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Weaker Corporate Earnings & Rising Rates Fears

The U.S. stocks closed mixed on Friday,10th February 2023, with the Dow and S&P posting small gains while the Nasdaq dipped by 0.6%. 

Federal officials’ comment about their intent to keep raising rates to tame inflation has raised fears that the policymakers will stay hawkish for longer than expected.  

To add, Fed Bank of Richmond President Thomas Barkin said it’s important to continue hiking to rein in inflation. 

Corporate earnings have been coming on the weaker side with fewer companies exceeding earnings expectations than the historical average. 

Investors are now paying more attention to the rise in 2-year yields that suggest that their calculations on a Fed pause are looking wrong. 

For the week, the Dow lost 0.2% for its second straight weekly drop, the S&P 500 fell 1.1% to snap two consecutive weeks of gains, and the Nasdaq Composite slumped 2.4%.  

Here are the closing levels on Friday, 10th February 2023:

 Last Change Change% 
Dow Jones 33,869.27. +169.39. +0.50% 
S&P 500 4,090.46 +8.96. +0.22% 
Nasdaq Comp 11,718.12 -71.46. -0.61% 
US 10Y 3.73%   
VIX  20.53 -0.18 -0.87% 

As predicted in last week’s commentary, the rally is beginning to struggle. 

Option traders have been reported to have priced in a 6% Federal peak rate, 1% higher than consensus.  

The 2s-10s yield spread is at its widest inversion level in decades, a prediction of an impending recession. The wider the more likely. 

To be fair the markets have been rallying for months in spite of this inversion. The bulls have ignored hawkish fed official comments, insisting that they will get a cut in rates this year. 

So why the pause in the rally? 

Could it be buyers’ fatigue?  

They also have been reports of underweight portfolios giving up and joining the rally changing their weights to neutral. In other words, the market has started to turn long. If this is the case, then most of the necessary buying could be done and there are little more new longs to come. 

Sometimes, this could be a signal that the market has topped. 

I will leave you with this article– Clock Is Ticking Louder on a Stock Rally the Pros Never Believed In. Read it if you have time. 

It is sounding a fair warning that we could have a similar selloff like we did in August. 

Hedge your downside risk. 

Source: CBOE, Bloomberg

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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