared to hold weight for investors. Bond yields shot up following the release and while investors inched closer to pricing in one less rate cut for this year, per Bloomberg data.
Prices paid increased in both the S&P Global and ISM readings.
S&P Global noted average selling prices charged by producers increased at their fastest rate in 11 months. The ISM’s prices paid sub-index rose to 55.8 in March, the highest since July 2022.
Chris Williamson, S&P Global Market Intelligence chief business economist said this could be a sign of concern given a recent slowdown in the decline of inflation seen in both January and February’s readings of popular inflation measures.
“Most notable was an especially steep rise in prices charged for consumer goods, which rose at a pace not seen for 16 months, underscoring the likely bumpy path in bringing inflation down to the Fed’s 2% target,” Williamson said.
To Renaissance Macro’s head of economics Neil Dutta this increase shouldn’t be overly concerning for the overall inflation story. He views the move in bond yields as a “head-fake.”
“Formal analysis reveals that while the ISM prices paid index helps improve forecasts of PPI inflation, it does not yield improved forecasts of PCE or core PCE inflation,” Dutta wrote in a research note on Tuesday. “This is a reminder that the ISM prices paid index is largely a proxy for energy prices and energy price pass-through to consumer prices is low.”
Dutta added the recent increases in labor productivity can also help quell inflationary pressures. The ISM production index rose to 54.6 in March, its highest level since June 2022. This came without a jump in the employment index.
“Taken at face value, this implies a pretty solid pick-up in manufacturing sector productivity growth in the coming quarters,” Dutta wrote. “You do not have inflation problems when productivity is running this strong.”
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Job openings steady in February as hiring picks up slighltly
New data from the Bureau of Labor Statistics released Tuesday showed there were 8.76 million jobs open at the end of February, a slight increase from the 8.75 million job openings in January, which was revised lower. Economists surveyed by Bloomberg had expected 8.73 million openings in February.
The report also showed the quits rate, a sign of confidence among workers, sat at 2.2% for the fourth consecutive month. Additionally, the Job Openings and Labor Turnover Survey (JOLTS) showed 5.8 million hires were made in the month, a slight increase from the 5.7 million seen in January.
The hiring rate picked up slightly at 3.7% in February, up from the 3.6% rate seen in January.
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Stocks open lower after yields spike to 2024 highs
Stocks were lower on Tuesday as bond yields rose for the second straight day.
The Dow Jones Industrial Average (^DJI) slipped almost 1%, or over nearly 400 points, setting the blue-chip index back from a bid to reach the key 40,000 level. The S&P 500 (^GSPC) shed 0.8%, while the tech-heavy Nasdaq Composite (^IXIC) fell 1.2%.
The 10-year Treasury yield (^TNX) popped roughly six basis points to nearly 4.39%, its highest level of 2024. This move comes after a hotter-than-expected reading on price increases in March’s ISM stoked inflation concerns and sent the 10-year Treasury yield up more than 10 basis points on Monday.
The 10-year Treasury yield is now at its highest level since November and has surpassed a level Morgan Stanley chief investment officer Mike Wilson recently flagged as critical for stock investors.
“We view 4.35% on the 10-year US Treasury yield as an important technical level to watch for signs that rate sensitivity may increase for equities,” Wilson wrote in a note on March 17.
Wilson noted that large caps have been less sensitive to rates recently. “Small caps are likely to show more rate sensitivity than large caps on a move higher in yields,” he said.
To Wilson’s point, the small-cap Russell 2000 index (^RUT) sagged more than 1% in early trade Tuesday.
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Tesla shares slide after delivery miss
Tesla stock (TSLA) stumbled in premarket trading, falling about 7% after the company delivered fewer cars than expected in the first quarter.
Tesla announced it delivered 386,810 cars in the first quarter, below Wall Street’s estimates of 449,080. This marked the first annual Q1 decline in deliveries since 2020.
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Consumer stocks in focus with gas prices on the rise
Stocks levered to the spending of consumers could become ice cold this spring.
Oil prices hit $85 a barrel this morning, a five-month high. The advance in oil, which may be starting to weigh on the broader market, has lit a fire under nationwide gas prices. The national average for gas prices of $3.51 a gallon last week was unchanged week on week — and that was after prices rose for four straight weeks.
Even still, gas prices were up $0.16 per gallon from a month ago.
“While we seem to be nearing a short-term peak, one word of caution for those in the Mid-Atlantic and Northeast: you haven’t yet finished the transition to summer gasoline, so you may experience some sticker shock in a few weeks,” said Patrick De Haan, head of petroleum analysis at GasBuddy, in a new blog post. “Be prepared for somewhat of a punch. For the rest of the nation, so long as we don’t see extenuating circumstances, we’re likely close to a top in prices. Let’s hope it pans out and sticks!”
As gas prices have risen, the Consumer Discretionary Select Sector SPDR Fund (XLY) has dropped 1.4% in the past month — perhaps on fears of weakening consumer spending. Key discretionary retailers in the fund, such as Amazon (AMZN), Starbucks (SBUX), and Nike (NKE), have relatively underperformed the S&P 500 in the last month.
Interestingly, Walmart’s (WMT) stock is up 2% in the past month as investors view the retailer as a trade down play on higher gas prices.
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Health insurer stocks tank
Health insurer stocks are being sent to their sickbeds on Tuesday.
Humana (HUM) is getting drilled by 9% premarket, with pressure also being seen on UnitedHealth Group (UNH) and Cigna (CI). The sell-offs come as US regulators failed to increase payments for Medicare Advantage plans in line with Wall Street estimates.
Payments will rise by 3.7% on average in 2025, down about 0.2% year over year.
Longtime healthcare analyst at JPMorgan Lisa Gill said in a client note that the decision came as a “surprise,” as many on the Street expected an increase “given the utilization environment.”
Humana is seen as the most exposed to the decision from the Centers for Medicare and Medicaid Services.
A key call-out from Humana’s latest annual report:
“At December 31, 2023, we provided health insurance coverage under CMS contracts to approximately 5,408,900 individual Medicare Advantage members, including approximately 851,300 members in Florida. These Florida contracts accounted for premiums revenue of approximately $14.9 billion, which represented approximately 19% of our individual Medicare Advantage premiums revenue, or 14% of our consolidated premiums and services revenue for the year ended December 31, 2023.”
RBC analyst Ben Hendrix said in a note this morning Humana’s profit guidance will have to be reset in the wake of the decision and the stock could stay under pressure. Conversely, Hendrix is recommending to clients to buy Cigna shares on the pullback.
