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Fear and Greed

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: – 

 Last Change %Change 
Dow Jones 32,899.37. -98.60. -0.30% 
S&P 500 4,123.34 -23.53. -0.57% 
Nasdaq Comp 12,144.66 -173.03. -1.40% 
US 10Y 3.13%   
VIX 30.19 +0 +0% 

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. 

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