The private sector ADP Employment Survey disappointed.  Analysts were expecting a 1 million increase in jobs.  The Survey only indicated a 428,000 gain.  July’s data was revised considerably higher.

Historically the ADP data closely correlates to the BLS data but since 2015 this correlation began to wane considerably, an environment that has been amplified since COVID. With this written, however, many do believe these statistics lower the probability of an upside surprise in Friday’s BLS report.

Equities had little reaction to the data.

Many times, I have commented about the narrowness of the markets, where the vast majority of the increase in the market averages is the result of exponential gains in a handful of names.  A small but growing number of firms are expressing the incredible risk that is now prevalent in the indices.

Reiterating Bloomberg, over the roughly 9,000 companies in indexes that track the global stock market, just 30 companies produced more than 70% of the total gains over the past five years.  Ten stocks were more than 50% of gain and 3 companies contributed over 25% of the increase.

Yesterday Barons commented that Apple has a greater capitalization than the S & P 500 Energy, Utilities and Materials Sectors combined.  The entire energy sector is now only worth 2.3% of the S & P 500, down from 4.0% at the start of the year and down considerably from its long-term average of 12% of the S & P 500.  Facebook is worth more that the entire market value of energy.

I have opined a possible catalyst for a decline in the averages are higher interest rates.  Bloomberg validated this view writing “Treasury Yields Will Become a Headache for Stocks around 1%,” partially relying upon recent history when Treasury yields rose.

Bloomberg suggests that if the 10-year Treasury rises to 1.0% from today’s 0.68% rate, the S & P may drop more than 10%.

If yields rose to 1.50%, the S & P might decline over 20%.  The pre-pandemic yield on the 10-year was around 1.75%.   If the “risk free’ 10-year climbs to 1.50%, the 10-year would have annual decline of 14.68% and this trade would not breakeven until 2028.

Commenting on yesterday’s market action, the beleaguered value stocks outperformed growth.  Some are beginning to acknowledge that six years of growth was pushed forward into six months, the result of the pandemic.  Will this become a common narrative?

Late in the afternoon, the CDC tells health officials to be ready to distribute a COVID vaccine to health care workers and other high-risk groups as soon as October or early November.  The timing and safety of the statement immediately entered the political vortex.

What will happen today?  Weekly jobless claims are released at 830.  Initial claims are expected to be 950k and continuing claims at 14 million.

Last night the foreign markets were mixed.  London was up 0.84%, Paris up 1.82% and Frankfurt up 1.30%.  China was down 0.58%, Japan up 0.94% and Hang Sang down 0.45%.

The Dow should open nominally lower as several more influential firms are acknowledging the incredibly imbalanced advanced.

Perhaps of considerable significance is the Dow Jones US Select Dividend Index is down almost 18% YTD at month’s end.  This decline in a generally accepted “conservative” portfolio is giving great question as to the popular 60/40 portfolio which is also considered a “conservative” strategy.

The 10-year is off 3/32 to yield 0.65%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.