(Bloomberg) – Wall Street hasn’t been able to find many reasons to continue raising stocks amid higher bond yields, hawkish Fedspeak and a pick-up in retail bull market stocks that are often viewed as a contrarian indicator.
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The S&P 500 has wiped out a nearly 1% rally. Options traders continued to take bets targeting a 6% Federal Reserve prime rate, nearly a percentage point higher than consensus. The two-year yield traded 4.5% and had previously risen above the 10-year yield by the widest margin since the early 1980s – a sign of fading confidence in the economy’s ability to withstand further tightening.
Fed Bank of Richmond President Thomas Barkin added to the drumbeat of officials signaling the central bank still has ways to rein in prices, saying it’s important to keep hiking to curb inflation. Jobless claims data bolstered the notion of a hot job market hinting at policy tightening, while mortgage rates rose for the first time in more than a month.
Read: Fed funds call at 8% keeps a strategist ahead of the 6% package
“The market is wondering if it is even possible for the Fed to do what it has set out to do because it is a very difficult task – slowing down the economy by raising interest rates while at the same time preventing us from going into a deep recession slip,” said Chris Gaffney, president of world markets at TIAA Bank.
Amidst so much uncertainty, some analysts see room for consolidation, especially after a surge that has taken stocks close to overbought levels. For Fairlead Strategies’ Katie Stockton, the biggest potential challenge for the market right now is overly bullish sentiment.
The story goes on
The latest poll from the American Association of Individual Investors showed US retail investors turned bullish for the first time since April, with the bull-to-bear spread widening to 12.5 from -4.7 a week earlier. The proportion of investors who are pessimistic about the next six months fell to 25%, its lowest level since November 2021.
“Well, since human nature never changes, sentiment ALWAYS follows price,” wrote Peter Boockvar, author of the Boock Report. “And the Bulls are back across the board now. From a contrarian perspective we have to be careful now and while it’s not extreme and standing room only, the cops boat is getting full.”
For some market observers, trades favorable to disinflation will soon reverse as price hikes prove firmer than expected.
This year, higher-duration sectors like technology and consumer discretionary have led the rise in stocks, while lower-duration sectors like energy and utilities have underperformed. This is a reversal of the trend seen in late 2021, when investors started avoiding long-duration stocks as inflation started to rise rapidly.
The performance of the megacaps was quite mixed on Thursday.
Tesla Inc. shares extended their breakneck rally to double from lows reached in early January. Google’s parent Alphabet Inc. suffered a two-day selloff amid concerns about the competency of Bard, the ChatGPT rival it revealed on February 6.
In late trading:
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Lyft Inc. declined after issuing an earnings outlook that missed analysts’ estimates by a wide margin as it prepares to sacrifice earnings to attract lower priced drivers.
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Expedia Group Inc. reported disappointing fourth-quarter sales reflecting weather-related travel chaos late last year.
Elsewhere, the decline in cryptocurrencies gained momentum as signs of regulatory action against the industry and a broader retreat from risky assets weighed on investor sentiment.
Key Events:
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University of Michigan consumer sentiment, Friday
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The Fed’s Christopher Waller and Patrick Harker speak on Friday
Some of the key movements in the markets:
Shares
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The S&P 500 was down 0.9% as of 4 p.m. New York time
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The Nasdaq 100 fell 0.9%
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The Dow Jones Industrial Average fell 0.7%
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The MSCI World Index fell 0.4%
currencies
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The Bloomberg Dollar Spot Index fell 0.1%
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The euro rose 0.2% to $1.0734
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The British pound rose 0.4% to $1.2117
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The Japanese yen fell 0.2% to 131.63 per dollar
cryptocurrencies
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Bitcoin fell 4.2% to $21,989.8
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Ether fell 4.7% to $1,575.74
Bind
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The 10-year government bond yield rose six basis points to 3.67%
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The 10-year German government bond yield fell six basis points to 2.30%
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The 10-year UK government bond yield fell two basis points to 3.29%
raw materials
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West Texas Intermediate Crude fell 1.1% to $77.63 a barrel
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Gold futures fell 1% to $1,872 an ounce
This story was created with the support of Bloomberg Automation.
–Assisted by Namitha Jagadeesh, Bailey Lipschultz, Isabelle Lee, Vildana Hajric and Peyton Forte.
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