Stocks come off a punishingly volatile week ready for more selling as the market continues to search for a floor along with stock investors keep an eye on rising interest rates.
The S&P 500 was down 5.2 percent to 2,619, its worst week of trading since January 2016. The Dow, also off 5.2 percent, along with the S&P both saw their first 10 percent correction since early 2016.
Culprits behind the selling were an ugly shakeout in funds which bet against market volatility along with the building pressure of higher interest rates on stocks.
Treasury yields for the 10-year note along with 30-year bond were slightly higher on the week, however the 2-year was lower at 2.05 percent. Rising yields pressured stocks, however when stocks sold off, investors turned to the Treasury market as a safe haven. which in turn sent rates back down, since yields move opposite cost. The 10-year was at 2.85 percent Friday, below its 2.88 percent high for the week.
Despite extremely wide swings along with days with 1,000-point Dow losses, stock strategists are mostly looking for the market to bottom soon along with expect stocks will ultimately adjust to rising interest rates. however which process could be rocky, with many bond strategists at This specific point seeing the 10-year yield at 3 percent or above, much sooner than expected.
Bank of America Merrill Lynch chief investment strategist Michael Hartnett, who has long been looking for a correction, said he expects which a Great buying level would likely be at about 2,500 on the S&P 500 along with 3 percent on the 10-year yield.
“My gut here is usually 2,500 along with 3 percent on the 10-year. They are big, big levels. You expect the market to find a reason to buy at which particular moment,” he said.
The markets from the week ahead will focus on their own action, particularly the tensions between stocks along with bonds, however there are a few key data points which could impact trading. The CPI, consumer cost index, is usually released Wednesday along with which is usually an important inflation reading which investors are watching for any surprise pickup in inflation. which is usually released Wednesday morning, as are January retail sales.
“The next big event we know which’s on the calendar is usually CPI, along with which could impact the Fed. The next big date for the bond market after which, assuming stocks calm down, which is usually a shaky assumption, is usually the 28th, when [Fed chair Jerome] Powell testifies,” said Michael Schumacher, director of rate strategy at Wells Fargo.
Powell started out as Fed chair This specific past week, along with markets have been anxious to hear his views on market volatility. Powell testifies before Congress Feb. 28, along with the Fed is usually likely to raise rates at its next meeting in March. however market pros are watching the volatility, along with there’s a view the Fed holds off on which hike if the turbulence persists.
Bond yields have been rising as global central banks, including the Fed, step back through easy policies along with raise rates. Treasury yields have also been rising as investors eye the steep increase in U.S. Treasury issuance, likely to rise to $1.25 trillion This specific year. Another big catalyst for the market is usually the improvement in global growth along with the potential for inflation to rise as a result.
at This specific point the stock along with bond markets are so closely correlated, the action in one feeds off the additional. Stocks will be a big factor for bonds from the week ahead.
Gluskin Sheff along with Associates’ David Rosenberg said, in a note Friday, which the fact both stocks along with bonds are selling off at the same time is usually unusual, along with which is usually similar to time periods with significant market turmoil. He noted which the 10-year yield was rising as the S&P fell sharply Thursday, down more than 10 percent through its January record high.
“I cannot tell you how rare a market condition This specific is usually — which yields are rising into This specific risk pullback,” he wrote in a note to clients Friday. Rosenberg cited how bonds rallied during the financial crisis in 2008 when the market fell along with during additional big corrections. additional times were 1987 along with 1994.
As for currency markets, the U.S. dollar had a powerful week, with the dollar index rising 1.3 percent, its best week since October. As the dollar rose, oil fell, with West Texas Intermediate losing 9.9 percent for the week to just above $59.20 per barrel, its worst week in two years.
Hartnett expects a rising dollar along with additional de-risking moves will be necessary before the shakeout in stocks ends.
“Maybe we need to see the dollar move up, along with which’s the thing which causes investors to do things they least like to do: sell winners — tech, high yield, emerging markets. In these corrections, you sell hubris along with buy humiliation. One measure of humiliation is usually everything goes through the wringer. Nothing is usually left unscathed,” he said. “The dollar rally would likely be the ultimate risk off. which’s part along with parcel of the story.”
Earnings from the week ahead include consumer companies, such as Pepsi on Tuesday along with Coca-Cola along with Campbell Soup on Friday. Some energy names also report, such as Diamond Offshore on Monday along with Occidental Petroleum on Tuesday.
JP Morgan strategists, in a late Friday note, said they believe which commodity trading advisors along with risk parity hedge funds were at the core of the correction, however they believe which most of the unwind by those investors is usually over.
“This specific, combined with the low equity exposures of Discretionary Macro along with Equity Long/Short hedge funds, leaves retail investors as the main residual risk for equity markets going forward,” they wrote in a note.
Unlike in additional corrections, many strategists said they did not see a fundamental reason behind the selling, along with the market became hostage to big round technical numbers which seemed to drive trading. After breaking the 50- along with 100-day moving averages, the S&P 500 bounced off the closely watched 0-day moving average Friday, at 2,538, along with rebounded to close 1.5 percent higher.
“There’s a little bit of … technical activity around what is usually happening with volatility along with how hedge funds have to readjust their strategies, given where volatility is usually,” said Patrick Palfrey, equities strategist with Credit Suisse. “Going forward, we’re not truly seeing a point where the economic cycle is usually coming to an end along with with the earnings backdrop as strong as which is usually, volatility should come back in over the next couple of weeks, as people start to look more closely at those underlying factors.”
Hartnett said there were plenty of warnings the correction was coming.
“Certainly, the first tremors were the very rate-sensitive areas of the equity markets — utilities, the REITs, the homebuilders along with bitcoin, which … reminded people of the famous phrase ‘fear of missing out.’ Whether which was FOMO, or BTD, ‘buy the dip,’ or TNA, ‘there is usually no alternative,’ all these acronyms come back in vogue, along with which’s always going to be a dangerous moment,” said Hartnett.