Stocks plummeted again today as bears took back control of the market. All three major indexes tumbled, driven lower by rate and recession fears. Yields continued “twisting,” further inverting the yield curve as well. The 2-year/10-year Treasury yield spread fell to -0.823%, erasing support at 0.800%.
The last five times this spread inverted, recessions followed. Bearish sentiment has been whipped up over the last few days as a result of concerns over slowed growth in 2023. Based on the 2-year/10-year yield spread alone, it seems as though those concerns are well founded.
This shift in sentiment wounded nearly every sector this morning. Communication services and tech led the way lower following several weeks of strong (albeit choppy) positive price action.
“It’s just typical bear market characteristics here,” said Apollon Wealth Management chief investment officer Eric Sterner.
“I continue to be surprised by these false starts with the markets and investors getting ahead of themselves.”
The market’s big bearish driver showed itself yesterday in a Wall Street Journal report by Nick Timiraos, the WSJ’s resident “Fed whisperer.”
Timiraos warned investors that the Fed would raise its target rate for 2023 at its next meeting, meaning that even if Fed Chairman Powell announces a 50 basis point rate hike on December 14th, it could still be a very bearish affair.
“It is just a sign that we’re getting closer and closer to the terminal rate, and the Fed is acknowledging that it takes time to see these rate hikes work their way through the economy,” Sterner said after commenting that a 50 basis point hike would not be a “bullish sign” by any means.
“The only reason they’re slowing down is because we were at historic low-interest rates.”
That suggests the “Santa Rally” is dead in part because stocks already enjoyed a big rally in November but also due to the revelation that the Fed is about to raise its median rate for next year.
Red-hot wages revealed in last week’s November jobs report release likely had a significant impact on the Fed’s outlook. That was reflected in rate expectations over the last few sessions.
“In light of the various releases, expectations of the Fed terminal rate priced for May 2023 moved up by 9.5 basis points on the day to 5.01%, crossing the 5% threshold again,” wrote Deutsche Bank’s Jim Reid in a note this morning.
“That’s a noticeable shift from where it was just before Friday’s jobs report, when it hit a low of 4.83%, and means that most of the moves lower after Chair Powell’s Wednesday speech have now reversed.”
The bears are back and could be here to stay for several weeks, if not months, as a fierce recession grips the US. Investors were given a taste of that today when Paramount Global (NASDAQ: PARA) CEO Robert Bakish told shareholders that his company’s Q4 advertising revenue would come in below Q3’s tally. PARA cratered, falling 7% through noon.
Relatively speaking, PARA isn’t a huge, market-leading stock. But a drop in ad revenue could have bigger implications for the US economy.
Advertising has long been viewed as an indicator of economic health, as virtually every company advertises. Sinking ad revenues could be indicative of a slowing economy.
And yet, according to Timiraos, the Fed is going to raise its median rate for 2023 at its next meeting. That’s about as bad as it gets for bulls. If Timiraos is right, then we’re probably not only kissing a “Santa Rally” goodbye but a bullish resurgence in 2023 as well, meaning that traders may want to get in the bearish mindset for the long haul as the Fed raises rates into the teeth of a recession.
