Stocks plunged again this morning as the April correction continued right on into May. After the market hinted at a bullish reversal last Wednesday, many traders – myself included – were watching for a short-term rebound.
Instead, stocks fell lower on Thursday, pulling the S&P well beneath the Wednesday high, which we identified as a potential breakout zone.
Momentum has flipped back to bears in a big way as the three major indexes all trade at new 2022 lows.
Opposite equities are Treasury yields, which have risen substantially over the last few trading sessions.
This is significant repricing, this is significant dislocation and this is all being spurred and driven by Federal Reserve policy,” said Sanctuary Wealth’s Jeff Kilburg.
“The only way I see us finding the bottom in equities short-term, the only way I see markets healing is if the Fed has the ability with the tools in their toolbox to calm down interest rates. The 10-year note needs to go back under 3%.”
Yields started climbing rapidly in 2022 before accelerating further in March in response to a tightening Fed. Growth stocks, which are impacted more by rapid rate increases than value shares, took it the hardest. Growth stocks (ie, tech) unsurprisingly led the market lower this morning.
But as one analyst put it, there’s much more to worry about than just interest rates in today’s market.
“The path of least resistance remains lower for global equity markets to start the week. The overwhelming focus continues to be on inflation, rising interest rates, and the war in Ukraine,” explained Brian Price, head of investment management at Commonwealth Financial Network.
“The combining factors of tight supply chains resulting from China’s zero COVID policy, and rising oil and food prices due to the war in Ukraine, are causing inflationary fears that are triggering a move out of risk assets. The market is void of major positive catalysts right now, so it is not surprising that we’re starting the week off under pressure.”
Many traders remain perplexed by the market’s recent price action following the Fed’s rate hike announcement last Wednesday. When the 50 basis point rate increase was revealed, stocks retraced before rallying fiercely during Fed Chairman Jerome Powell’s press conference.
Everyone expected a 50 point hike and stocks sold off leading up to it. But when the hike actually came? Stocks burst higher in yet another epic intraday surge.
But, as investors are learning today, the Wednesday afternoon run-up was simply a temporary bear market rally.
Or, more accurately, a bear market short squeeze. Sentiment was extremely bearish heading into Wednesday. When Powell didn’t go more hawkish than expected, shorts were covered en masse.
Now, though, it’s clear that persistent uncertainty has left investors feeling bearish, even if Powell’s hike matched expectations.
Wall Street banks went so far as to say that earnings will soon be impacted, too, not just short-term sentiment.
“Looking forward, the path of the market will depend on the Fed’s battle against inflation,” wrote Goldman Sachs chief US equity strategist David Kostin.
“In our base case, the negative impact on valuations from higher real rates will be partially offset by a narrowing yield gap. If recession risk rises, interest rates may fall but not by enough to prevent equity multiples and share prices from falling further.”
The S&P’s current trajectory has it testing 3,400 by the end of October this year. That’s almost 15% lower from where it’s currently trading.
But will the S&P actually fall that far? Based on the current macro environment, it certainly seems possible. The Fed’s fight with inflation is looking like it will be a yearlong struggle. As rates advance and conditions tighten, the market’s sky-high PE multiples are doomed to fall.
Keep in mind that the coming bear market will be dotted with wicked short-term rallies along the way.
That’s what makes being a bear so difficult, even during long-term corrections.
Overall, however, the good times may finally be coming to an end, following decades of quantitative easing (QE), provided by a Fed that just couldn’t say “no” to lower rates.
