Stocks continued their downward trajectory this morning, with increasing bond yields and China’s economic distress posing significant challenges, steering the market towards yet another week of losses.
The Dow declined by 62 points, equivalent to 0.2%, while the S&P fell by 21 points, or 0.5%. The Nasdaq Composite fell the most, sliding 124 points – roughly 0.9% – settling at 13,193 through noon.
The Dow experienced a 2.3% decrease over the week up to Thursday. Both the S&P and the Nasdaq Composite were poised for their third consecutive weekly decline, with the S&P experiencing drops during 10 of the last 13 trading sessions. This performance marked its lowest since June 26.
The decline in the value of long-term government bonds has created significant ripples in the market. The 10-year yield is nearing its highest since 2008, while the 30-year yield has achieved its peak in over a decade.
Although Treasury yields saw a slight dip today, equities still felt some strain. Reflecting on the global economic landscape, Raffi Boyadjian, the lead investment analyst at XM, observed, “In China, the alarming headlines about a deteriorating economy just haven’t stopped, while in the United States, evidence is piling that the economy is regaining some momentum at this late stage of the tightening cycle.”
Boyadjian further noted, “With the former fueling fears of a global contagion and the latter bolstering higher for longer bets for the Fed, the overriding sentiment now is one of heightened uncertainty.”
The surge in yields can be attributed to several factors, as Louis Navellier, chairman and founder of Navellier & Associates, elaborated: “Rising yields have been fueled by a surge in new issuance of Treasurys by the U.S. government, with pent-up needs after the delay of the budget ceiling brinkmanship, the lack of buying by the Fed who had been the major buyer of all auctions during QE and are now letting their massive portfolio roll off as it matures, and that traditional buyers of fixed income are reluctant to settle for lower yields of longer maturities when they can just sit in shorter less volatile maturities at higher yields.”
Michael Kantrowitz of Piper Sandler provided an analysis of the market’s recent volatility, stating it has been oscillating since early 2022 mainly due to alterations in market multiples or price-to-earnings ratios rather than fundamental cyclical concerns. He added, “In the most simplistic sense, P/Es are just…[a] figure that represent emotional views of investors. While many variables factor into valuation, over the short run, it’s investors’ perception of risks that dominate.” Kantrowitz further explained that right now, bond yields heavily influence these sentiments.
Drawing from historical data, Kantrowitz mentioned that stocks began rallying in October 2022 when inflation data started to ease. He recollected, “Recall, the market got off to a great start this year largely due to views that bonds yields had peaked, especially after the March bank issues.” However, he emphasized that today’s high yields for 10-year bonds arise from multiple factors including Japan’s monetary policy shifts, the U.S. budget deficit, positive economic surprises, and hawkish sentiments from the Federal Reserve.
Discussing the future, Kantrowitz believes that bond yields’ stabilization for good reasons might prompt a rally in riskier assets. In contrast, a decline in yields for negative reasons could negatively impact these assets. He clarified, “At some point, equity weakness might be viewed as super bearish for the macro outlook and investors will return to the safety of bonds and policymakers will try to talk down yields … which could help to stabilize the situation.”
He concluded, “The thing about P/E-driven markets is that they can change on a dime – if the perception of risks changes, the markets do as well.”
Other significant events include China’s real estate giant, Evergrande, filing for bankruptcy protection in U.S. courts and the intervention of the People’s Bank of China in aiding its struggling currency. Additionally, Charlie McElligott of Nomura indicated potential market volatility due to the U.S. stock options contracts’ monthly expiration, especially if the S&P 500 dips to 4,320.
All eyes are now on the impending gathering of Federal Reserve officials in Jackson Hole, Wyoming, next week. Stocks appear oversold in the short term, but if investors don’t like what Powell has to say, an even larger retracement could form, potentially sinking stocks further into the red during what has been a historically weak month for bulls.