U.S. stocks plummeted this past Friday, 23 September 2022, in what looked like a risk-off selling. Treasury yields soared to levels not seen in more than a decade following the Fed’s moves, with the two-year yield jumping as high as 4.26% and the ...
U.S. stocks closed lower on Friday, 6th May 2022, to mark yet another weekly loss. The S&P posted its fifth straight weekly drop — the longest losing streak since June 2011.
This followed the latest Jobs report that was strong enough to keep expectations of continued 50bps hikes from the fed at the next 2 or more meetings.
Nonfarm payrolls rose by 428,000 last month matching the gain in March, a Labor Department report showed on Friday. The unemployment rate held at 3.6% and the average hourly earnings rose, albeit at a more moderate pace from a month earlier.
The median estimate in a Bloomberg survey of economists called for a 380,000 advance in payrolls and for the unemployment rate to fall to 3.5%.
Earlier in the week, the Federal Reserve raised interest rates by 0.5%, its biggest rise since 2000. The U.S. central bank will also start shrinking its massive balance sheet next month.
The immediate response was a relief rally or some might call “buy the fact” after “selling the rumour” of a 0.5% hike. Unfortunately, this did not last long as bond yields continue to climb over the next few days. The 10-Year breached the 3% level and then some. At the close on Friday, it was 3.13%
Here are the closing levels on Friday, 6th May 2022: –
This is a story of Fear and Greed.
Greed was the cause of the market making unprecedented highs last year with FOMO (fear of missing out) after fears of covid subsided. Stay at home stocks rallied to dizzy heights that we thought would never end. The economy was hot, fuelled by easy money and government subsidies, jobs were on the rise, and all was good.
Now it’s time for Fear. Subsidies are gone, easy money is going, and we have a full-scale war in Ukraine and a slowdown in China due to covid zero policies that are affecting supply chains.
The latter 2 contributed to inflation which was already on the rise.
Inflation, now the buzz word, is being blamed for where we are now.
Inflation has caused the Fed to switch to an aggressive posture raising rates by 50 bps the most in 20 years and taking away the biggest buyer of bonds by reducing their balance sheet.
But wait, the economy is strong, and job numbers are good that’s why the fed is doing what it’s doing right? Yes. Maybe.
So why is the market selling off?
The market is always searching for equilibrium. There were arguments about the market being overbought when we were making new highs and now the reverse argument is that its oversold.
The question now is, have we reached this Equilibrium? Is it lower or higher from here?
With 10yr through the 3% level and poised to go higher its going to put a strain on tech stock valuations. This will affect the S&P. Higher rates have also been known to slow down economies into recession. If we are pricing in a recession, we have more downside to look forward to.
Source: CBOE, Bloomberg, Federal Reserve
This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.
While every effort has been made to ensure the accuracy of the information in this document, the DOO Group does not warrant or guarantee the accuracy, completeness or reliability of this information. The DOO Group does not accept responsibility for any losses or damages arising directly or indirectly, from the use of this document. The material contained in this document is provided solely for general information and educational purposes and is not and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, securities, futures, options, bonds or any other relevant financial instruments or investments. Nothing in this document should be taken as making any recommendations or providing any investment or other advice with respect to the purchase, sale or other disposition of financial instruments, any related products or any other products, securities or investments. A decision to invest in financial instruments, any investment related products or any other products, securities or investments should not be made in reliance on any of the statements in this document. Before making any investment decision, prospective investors should seek advice from their own financial advisers, take into account their individual financial needs and circumstances and carefully consider the risks associated with such investment decision.
Without limiting any of the foregoing, in no event will the DOO Group or any of its affiliates be liable for any decision made or action taken in reliance on the information in this document and, in any event the DOO Group and its affiliates shall not be liable for any consequential, special, punitive, incidental, indirect or similar damages arising from, related to or connected with this document, even if notified of the possibility of such damages.
This document contains forward-looking statements. The forward-looking statements included in this document are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on the analysis of DOO Group of the statistics available to it. Assumptions relating to the forward-looking statement involve judgments with respect to, among other things, future economic, competitive and market conditions all of which are difficult or impossible to predict accurately. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the DOO Group that the forward-looking statements will be achieved. The DOO Group cautions you not to place undue reliance on its forward-looking statements and we assume no responsibility for updating any forward-looking statements. Expressions of opinion are those of the authors and are subject to change without notice.
This document is strictly confidential to the recipient. It is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly to other person or published, in whole or in part. For any purpose, neither this document nor any copy of it may be taken or transmitted into Singapore, Hong Kong, Malaysia, United Kingdom and the United States or distributed directly or indirectly in Singapore, Hong Kong, Malaysia, United Kingdom and the United States. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document should inform themselves about, and observe any such restrictions. By accepting this report, you agree to be bound by the foregoing instructions.