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Business

Is it time to bail out of the stock market? Wild price swings are shaking the resolve of some investors.

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Is it time to bail out of stocks and bonds? This isn’t the market that investors likely signed up for back in 2021 when shares in GameStop Corp.
GME,
+4.69%
and movie chain AMC Entertainment Holdings
AMC,
+3.72%
were headed to the moon, drawing in droves investing neophytes.

The meme-stock frenzy, the one underpinned by social-media chatter as opposed to fundamentals, has fizzled, at least for now. Highflying technology stocks that could change the course of the world have been under pressure, as benchmark bond yields turn up with the promise of a Federal Reserve that is closing the purse-strings of too-loose monetary policy.

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Economists and market participants are predicting three, four, maybe as many as seven interest-rate increases, of about a 0.25 percentage points each, this year to tackle inflationary pressures that have gotten out of hand.

Read: What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

The upshot is that borrowing costs for individuals and companies are going up and the cheap costs of funds that helped to fuel a protracted bull market is going away.

Those factors have contributed partly to one of the ugliest January declines in the history of the technology-heavy Nasdaq Composite Index
COMP,
+3.13%,
which is down nearly 12%, with a single session left in the month, leaving one final attempt to avoid its worst monthly decline since October of 2008, FactSet data show.

Check out: Is the market crashing? No. Here’s what’s happening to stocks, bonds as the Fed aims to end the days of easy money, analysts say

What’s an investor to do?

Jason Katz, senior portfolio manager at UBS Financial Services, says that he’s had an “increased volume of hand-holding calls” from his high-net worth clients.

Katz said he’s telling investors that “it’s not about exiting the market now but making sure you are properly allocated.”

“It’s not a systemic problem we have in [financial markets], it’s a rerating,” of assets that fueled a speculative boom.

“You had a whole constituency of investments that should have never traded to where they did,” Katz said, “Aspirational stocks, meme stocks…all fueled by fiscal and monetary stimulus and this year it is about a great rerating,” of those assets, he said.

Art Hogan, chief market strategist at National Securities Corporation, told MarketWatch that losses come with the territory of investing but investors tend to feel it more acutely when stocks go down.

“It is our nature to feel losses more sharply than we enjoy gains. That is why selloffs always seem much more painful than rallies feel pleasurable,” Hogan said.

It is always important to note the difference between investing and trading. Traders purchase assets for the short term, while investors tend to buy assets with specific goals and time horizons in mind. Traders need to know when to take their losses, and live to trade another day, but investors who usually have time on their side need to invoke different tactics.

That is not to say that investors shouldn’t also be adept enough to cut their losses when the narrative shifts but such decisions should hinge on a change in the overall thesis for owning assets.

Hogan said that investors considering bailing on markets now need to ask themselves a few questions if they are “afraid.”

“’Have my reasons, for investing changed?’”

“’Have my goals changed? Has my time horizon for the money changed?,’” he said.

“Most importantly, ask yourself the question: ‘Am I skillful enough to get back into the market after the average drawdown has occurred,’” he said. “They certainly, don’t ring a bell at the [stock market] bottom,” Hogan said.

Data from the Schwab Center for Financial Research, examining a group of hypothetical investors over a 20-year time period, also supports the idea that being out of stocks, and in cash, for example, is unlikely to outperform investing in equities, even if investors were badly timing the market.

“The best course of action for most of us is to create an appropriate plan and take action on that plan as soon as possible. It’s nearly impossible to accurately identify market bottoms on a regular basis,” according to findings from Schwab’s research.

To be sure, the market going forward is likely to be tough sledding for investors, with some speculating about the possibility of a recession. The Russell 2000 index
RUT,
+1.93%
entered a bear market last week, falling at least 20% from its recent peak. And the yields for the 10-year
TMUBMUSD10Y,
1.771%
and 2-year Treasury notes
TMUBMUSD02Y,
1.164%
have compressed, usually viewed as a sign of an impending recession if the yields for shorter dated bonds rise above those for longer maturities.

And the rest of the stock market, looks fragile, even after a Friday flourish into the close, other equity bourses are looking at big monthly losses. Beyond the Nasdaq Composite, the Dow Jones Industrial Average
DJIA,
+1.65%
is down 4.4% so far in January, the S&P 500 index
SPX,
+2.43%
is off 7% thus far in the month and the Russell 2000 index is down 12.3% month to date.

Katz said that he’s advising many of his clients to look for quality stocks. ”

“High-quality growth and tech names have been wearing the black eye for [speculative tech], but “those [quality] stocks are starting to find their footing,” he said.

Indeed, Apple Inc.
AAPL,
+6.98%,
for example, surged 7% on Friday to mark its best percentage gain since July 31, 2020.

Katz also said international, and developing markets are good investments as well as small and midcap stocks. “I would remain long equities here, it’s just the right equities,” the UBS wealth manager said.

That said, wild intra and interday price swings are likely to continue to be a feature of this phase in financial markets, as the economy transitions from the COVID-19 pandemic and toward a regime of higher rates.

But slumps don’t necessarily mean the end of the world.

“Not every pullback becomes a correction, and not every correction becomes a bear…and not every bear becomes a diaster,” Katz said.  

Hogan said that downturns also can be viewed as opportunities.

“Volatility is a feature not a bug, and the price we pay for the long-term higher average returns in the U.S. equity market,” he said.

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Business

What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

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Federal Reserve Chairman Jerome Powell fired a warning shot across Wall Street last week, telling investors the time has come for financial markets to stand on their own feet, while he works to tame inflation.

The policy update last Wednesday laid the ground work for the first benchmark interest rate hike since 2018, probably in mid-March, and the eventual end of the central bank’s easy-money stance two years since the onset of the pandemic.

The problem is that the Fed strategy also gave investors about six weeks to brood over how sharply interest rates could climb in 2022, and how dramatically its balance sheet might shrink, as the Fed pulls levers to cool inflation which is at levels last seen in the early 1980s.

Instead of soothing market jitters, the wait-and-see approach has Wall Street’s “fear gauge,” the Cboe Volatility Index
VIX,
-9.28%,
up a record 73% in the first 19 trading days of the year, according to Dow Jones Market Data Average, based on all available data going back to 1990.

“What investors don’t like is uncertainty,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, in a phone interview, pointing to a selloff that’s left few corners of financial markets unscathed in January.

Even with a sharp rally late Friday, the interest rate-sensitive Nasdaq Composite Index
COMP,
+3.13%
remained in correction territory, defined as a fall of at least 10% from its most recent record close. Worse, the Russell 2000 index of small-capitalization stocks
RUT,
+1.93%
is in a bear market, down at least 20% from its Nov. 8 peak.

“Valuations across all asset classes were stretched,” said John McClain, portfolio manager for high yield and corporate credit strategies at Brandywine Global Investment Management. “That’s why there has been nowhere to hide.”

McClain pointed to negative performance nipping away at U.S. investment-grade corporate bonds
LQD,
+0.11%,
their high-yield
HYG,
+0.28%
counterparts and fixed-income
AGG,
+0.07%
generally to begin the year, but also the deeper rout in growth and value stocks, and losses in international
EEM,
+0.49%
investments.

“Every one is in the red.”

Wait-and-see

Powell said Wednesday the central bank “is of a mind” to raise interest rates in March. Decisions on how to significantly reduce its near $9 trillion balance sheet will come later, and hinge on economic data.

“We believe that by April, we are going to start to see a rollover on inflation,” McClain said by phone, pointing to base effects, or price distortions common during the pandemic that make yearly comparison tricky. “That will provide ground cover for the Fed to take a data-dependent approach.”

“But from now until then, it’s going to be a lot of volatility.”

‘Peak panic’ about hikes

Because Powell didn’t outright reject the idea of hiking rates in 50-basis-point increments, or a series of increases at successive meetings, Wall Street has skewed toward pricing in a more aggressive monetary policy path than many expected only a few weeks ago.

The CME Group’s FedWatch Tool on Friday put a near 33% chance on the fed-funds rate target climbing to the 1.25% to 1.50% range by the Fed’s December meeting, through the ultimate path above near- zero isn’t set in stone.

Read: Fed seen as hiking interest rates seven times in 2022, or once at every meeting, BofA says

“It’s a bidding war for who can predict the most rate hikes,” Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research, told MarketWatch. “I think we are reaching peak panic about Fed rate hikes.”

“We have three rate hikes penciled in, then it depends on how quickly they decide to use the balance sheet to tighten,” Jones said. The Schwab team pegged July as a starting point for a roughly $500 billion yearly draw down of the Fed’s holdings in 2022, with a $1 trillion reduction an outside possibility.

“There’s a lot of short-term paper on the Fed’s balance sheet, so they could roll off a lot really quickly, if they wanted to,” Jones said.

Time to play safe?

““You have the largest provider of liquidity to markets letting up on the gas, and quickly moving to tapping the brakes. Why increase risk right now?””


— Dominic Nolan, chief executive officer at Pacific Asset Management

It’s easy to see why some beaten down assets finally might end up on shopping lists. Although, tighter policy hasn’t even fully kicked in, some sectors that ascended to dizzying heights helped by extreme Fed support during the pandemic haven’t been holding up well.

“It has to run its course,” Jones said, noting that it often takes “ringing out the last pockets” of froth before markets find the bottom.

Cryptocurrencies
BTCUSD,
-0.78%
have been a notable casualty in January, along with giddiness around “blank-check,” or special-purpose acquisition corporations (SPACs), with at least three planned IPOs shelved this week.

“You have the largest provider of liquidity to markets letting up on the gas, and quickly moving to tapping the brakes,” said Dominic Nolan, chief executive officer at Pacific Asset Management. “Why increase risk right now?”

Once the Fed is able to provide investors will a more clear road map of tightening, markets should be able to digest constructively relative to today, he said, adding that the 10-year Treasury yield
TMUBMUSD10Y,
1.771%
remains an important indicator. “If the curve flattens substantially as the Fed raises rates, it could push the Fed to more aggressive [tightening] in an effort to steepen the curve.”

Climbing Treasury yields have pushed rates in the U.S. investment-grade corporate bond market near 3%, and the energy-heavy high-yield component closer to 5%.

“High yield at 5%, to me, that’s better for the world than 4%,” Nolan said, adding that corporate earnings still look strong, even if peak levels in the pandemic have passed, and if economic growth moderates from 40-year highs.

Draho at UBS, like others interviewed for this story, views the risk of a recession in the next 12 months as low. He added that while inflation is at 1980s highs, consumer debt levels also are near 40-year lows. “The consumer is in strong shape, and can handle higher interest rates.”

U.S. economic data to watch Monday is the Chicago PMI, which caps the wild month. February kicks off with the Labor Department’s job openings and quits on Tuesday. Then its ADP private sector employment report and homeownership rate Wednesday, following by the big one Friday: the January jobs report.

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Business

Correction forecast implies it’s a bad time to deploy cash into stocks

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The stock market’s volatility jump may be in its early stages.

Despite a bullish 2022 outlook, Wilmington Trust’s Meghan Shue expects the wild swings to ramp up as investors digest a less accommodative Federal Reserve and assess new risks tied to the Covid omicron variant.

“While we’re overweight to equities, we’re holding elevated cash because we think there are probably going to be more opportunities presenting themselves,” the firm’s head of investment strategy told CNBC’s “Trading Nation” on Friday. “Cash could be your friend over the coming months.”

The major indexes are on a losing streak. The Dow dropped 532 points on Friday and posted its worst day of the month. It fell 1.9% last week while the S&P 500 lost 1%.

Meanwhile, the tech-heavy Nasdaq fell 3% and is now off more than 6% from its 52-week high. The Nasdaq traditionally has a tougher time weathering a rising rate and slowing growth environment.

“When you combine that with elevated valuations and then continued uncertainty around omicron, you just get a recipe for continued volatility and a possible correction,” said Shue, a CNBC contributor.

Her base case calls for stocks to correct as much as 10% over the next two to three months. But she refers to it as a buying opportunity.

“Cyclicals and value still look very attractive,” she said. “Small caps are also very beaten down. And, if we do move beyond omicron, we could see a rally there.”

Overall, Shue, who oversees $152 billion in assets, is positive on the U.S. and international markets. According to her firm’s bullish 2022 forecast, inflation will normalize, supply chain pressures will ease and labor market participation will pick up.

“We’re going to be moving back into a reacceleration phase of the economic cycle,” she said.

Last month, Shue told “Trading Nation” her firm had its biggest overweight in stocks ever.

“Stocks [are] still expected to be one of the strongest performing asset classes,” Shue said.

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Business

Stock Market Today: Dow Rose as Moderna Slumped Again

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The


Dow Jones Industrial Average
had one of its best days this year on Monday, as value and defensive stocks led a rebound from last week’s market declines.

The news Monday was relatively positive, with signs that the Omicron variant of Covid-19 might be less severe than earlier strains and reports that China is considering easing monetary policy. On the Federal Reserve policy front, the latest reporting suggested that the central bank could announce plans at its next meeting to more quickly pull back from its bond-buying program.

The Dow surged 647 points, or 1.9%, for its best one-day point gain since November 2020 and the largest percentage increase since last March. The


S&P 500
closed up 1.2% and the Nasdaq Composite rose 0.9%, while the small-cap


Russell 2000
gained 2.1%, for its fourth-straight daily move of 2% or more.

Post-pandemic reopening stocks were among the biggest gainers on Monday. The


U.S. Global Jets
exchange-traded fund (ticker: JETS) added 5.3%, as


American Airlines Group

(AAL) added 7.9% and


United Airlines Holdings

(UAL) jumped 8.3%. Cruise lines


Carnival

(CCL) and


Royal Caribbean Cruises

(RCL) surged 8.0% and 8.3%, respectively.


Marriott International

(MAR) added 4.5%,


Live Nation Entertainment

(LYV) rose 6.1%, and


Cinemark Holdings

(CNK) gained 7.7%.

S&P 500 value stocks as a group gained 1.4% on Monday, versus a 0.9% rise for growth stocks in the index.

Investor attention remains focused on the newly discovered Omicron variant of coronavirus, news of which recently brought about the Dow’s worst day of the year and saw volatility rock markets last week. The latest headline driving sentiment comes from South Africa, where data—though from a small sample size—suggest that symptoms caused by Omicron were milder than with other variants.

Investors aren’t out of the woods yet, however. The broad market will remain sensitive to daily headlines about Omicron—both good and bad.

“It still feels like we’re in the guesswork stage of working out what the impact of Omicron will be,” said Russ Mould, an analyst at broker AJ Bell. “It would be naive to rule out further volatility as markets attempt to work out exactly what’s going on.”

On Monday, the news was positive and investors bought the market. All 11 S&P 500 sectors closed in the green.

Fed policy has been pushing investor sentiment the other way. Chair Jerome Powell indicated last week that the central bank would consider speeding up its slowing, or tapering, of monthly asset purchases, which add liquidity to markets, amid higher inflation.

“We’re really at a fascinating crossroads in markets at the moment,” said Jim Reid, a strategist at Deutsche Bank. “The market sentiment on the virus and the policy makers at the Fed are moving in opposite directions.”

Those trends mean different things for different kinds of stocks and indexes.

If Omicron is less severe than feared, then the economy might hold up better than expected. That would be good for economically-sensitive cyclical stocks, like many of those in the Dow. Higher bond yields and interest rates, however, can put downward pressure on stock valuations, particularly those with nosebleed price-to-earnings ratios, many of which are found in the Nasdaq.

“Like Friday, how the Nasdaq trades will likely determine the day, as markets want to see the tech sector stabilize after intense weakness late last week,” wrote the Sevens Report’s Tom Essaye. “If the Nasdaq can stabilize, the broad market can bounce.”

The tech-heavy index bounced from a loss of about 1% shortly after Monday’s opening bell.

In the commodity space, oil prices rose Monday after Saudi Arabia raised its January prices for Asian and U.S. customers over the weekend by $0.60, in a sign of firmer demand expectations.

Futures contracts for the international oil benchmark Brent rose 4.6%, to above $73 a barrel, with U.S. futures for West Texas Intermediate crude up 4.9% to about $69.50 a barrel.

“Given that OPEC+ is proceeding with its planned 400,000 barrels per day increase this month, it appears that Saudi Arabia is taking a punt that Omicron is a virus in a teacup,” said Jeffrey Halley, an analyst at broker Oanda. “Saudi Arabia’s confidence, along with the South African Omicron article over the weekend, is a boost to markets looking for good news in any corner they can find it.”

Cryptocurrency markets remained depressed after digital assets took a tumble over the weekend.


Bitcoin
and


Ether,
the two leading cryptos, remained off their lows following the stark fall Saturday, but were slipping after steadying Sunday. Bitcoin was trading hands around $49,000—down from more than $57,000 as recently as Friday—with Ether holding above $4,000.

Here are several stocks on the move Monday:


Nvidia

(ticker: NVDA) was among the most actively traded stocks in the U.S. Monday, closing down about 2.1%. Shares of fellow semiconductor firm Advanced Micro Devices (AMD) lost 3.4%.


Lucid Group

(LCID) stock dropped 5.1% after the electric-vehicle startup revealed that it had received a subpoena from the Securities and Exchange Commission, without offering many details.


Kohl’s

(KSS) gained 5.4% after an activist investor said it should explore selling itself.


Moderna

(MRNA) fell 13.5% after its president said that the risk that vaccines don’t work as well against Omicron is high. Pfizer (PFE) stock slid more than 5%.

Alibaba Group Holding (BABA) stock closed up 10.4% after a management shakeup at the e-commerce giant.


Deutsche Bank

(DB) rose 3.6% after JPMorgan upgraded the bank to Overweight from Neutral, adding that the group shows positive revenue developments in key divisions.

Pharma giant


Roche

(ROG.Switzerland) rose 1.5% in Zurich after announcing that it would release rapid antigen tests for Covid-19 and flu viruses next month.

Food delivery group


Just Eat Takeaway.com

(JET.U.K.) fell 4.9% in London following a price target cut and downgrade to Market Perform from Outperform by Bernstein, which sees few positive catalysts in the pipeline for the company.

Write to Jack Denton at jack.denton@dowjones.com

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Business

Friday’s jobs report will be released to a closed stock market—that’s only occurred 12 times since 1980

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Good Friday is next week and markets will be closed as per usual. However, what will be unusual is that the closure of financial exchanges in the U.S., and some other parts of the world, comes as the government is slated to release a key report on employment in the middle of a pandemic.

Why is the stock market closed while federal data are being released? That is because Good Friday, this year on April 2, isn’t a federal holiday.

It’s a fairly rare occurrence for the government to release a major piece of data as market participants aren’t able to react to it.

And it is only happened 12 times since 1980, according to Dow Jones Market Data, with the last time occurring on 2015, and before that it happened on 2012 and 2010.

Year Dates that nonfarm-payrolls have been released on Good Friday
1980 April 4
1983 April 1
1985 April 5
1988 April 1
1994 April 1
1996 April 5
1999 April 2
2007 April 6
2010 April 2
2012 April 6
2015 April 3
2021 April 2 (scheduled)
Source: Dow Jones Market Data

The jobs report is arguably the granddaddy of economic reports, outside of GDP, but its significance has been amplified by the pandemic, particularly as market participants seek more evidence on the magnitude of the rebound a year into one of the worst public health crisis in a century.

The latest jobs report will come as investors are unclear about the degree to which the labor market and/or the economy could fully recover, or even overheat, potentially compelling the Federal Reserve to act quickly to tamp down out-of-check inflation, with vaccine rollouts and some $1.9 trillion in fresh fiscal aid have helping to buttress the economy.

Fed boss Jerome Powell has tried to pacify jittery markets by emphasizing that the central bank will adopt a go-slow approach to normalizing policy, which itself is forecast to be years away.

National Securities chief market strategist Art Hogan told MarketWatch that it may be a good thing that the jobs report comes as the market is closed.

“Having the weekend to digest this news and calibrate what this means for the economic expansion, that may be a good thing for the market,” Hogan said.

A year ago, U.S. nonfarm payrolls fell by 663,000 in March, while the unemployment rate jumped to a 26-year high of 8.5% from 8.1%.

The 2021 jobs report for March is expected to show a gain of 655,000 based on some estimates, after payrolls data showed that unemployment fell to 6.2% as 379,000 jobs were added in February, marking the biggest such gain in four months.

Some time to pause for financial markets may be warranted, Hogan says, because the economy still has a long way to go to achieve a healthy recovery.

“We still have maybe nine million people out of the labor force. We are going to need some blockbuster levels to get to pre-pandemic levels,” the analyst said, estimating that the economy would have to average some 750,000 jobs a month to achieve post-COVID levels.

“It would take us two years, so we really need to start ratcheting up those numbers,” he said.

On Friday, the Dow Jones Industrial Average
DJIA,
+1.39%,
the S&P 500 index
SPX,
+1.66%,
the Nasdaq Composite Index
COMP,
+1.24%
and the small-capitalization Russell 2000 index
RUT,
+1.76%
finished sharply higher, following a choppy week of trading that ended with a late-session flourish.

To be sure, it will be hard to say how robust trading action might be on the Monday after Good Friday, because a number of global exchanges will be closed in observance of Easter Monday.

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Business

Fed could be source of volatility as Powell speaks in week ahead

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Chairman of the Federal Reserve Jerome Powell listens during a Senate Banking Committee hearing on “The Quarterly CARES Act Report to Congress” on Capitol Hill in Washington, U.S., December 1, 2020.

Susan Walsh | Reuters

The Federal Reserve could remain a source of angst for markets in the week ahead, with chairman Jerome Powell scheduled to testify twice before Congress and more than a dozen other Fed speeches expected.

The bond market’s reaction to the central bank this past week was unusually volatile.

Though the market was initially steady after the two-day Fed meeting and Powell’s briefing Wednesday, Thursday came with a big selloff in bonds and spiking rates. Traders reacted to the fact that the central bank is willing to let inflation and the economy run hot while the job market recovers.

In the approaching week, bond market professionals will be watching Powell and other member of the Fed for further cues.

“This is bonds’ — I wouldn’t call it day in the sun — it’s more like day in the tornado,” said Michael Schumacher, head of rate strategy at Wells Fargo. “Clearly the bond market is the one the equity market is watching right now, and normally that’s not the case.”

Stocks were lower on the week, with the Dow off about 0.5% and the S&P 500, down 0.7%. The Nasdaq Composite was off 0.8% for the week.

The Russell 2000, however, was hit the hardest, losing close to 3% for the week.

Yields ratcheted higher as the market sold off. Bond yields move inversely to price.

The benchmark 10-year Treasury yield, which impacts mortgages and other loans, rose as high as 1.75% Thursday, a move of more than 10 basis points in less than a day. It was at 1.72% Friday afternoon.

“The bond move has been huge, and it’s starting to scare people,” said Schumacher.

“There’s been this question hanging out there for awhile: How much of an increase in yield can some of the higher octane stocks take?” he asked. “There’s no magic number, but as we speak, the 10-year is up 80 basis points this year. It’s incredible.”

Powell speaks

Powell testifies Tuesday and Wednesday before Congressional committees along with Treasury Secretary Janet Yellen on Covid relief efforts and the economy.

He also speaks on central bank innovation at a Bank for International Settlements event Monday morning.

Other central bank speakers this week include Fed Vice Chairman Richard Clarida, Vice Chairman Randal Quarles, Fed Governor Lael Brainard, and New York Fed President John Williams.

Inflation and the Fed

There is also some key data.

Important releases include the personal consumption and expenditure data on Friday, which includes the PCE deflator, the Fed’s preferred inflation measure. Core PCE inflation was running at an annual pace of 1.5% in January.

The Federal Reserve this past week took no action at its two-day meeting, but it did present new economic projections including a forecast of 6.5% for gross domestic product this year. The central bank’s forecast now shows PCE inflation going to 2.4% this year, but falling to 2% next year.

The majority of Fed officials did not see any interest rate hikes through 2023.

Powell reiterated that the Fed sees just a temporary pickup in inflation this year because of the base effects against last year’s numbers when prices fell.

The central bank will target an average range of inflation around 2%, so that number could exceed that threshold for some time. It’s a change to the Fed’s ground rules, which makes the bond market nervous.

Normally, the Fed would hike interest rates if inflation flared up to avoid an overheating economy and avert a bust cycle.

“For the bond market, and the Fed, there is a communications problem and there’s a consensus problem. There can’t not be tension,” said Diane Swonk, chief economist at Grant Thornton.

“They will be trying to clarify the Fed’s message, but without a consensus on what those numbers and guardrails mean, it will be hard,” she said. “They will be explaining themselves as economists, and they’ll be speaking a different language than the bond market speaks.”

Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, expects the bond market could be more volatile than stocks, and inflation would be problematic for both.

At some point, he expects there could be a 10% stock market correction, and inflation or a sharp move in bond yields could be a trigger.

“The market is trying to make sense of what could be perceived as a disconnect, between their economic projections and the Fed’s dual mandate of unemployment and inflation,” said Grohowski.

“Yet, they’re committed to keep short rates on hold until the end of 2023,” he said. “That’s what the market is struggling with. I think it’s unsettling to me to hear words like ‘overshoot.'”

Rotation from tech into cyclicals

Grohowski expects what he calls the ‘great rotation’ from tech and growth stocks into cyclicals and value to continue. Growth and tech have been most sensitive to rising rates, and the Nasdaq has corrected more than 10%.

“I think we’re in the sixth or seventh inning of a nine-inning game. It’s not over, but I think we’ve seen the lion’s share of the great rotation out of growth, into value,” said Grohowski. He said that view depends on the 10-year not rising much above 1.75%.

Grohowski is concerned by the Fed’s willingness to let inflation overshoot because inflation is a negative for stocks.

Supply chain issues are a concern. He pointed to Nike’s comments Thursday that its sales were hurt by port congestion, and also the shortage of semiconductors, which is impacting automobile production.

“Inflation expectations are troublesome for P/E [price-earnings] ratios,” Grohowski said. The [stock] market is trading at 22 times our estimate for this year’s earnings.”

He said the market is having difficulty reconciling the lack of any forecasted interest rate hikes versus the strength of the Fed’s economic forecast.

“If you ask me what I lose sleep over? …It’s too much of a good thing. Too much of a good thing is being too accommodative,” Grohowski said.

Bond market direction

Schumacher said there’s a chance the bond market could steady in the next couple of weeks, even if yields tick up.

He said corporate pension funds appear likely to reallocate capital into bonds before the end of the quarter March 31, and that could be supportive. Also as the Japanese fiscal year is set to begin, there could also be new buying in U.S. Treasurys because on a currency adjusted basis U.S. debt looks very cheap, Schumacher said.

He is also watching Treasury auctions in the coming week.

The Treasury auctions $60 billion 2-year notes Tuesday; $61 billion 5-year notes Wednesday, and $62 billion 7-year notes Thursday.

In particular, Schumacher is watching the 7-year auction, which drew poor demand last month.

Week ahead calendar

Monday

Earnings: Tencent Music Entertainment

9:00 a.m. Fed Chairman Jerome Powell at Bank for International Settlement summit

10:00 a.m. Existing home sales

10:00 a.m. Quarterly Financial Report

1:00 p.m. San Francisco Fed President Mary Daly

1:30 p.m. Fed Vice Chairman Randal Quarles

7:15 p.m. Fed Governor Michelle Bowman

Tuesday

Earnings: Adobe, IHS Markit, DouYu, GameStop, Steelcase

8:30 a.m. Current account

9:00 a.m. St. Louis Fed President James Bullard

10:00 a.m. New home sales

12:00 p.m. Fed Chairman Powell, Treasury Secretary Janet Yellen at House Financial Services Committee

1:00 p.m. Treasury auctions $60 billion 2-year notes

1:25 p.m. Fed Governor Lael Brainard

1:45 p.m. New York Fed President John Williams

3:45 p.m. Fed Governor Brainard

4:20 p.m. St. Louis Fed’s Bullard

Wednesday

Earnings: General Mills, Shoe Carnival, KB Home, RH, Tencent, Embraer, Winnebago

8:30 a.m. Durable goods

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

10:00 a.m. Fed Chairman Powell, Treasury Secretary Yellen at Senate Banking Committee

1:00 p.m. Treasury auctions $61 billion 5-year notes

1:35 p.m. New York Fed’s Williams

3:00 p.m. San Francisco Fed’s Daly

7:00 p.m. Chicago Fed President Charles Evans

Thursday

Earnings: Darden Restaurants

5:30 a.m. New York Fed’s Williams

8:30 a.m. Initial claims

8:30 a.m. Q4 GDP third reading

10:10 a.m. Fed Vice Chairman Richard Clarida

10:30 a.m. New York Fed’s Williams

1:00 p.m. Treasury auctions $62 billion 7-year notes

1:00 p.m. Chicago Fed’s Evans

7:00 p.m. San Francisco Fed’s Daly

Friday

8:30 a.m. Personal income/spending

8:30 a.m. Advance economic indicators

10:00 a.m. Consumer sentiment

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