Stocks down, precious metals up. Investors piled into the market’s favorite inflation hedges – primarily gold and silver – as equities fell slightly. Growth shares led the market lower while value stocks fell the least.
In essence, it was merely a continuation of last week’s trend. But who could blame investors for another bearish move? Wall Street has made it abundantly clear to clients that a US recession is coming. Even worse, strategists increasingly believe that the Fed will raise rates no matter how much pain the market endures.
In late March, the assumption was that a recession would cause the Fed to reverse its tightening while starting a new round of quantitative easing. This narrative helped kick stocks higher in an epic end-of-the-month melt-up.
But now, based on recent comments from Fed officials, it’s seeming like the Fed will tighten at all costs. This drove yields higher over the last few weeks, which has bulls feeling uncomfortable about the market’s long-term prospects for the first time since Covid hit.
And that’s doubly true for anyone holding debt-hungry growth stocks, which tend to react poorly to sharply rising yields.
“The big concern is how consistently and how far the 10-year note will rise,” explained CFRA chief investment strategist Sam Stovall.
“Nothing is really new on the Ukraine front, nothing is really new on the inflation front, the Fed is expected to raise by 50 basis points at its next meeting. So really, the question is, what are the bonds doing?”
The 10-year Treasury yield jumped to a session high of +2.862%, fueling a growth (ie, tech) selloff shortly before noon. This was welcomed with open arms by bank stocks, however, as the surge in long-term rates caused the yield curve to un-invert further. The much-watched 2-year/10-year (2s10s) yield spread climbed to +0.396%. Earlier this month, the 2s10s went negative, sparking recession fears.
But the stat to watch this week will be S&P earnings, and forward guidance more specifically, as earnings season gets into full swing. Bank of America (NYSE: BAC) beat estimates this morning but opened lower on the day as forward guidance disappointed. The stock was ultimately saved by soaring long-term yields, however, as short-term/long-term yield spreads gained.
Still, major earnings “misses” could be on their way in the coming days as rising input costs catch up with expectations.
“I do think that we’re potentially in for a tough earning season, only because when people gave guidance [last quarter], the input costs have clearly gotten worse than they expected,” said Rhys Williams, Spouting Rock Asset Management chief strategist.
“So you have further increases in costs. And then at the same time, the consumer has gotten a little rockier in the month of March. So I expect that there will be some revenue misses. That’s probably a sign that there’ll be somewhat negative earnings surprises, certainly much more than compared to the last four or five quarters, where the earnings news has been just fantastic.”
More important than last quarter’s results will be forward guidance with a vicious tightening cycle on its way. Companies have a tendency to under-promise when issuing guidance so as to not disappoint shareholders next earnings season.
A wave of significant under-promising may be awaiting investors this week. And, as a result, the market’s recent bearish trend could easily continue while fears of higher rates mount further.
