There is an adage on Wall Street: Markets take the staircase up, and the elevator down. This week, however, markets got excited and took the elevator both ways in a rollercoaster tape for the stock market.
The major averages took a unanimous tumble this week, with both the DOW and S&P 500 ending down -2.91% and the NASDAQ falling -2.6%. The NASDAQ held up best out of the major averages as treasury yields and the US Dollar paused their ever-lasting rally higher. Yields actually fell slightly on the week, with the 2Y and 10Y Treasury Yields trading at 4.26% and 3.82% respectively as of Friday’s close.
The negative move in equities comes at the heels of continued hawkish Fed-speak, a stubbornly high Core PCE report (4.9% actual vs 4.7% expected), and signs that consumer demand is slowing. Fears of slowing demand for Apple’s iPhone 14 rippled through markets on Wednesday and led a cascade of corporations to similarly announce slowing results. Of the group was Micron, which cited slowing demand for its chips, and Carnival Cruise lines which cited that inflationary cost-pressures were squeezing its customers.
The surge in volatility is a direct side-effect of the headline-driven, whipsaw tape endured by markets over the past week. The Volatility Index (VIX) closed above 30 five out of the five past trading days, a reminder to investors that volatility persists in current market conditions.
In an attempt to calm its bond market, the Bank of England began buying long-dated bonds, a sign of foreign central bank capitulation after a recent period of tight policy. US equity markets ripped higher on Wednesday following the news of the BOE’s policy change, but quickly reversed lower after the Federal Reserve’s Bullard and Mester continued to telegraph hawkish comments to US Markets.
The carnage in equity markets is becoming exhaustive, and investors continue to run for the exits. The AAII Investor Sentiment Survey flashed its second reading in a row of >60% bears, underscoring the extent of pessimism that resides in the equity market.
The narrative seemed to change this week on the future outlook of US monetary policy, as Wall Street seems to have latched on to the idea that the Fed has “gone too far too fast.” Below is a chart comparing the pace and extent to which the Fed has tightened versus other tightening initiatives taken upon by the Fed.
Given the Fed has remained steadfast on taming inflation through tightening financial conditions, the few bulls left in the market continue to bet on a dovish pivot. While the Fed has managed to front-load rate hikes, there is no way to identify an exact point where the Fed complies with the bulls demands. As our very own Tom Lee likes to say: The future is uncertain.
As negative headlines continue to cloud the minds of equity investors, we would like to leave you with a positive affirmation, reminder, and ounce of satire as we head into the weekend. To come full circle, we offer another adage, and while not from Wall Street, we think that is equally important: what doesn’t kill you makes you stronger. While Kelly Clarkson may not have been referencing the US economy, a gentle reminder that corporate earnings have grown at an average 8% clip since 1954 can never hurt, especially after one of the largest YTD drops in S&P 500 history. If not for us, maybe she can remind you that there is always light at the end of the tunnel.