Investors looking for something to blame for the recent stock market slump need only look to the bond market. The major US stock averages recorded their worst weekly performance of the year last week, with the S&P 500 losing 2.7%. The Dow Jones Industrial Average and Nasdaq Composite lost 3% and 3.3% respectively. Those losses came as yields rose on higher-than-expected inflation data, along with several Federal Reserve officials reiterating that rates could stay high longer if inflation continues. On Monday, the 2-year US Treasury yield reached 4.8%, marking its highest point since 2007, before falling from those levels. “The recent stock market reset feels more like a by-product of higher interest rates than one [simple] reset from overbought territory for stocks,” JC O’Hara, chief market technician at Roth MKM, said in a note to clients Sunday. “Overall, we believe this pullback has been orderly for stocks,” he added. However, again a big factor.” Given this recent trade move, market techs view prices as the main catalyst for stocks going forward. Note on Sunday that an inverse correlation between interest rates and stocks remains intact. will be positively correlated, we’re not yet sure we’re at a point of decoupling,” Krinsky said in a separate note to clients. That correlation was evident Monday. The Dow, S&P 500 and Nasdaq rose throughout the day as the Treasury yields fell Stocks or Bonds: Who’s Right January ushered in an early rally for equities as investors end in the red after 2022. The S&P 500 had its best January since 2019 with a gain of 6.2%, while the Nasdaq Composite posted its best January since 2001 with a 10.7% gain. The Dow also ended the month higher, rising 2.8%. But the enthusiasm faded in February as the three main averages were well on their way to ending the month lower. The S&P 500 and Nasdaq Composite lost 2.2% and 0.9% respectively in February. The Dow is down 3.4% this month and is down year to date. Yields on 2-year and 10-year bonds have moved in the opposite direction, rising in February after falling in January. US10Y YTD mountain 10 years in 2023 This back and forth raises questions about who investors should listen to: the stock market or bonds. Roth MKM’s O’Hara said the latest economic data could help inform that decision. The core personal consumer spending index, a preferred measure of inflation for the Federal Reserve, came in above economists’ expectations for January. That added to fears that the central bank may have to keep rates high longer than some market observers hope to successfully contain inflation. “Inflation, seen through break-evens affecting Treasury yields, has returned as the bogeyman the stock market thought was dead,” said O’Hara. Each of the three indices closed 1% or more lower Friday following the data. Conversely, yields on 2-year and 1-year bonds, along with those on 6-month and 3-month Treasury bills, moved upwards. And while yields on longer-maturity securities like the 10-year bond and the 30-year bond have yet to reach their fall 2022 highs, strategist John Roque thinks those levels could be broken soon. “Without the benefit of clairvoyance, I think we’ll soon be hearing consumer laments regarding ’embedded higher prices,’ because on God’s green earth, it’s almost impossible for the price you pay for a pizza to ever drop again. considered a bargain,” said Roque, chief of technical strategy at 22V Research. Market participants view the stock market as an expectation from the Fed to successfully cool inflation while avoiding a recession, a scenario referred to as a “soft landing.” Fixed income markets are seen as more pessimistic about the future of the economy, but O’Hara said the recent sell-off in stocks could show that mindset is gaining popularity. “Equity markets have seemingly realized that the bond market could be right for longer on higher inflation,” O’Hara said. “The upward pressure on the closing price had a negative effect on the stock market. Bonds continue to worship on the altar of inflation, while stock markets begin to question whether their soft landing god is indeed real.” ‘We are buying bonds’ Some investors see the recent market action as a buying opportunity – not in stocks. Steve Eisman, an investor known for calling and profiting from the 2007 housing crisis, said Monday his favorite trade in the current investment landscape is short-term treasury bills on CNBC’s “Squawk Box.” He also said he is “laddering” government bonds, which refers to the strategy of building a portfolio of bonds with different maturities and then reinvesting them when the bonds mature. “We buy bonds, especially government bonds,” said Eisman, senior portfolio manager at Neuberger Berman. “Only risk-free government bonds at 4.8[%] is a nice place to be. See, customers have different goals. There’s no shame in putting some of your customers’ money into 4.8%.” — CNBC’s Yun Li and Michael Bloom contributed to this report.
The negative market turn revolves around one thing: rates