Wall Street Turns Risk Off as Bonds Surge and Stocks Pull Back | Kenny Polcari

Well, good morning. Yes, it's me, Kenny Polcari, your host of the party. Today is Monday, May 18th, 2026, and oh boy, here are the things that you need to know to get your day started. Well, the Momo crowd, uh, getting a little bit nervous. Bonds got whacked on Friday as yields surge. Oil is up. The VIX finally waking up. And it is the last week of earnings, and there's going to be lots to consider. And what are we having for dinner tonight? We're gonna have the Alaskan black cod. Oh, we're gonna get to that in a moment. Look, I'm traveling tomorrow and Wednesday, so my next note is gonna be Thursday, just FYI. Okay, well, if you thought this market was just gonna coast its way into Memorial Day weekend on autopilot, you better start thinking again. After celebrating Dow 50,000 and S&P 7,500 on Thursday, investors and traders in algo suddenly remembered that inflation interest rates and oil prices actually do matter. And once the algos and the Momo crowd realized that the bond market was no longer cooperating, guess what? They started running for the exits. And that was true all around the world. Asian markets ended the day lower on Friday. European markets also got whacked. And by the end of the day here, stocks, uh, got hit over the head as well, as the bulls ended up taking a back seat and the bears grab the steering wheel. So at 4 o'clock, here's what it looked like. The damage was done. The Dow fell 537 points or 1.1%, closing at 49,526. The S&P gave up 92 points or 1.2%. Uh, the NASDAQ led the decline, down 410 points or 1.5% to, uh, 26,225, as investors took profits in many of the AI momentum names that have powered this rally. Higher. Some of the most recent high flyers taking it hard. NVIDIA lost 3.6% ahead of this week's earnings, uh, on Wednesday after the bell. We'll get to that in a minute. MU gave back 6.6%. AMD gave up 5.7%. Broadcom lost 3.3%. Arm lost 8.5%. Marvell lost 3%. Intel lost 6%. The semiconductor ETF gave back 4%. Speculative AI and quantum names got hit even harder in a sign that traders are de-risking the highest beta parts of the market first, and that makes sense. IONQ gave back 6%, QUBT lost 10%, Rigetti lost 7%, and small caps, they got smoked, down 2.4% as rising yields suddenly forced investors to rethink that risk appetite. Now, transports in a surprising move actually advanced, adding 76 points, led by Landstar up 4.8%, J.B. Hunt up 3%, Old Dominion up 2.2%. The equal-weight S&P gave up 90 points or 1.1%, while the Mag 7 lost 470 points or 1.3%. Now let's just go back to the transports for one minute because it is interesting. The broader market got hit over the head, yet the transports advanced when they had every reason to decline. Now there's a message buried in here, so let's discuss it, because at first glance it doesn't make sense, right? Higher oil is supposed to crush the transports, right? Well, yes and no. Freight and logistics names like J.B. Hunt, Old Dominion, UPS, and Uber, Landstar, all helped push the index higher because investors started focusing on, guess what? Pricing power and freight demand. Remember, when diesel prices rise, trucking capacity tightens, shipping costs rise, and logistics companies with scale and pricing leverage suddenly become more valuable. JB Hunt talked about this, right? Customers are increasingly shifting freight patterns and optimizing routes to deal with these rising transportation costs. Then you add in a little bit of the China angle after the sleepover with Trump and Xi Jinping, and buried underneath it all is one important development: China is going to buy more Boeing airplanes, and that suggests improving trade and potentially strong stronger freight demand globally, if you actually believe anything that Gigi says. But let's go with that headline. And that is what mattered to the transport. So while the broader market was busy panicking about inflation and yields and valuation compression, parts of the transport sector were quietly signaling that underlying economic activity is actually holding together better than expected. And that's important because this didn't feel like a classic demand destruction kind of a sell-off. It felt more like a valuation reset driven by higher rates. And guess what? There may be more to go if rates continue to push higher, right? But if you really want to understand what drove the action and stop looking at stocks and look at what happened to bonds and bond yields, because that is where the real story is unfolding, right? Bonds got whacked on Friday. The TLT and TLH both down 1.5%, 1.3% respectively. And that sent yields surging. The 2-year ended the day yielding 4.08%. The 10-year's at 4.59%. The 30-year ended the day at 5.12%. All levels that suggest caution, yet they have pierced those key trigger points that we've been talking about— 4%, 4.5%, and 5% respectively. And that gets everyone's attention because psychologically it does change the conversation even a little bit. Now remember, higher yields are competition for stocks, right? And for investors. And when yields rise because inflation feels to be accelerating, that becomes a problem for richly valued stretched growth stocks that are trading on future expectations. And then there's oil. WTI crude surged to $106 while Brent flirted with $110 as traders continue pricing in the geopolitical risk tied to Iran and the Strait and the ongoing uncertainty in the region. And this matters because higher oil acts like a tax on everything. We've talked about this— transportation, manufacturing, food distribution, airlines. Consumer spending. Ultimately, it all gets squeezed, which is why the bond market is repricing the whole Fed cuts are coming narrative into Fed hikes may be coming narrative. In fact, famed investor Jeffrey Gundlach is betting on a rate hike before a rate cut, and Fed fund futures are now pricing in a 51% chance of a rate hike before year-end 2026, which is very different than how we came into this year. And do not discount what the bond market and stock markets are doing. They are testing the new Fed chair, Kevin Warsh, because this is no longer Jay Jay's problem, and the market wants to see what Kevin is going to do about it. And that matters psychologically. On the economic front, the Empire State Manufacturing Report, which on the surface looked strong on Friday, coming in at 19.6, up from 7.2, "The strongest reading in 4 years." Bravo, that's great. "Manufacturing activity and new orders were solid." But again, there's always a but. Buried underneath the headline was another real issue. "Prices paid and prices received both jumped sharply." Meaning companies are paying more and charging more. Translation, inflation is still very much alive. On the other hand, industrial production capacity utilization both advance, and that's a positive. Now, all this drama sent the VIX up 6.7% to 18.4 as traders finally started buying some protection again. Not panic, but it is starting to show some concern, even if a little bit. As we begin this week, this morning the VIX is up another 74 cents at 19.17, and it's about to kiss trendline resistance at 19.74, and that is helping put pressure on stocks this morning. Now looking ahead to this week, the focus becomes crystal clear. Tomorrow on the economic front, tomorrow we're going to get pending home sales. Wednesday, going to get mortgage apps and the FOMC minutes, right? I suspect that investors are going to dissect every word looking for signs on just how uncomfortable Jay Powell and the Fed really are behind closed doors. Are they still sitting in this wait-and-see mode, or are they quietly discussing tighter policy if, if inflation reaccelerates. Thursday brings us global flash PMI data from the US, UK, Germany, and the Eurozone. This is a real-time pulse check on the global economy. Is growth slowing? Are we drifting towards an ugly stagflation setup where growth weakens while inflation stays sticky? That's going to be key and very important. Remember, 50 is a dividing line. Anything north of 50 suggests we're in an expansion zone. Anything south of 50 suggests we're in contraction. Inflation data out of the UK and Canada will matter more than usual because investors are trying to determine if this inflation problem is becoming global again and not just this US issue. Now let's be honest though, while all of that matters, next week is really about— this week is really about one thing: Nvidia earnings. Due out on Wednesday after the bell. Remember, NVIDIA is not just another stock. It has become the heartbeat of the entire AI trade, the semis, the NASDAQ, and frankly, the overall market sentiment as well. Investors are going to focus clearly on data center growth, Blackwell chip demand, AI infrastructure spending, China exposure, margins, and whether the hyperscalers will continue to just write these blank checks to build out AI capacity. If Jensen delivers another monster quarter, the Momo crowd is going to try and push the market higher. But if guidance disappoints even slightly, even by a hair, and this entire ecosystem trade could suddenly face another valuation reality check. This week also includes earnings from Home Depot, Toll Brothers, Lowe's, Target, TJ Maxx, Deere, and Snowflake. Giving us insight into housing activity, contracted demand, and the impact of higher mortgage rates. It's going to detail how the consumer is thinking and how inflation is taking a bite out of household budgets. Then it's going to be about industrial demand, agriculture, cloud spending, and enterprise AI infrastructure. So while the headlines are going to scream NVIDIA, the reality is that this week's earnings lineup is going to help investors answer a much bigger question. Can investors, traders, and algos continue justifying valuations in an environment where oil remains above $100 a barrel, the 10-year is pushing 4.6%, the 30-year is back above 5%, inflation risks are real, all while the geopolitical conflict is at a breaking point? If the answer starts becoming no, then this market will surely have to take a breath after the latest advance. Now, the bottom line: yes, the trend is still up, the charts do look constructive, but Friday was a reminder that the market has gotten a little too comfortable, a little too complacent, and a little too frothy. And how long have we been discussing that? And when everyone crowds onto the same side of the boat, doesn't take much to tip it over. How many times have we discussed that, right? We keep talking about it. Now, this morning, European markets are mixed. The UK and Germany are both up about 2/10, while the Euro Stoxx, France, Spain, and Italy are all negative. Italy getting hit the hardest, down 1.8%. US futures, well, they are under pressure this morning. Dow futures down 360, S&P's down 35, the NASDAQ's down 116, while the Russell is down 12 points. Over the weekend Trump warned Iran to get moving or there won't be anything left, and that is keeping global markets on edge. The S&P closed at 7,408 on Friday, down 92 points. Again, why are you surprised? You shouldn't be at all. The chart has gone parabolic off the April lows. So as an investor, you should want to see a pullback because remember, trees don't grow to the sky. If you look at the chart it would not be a surprise to see us test the 7,150, 7,200 range, right? It's gonna shake the branches a bit, it's gonna force the weak hands to fall out, all while providing an opportunity for long-term investors to buy stocks at better or lower prices. My advice, it's usually the same. Do not make emotional FOMO-driven decisions in either direction. Don't chase them when you feel like you're missing them and don't sell them when they feel like they're falling apart. Stay focused, stay quality, and stick to your plan. A plan that should be based on who you are, your age, your risk tolerance, and your own liquidity needs. You can feel free to call me at 561-931-0190. I'm always happy to discuss it. Now, what do we have for dinner tonight? We're going to have the Alaskan black cod, also known as sablefish. Now, if you've never had this, you need to try it. The fish has a rich, buttery taste, and its fatty texture lends itself to a great meal. Now I order this from Jerry's Meats and Seafoods in Juneau, Alaska. You can see it at jerrysmeats.com. You can call them at 877-789-0789. It comes flash frozen, packed in dry ice. It is now a family favorite. You're not going to see this fish in your local fish market unless of course you live in Alaska or the Northwest. So I order it from Jerry's and he sends it via UPS overnight. Now if you call there, you're going to ask for Scotty and you're going to tell him that Kenny sent you. Now for this, you need the fish, you need butter, salt, and pepper, fresh lemon juice, dry white wine. You can use chicken stock if you prefer, and you need capers. Set your oven to 400 degrees, right? Now you're going to defrost the fish in a pan of warm water. Let it defrost slowly, just leave it sitting. It'll take, you know, half an hour, 40 minutes. Once it's defrosted, you're going to take it out, you're going to pat it all nice and dry. You're going to season it with salt and pepper, fresh lemon juice, and some melted butter. The pieces are big, they're almost a pound. I use about 3/4 of a stick, don't tell anybody. Place it in the oven, let it roast for 10 minutes. Then you're gonna pull it out, you're gonna add a splash of white wine. I use Pinot Grigio, Santa Margherita, and the capers, right? Push it back in, allow it to roast for another 8 to 10 minutes. You can baste it with the butter and wine while it's cooking. When it's done, you're gonna remove it and place it on a plate. I usually serve it on a bed of wild rice with roasted butternut squash, I like that, and a large mixed salad. You can always have, naturally, a chilled glass of the Pinot Grigio to finish off the meal. It is delicious. You will not be disappointed. And if you call Jerry's, you tell Scotty that Kenny sent you. In any event, I am going to see you on Thursday because I'm out Tuesday and Wednesday. Until then, take good care.