Tag Archives: U.S. 2 Year Treasury Note

Business

Fed’s Powell sparked a 1,000-point rout in the Dow. Here’s what investors should do next.

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Now might be the time to consider hiding out in short-dated Treasurys or corporate bonds and other defensive parts of the stock market.

On Friday, Federal Reserve Chairman Jerome Powell talked of a willingness to inflict “some pain” on households and businesses in an unusually blunt Jackson Hole speech that hinted at a 1970s-style inflation debacle, unless the central bank can rein in sizzling price gains running near the highest levels in four decades.

Read: Fed’s Powell says bringing down inflation will cause pain to households and businesses in Jackson Hole speech

Powell’s strident stance had strategists searching for the best possible plays that investors can make, which may include government notes, energy and financial stocks, and emerging-market assets.

The Fed chair’s willingness to essentially break parts of the U.S. economy to curb inflation “obviously benefits the front end” of the Treasury market, where rates are moving higher in conjunction with expectations for Fed rate hikes, said Daniel Tenengauzer, head of markets strategy for BNY Mellon in New York. 

To his point, the 2-year Treasury yield
TMUBMUSD02Y,
3.384%
hit its highest level since June 14 on Friday, at 3.391%, after Powell’s speech — reaching a level last seen when the S&P 500 officially entered a bear market.

Investors might consider making a play for the front end of credit markets, like commercial paper, and leveraged loans, which are floating-rate instruments — all of which take advantage of the “most clear direction in markets right now,” Tenengauzer said via phone. He’s also seeing demand for Latin American currencies and equities, considering central banks in that region are further along in their rate-hiking cycles than the Fed is and inflation is already starting to decline in countries like Brazil. 

A Fed battle cry

Powell’s speech was a moment reminiscent of Mario Draghi’s “do whatever it takes” battle cry a decade ago, when he pledged as then-president of the European Central Bank to preserve the euro during a full-blown sovereign-debt crisis in his region.

Attention now turns to next Friday’s nonfarm payroll report for August, which economists expect will show a 325,000 job gain following July’s unexpectedly red-hot 528,000 reading. Any nonfarm payrolls gain above 250,000 in August would add to the Fed’s case for further aggressive rate hikes, and even a 150,000 gain would be enough to generally keep rate hikes going, economists and investors said.

The labor market remains “out of balance” — in Powell’s words — with demand for workers outstripping supply. August’s jobs data will offer a peek into just how off kilter it still might be, which would reinforce the Fed’s No. 1 goal of bringing inflation down to 2%. Meanwhile, continued rate hikes risk tipping the U.S. economy into a recession and weakening the labor market, while narrowing the amount of time Fed officials may have to act forcefully, some say.

“It’s a really delicate balance and they’re operating in a window now because the labor market is strong and it’s pretty clear they should push as hard as they can” when it comes to higher interest rates, said Brendan Murphy, the North American head of global fixed income for Insight Investment, which manages $881 billion in assets.

“All else equal, a strong jobs market means they have to push harder, given the context of higher wages,” Murphy said via phone. “If the labor market starts to deteriorate, then the two parts of the Fed’s mandate will be at odds and it will be harder to hike aggressively if the labor market is weakening.”

Insight Investment has been underweight duration in bonds within the U.S. and other developed markets for some time, he said. The London-based firm also is taking on less interest-rate exposure, staying in yield-curve flattener trades, and selectively going overweight in European inflation markets, particularly Germany’s.

For Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, the best combination of plays that investors could take in response to Powell’s Jackson Hole speech are “to be offense in materials/energy/banks/select EM and defense in dividends/low vol stocks (think healthcare)/long the dollar.”

‘Tentative signs’

The depth of the Fed’s commitment to stand by its inflation-fighting campaign sank in on Friday: Dow industrials
DJIA,
-3.03%
sold off by 1,008.38 points for its largest decline since May, leaving it, along with the S&P 500
SPX,
-3.37%
and Nasdaq Composite
COMP,
-3.94%,
nursing weekly losses. The Treasury curve inverted more deeply, to as little as minus 41.4 basis points, as the 2-year yield rose to almost 3.4% and the 10-year rate
TMUBMUSD10Y,
3.042%
was little changed at 3.03%.

For now, both the inflation and employment sides of the Fed’s dual mandate “point to tighter policy,” according to senior U.S. economist Michael Pearce of Capital Economics. However, there are “tentative signs” the U.S. labor market is beginning to weaken, such as an increase in jobless claims relative to three and four months ago, he wrote in an email to MarketWatch. Policy makers “want to see the labor market weakening to help bring wage growth down to rates more consistent with the 2% inflation target, but not so much that it generates a deep recession.”

With an unemployment rate of 3.5% as of July, one of the lowest levels since the late 1960s, Fed officials still appear to have plenty of scope to push forward with their inflation battle. Indeed, Powell said the central bank’s “overarching” goal is to bring inflation back to its 2% target and that policy makers would stand by that task until it’s done. In addition, he said they’ll use their tools “forcefully” to bring that about, and the failure to restore price stability would involve greater pain.

Front-loading hikes

The idea that it be might be “wise” for policy makers to front-load rate hikes while they still can seems to be what’s motivating Fed officials like Neel Kashkari of the Minneapolis Fed and James Bullard of the St. Louis Fed, according to Derek Tang, an economist at Monetary Policy Analytics in Washington. 

On Thursday, Bullard told CNBC that, with the labor market strong, “it seems like a good time to get to the right neighborhood for the funds rate.” Kashkari, a former dove who’s now one of the Fed’s top hawks, said two days earlier that the central bank needs to push ahead with tighter policy until inflation is clearly moving down.

Luke Tilley, the Philadelphia-based chief economist for Wilmington Trust Investment Advisors, said the next nonfarm payroll report could come in either “high or low” and that still wouldn’t be the main factor behind Fed officials’ decision on the magnitude of rate hikes.

What really matters for the Fed is whether the labor market shows signs of loosening from its current tight conditions, Tilley said via phone. “The Fed would be perfectly fine with strong job growth as long as it means less pressure on wages, and what they want is to not have such a mismatch between supply and demand. Hiring is not the big deal, it’s the fact that there are so many job openings available for people. What they really want to see is some mix of weaker labor demand, a decline in job openings, stronger labor-force participation, and less pressure on wages.”

The week ahead

Friday’s August jobs report is the data highlight of the coming week. There are no major data releases on Monday. Tuesday brings the S&P Case-Shiller home price index for June, the August consumer confidence index, July data on job openings plus quits, and a speech by New York Fed President John Williams.

On Wednesday, Loretta Mester of the Cleveland Fed and Raphael Bostic of the Atlanta Fed speak; the Chicago manufacturing purchasing managers index is also released. The next day, weekly initial jobless claims, the S&P Global U.S. manufacturing PMI, the ISM manufacturing index, and July construction spending data are released, along with more remarks by Bostic. On Friday, July factory orders and a revision to core capital equipment orders are released.

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Business

Stock-market investors should watch this part of the yield curve for the ‘best leading indicator of trouble ahead’

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Investors have been watching the U.S. Treasury yield curve for inversions, a reliable predictor of past economic downturns.

They don’t always agree on which part of the curve is best to watch though.

“Yield curve inversion, and flatting, has been at the forefront for everyone,” said Pete Duffy, chief investment officer at Penn Capital Management Company, in Philadelphia, by phone.

“That’s because the Fed is so active and rates suddenly have gone up so quickly.”

An inversion of the yield curve happens when rates on longer bonds fall below those of shorter-term debt, a sign that investors think economic woes could lie ahead. Fears of an economic slowdown have been mounting as the Federal Reserve starts to tighten financial conditions while Russia’s Ukraine invasion threatens to keep key drivers of U.S. inflation high.

Lately, the attention has been on the 10-year Treasury yield
TMUBMUSD10Y,
2.478%
and shorter 2-year yield, where the spread fell to 13 basis points on Tuesday, up from a high of about 130 basis points five months ago.

Read: The yield curve is speeding toward inversion — here’s what investors need to know

But that’s not the only plot on the Treasury yield curve investors closely watch. The Treasury Department sells securities that mature in a range from a few days to 30 years, providing a lot of plots on the curve to follow.

“The focus has been on the 10s and 2s,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, in Horsham, Penn, a northern suburb of Philadelphia.

“I will hold out until the 10s to 3-month bills inverts before I turn too negative on the economic outlook,” he said, calling it “the best leading indicator of trouble ahead.”

Watch 10-year, 3-month

Instead of falling, that spread climbed in March, continuing its path higher since turning negative two years ago at the onset of the pandemic (see chart).

The 3-month to 10-year yield spread is climbing


Bloomberg data, Goelzer Investment Management

“The 3-month Treasury bill really tracks the Federal Reserve’s target rate,” said Gavin Stephens, director of portfolio management at Goelzer Investment Management in Indiana, by phone.

“So it gives you a more immediate picture of if the Federal Reserve has entered a restrictive state in terms of monetary policy and, thus, giving the possibility that economic growth is going to contract, which would be bad for stocks.”

Stocks were lower Friday, but with the S&P 500 index
SPX,
+0.51%
and the Nasdaq Composite Index
COMP,
-0.16%
still up about 1.2% on the week. The three major indexes were 4.5% to 10.1% lower so far in 2022, according to FactSet.

By watching the 10s and 2s
TMUBMUSD02Y,
2.280%
spread, “You are looking at the expectations of where Fed Reserve interest rate policy is going to be over a period of two years,” Stephens said. “So, effectively, it’s working with a lag.”

On average, from the time the 10s and 2s curve inverts, until “there’s a recession, it’s almost two years,” he said, predicting that with unemployment recently pegged around 3.8% that, “this curve is going to invert when the economy is really strong.”

The Federal Reserve Bank of San Francisco also called the 3-month
TMUBMUSD03M,
0.535%
and 10-year curve relationship its “preferred spread measure because it has the strongest predictive power for future recessions,” such as in 2019, back when the yield curve was more regularly flashing recession warning signs.

“Did it see COVID coming?” Duffy said, of earlier yield curve inversions.

A more likely catalyst was that investors already were on a recession watch, with the American economy in its longest expansion period on record.

“There are a number of these curves that you need to look at in totality,” Duffy said. “We’ve always said look at many signals.”

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Business

The yield curve is speeding toward inversion — here’s what investors need to know

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The bond market’s most reliable gauge of the U.S. economic outlook for the past half-century is hurtling toward inversion at a faster pace than it has in recent decades, raising fresh worries about the economy’s prospects as the Federal Reserve begins to consider aggressively hiking interest rates.

The widely followed spread between 2-year
TMUBMUSD02Y,
2.170%
and 10-year Treasury yields
TMUBMUSD10Y,
2.384%
shrank to as little as 13 basis points on Tuesday, a day after Fed Chairman Jerome Powell opened the door to raising benchmark interest rates at more than a quarter percentage point at a time. Though slightly higher on the day as of Tuesday afternoon, the spread is down from as high as 130 basis points last October.

Investors pay close attention to the Treasury yield curve, or slope of market-based yields across maturities, because of its predictive strength. An inversion of the 2s/10s has signaled every recession for the past half-century. That’s true of the early 1980’s recession that followed former Fed Chairman Paul Volcker’s inflation-fighting effort, the early 2000’s downturn marked by the bursting of the dotcom bubble, the 9/11 terrorist attacks, and various corporate-accounting scandals, as well as the 2007-2009 Great Recession triggered by a global financial crisis, and the brief 2020 contraction fueled by the pandemic.

Inversions have already struck elsewhere along the U.S. Treasury curve, suggesting the dynamic is broadening out and could hit the 2s/10s soon. Spreads between the 3-, 5-, and 7-year Treasury yields versus the 10-year, along with the gap between 20-and 30-year yields, are all now below zero.

“The yield curve has the best track record within financial markets of predicting recessions,” said Ben Emons, managing director of global macro strategy
at Medley Global Advisors in New York. “But the psychology behind it is just as important: People begin to factor into their minds interest rates that are perhaps too restrictive for the economy and which could lead to a downturn.”

The following chart, compiled in February, shows how the 2s/10s inverted ahead of past recessions and has continued to flatten this year. The 2s/10s most recently inverted for a brief time in August and September of 2019, just months before a downturn sparked by COVID-19 hit in February to April of the following year.


Source: Clearnomics, Federal Reserve, Principal Global Investors. Data as of Feb. 9, 2022.

Ordinarily, the curve slopes upward when investors are optimistic about the prospects for economic growth and inflation because buyers of government debt typically demand higher yields in order to lend their money over longer periods of time.

The contrary is also true when it comes to a flattening or inverting curve: 10- and 30-year yields tend to fall, or rise at a slower pace, relative to shorter maturities when investors expect growth to cool off. This leads to shrinking spreads along the curve, which can then lead to spreads falling below zero in what’s known as an inversion.

An inverted curve can mean a period of poor returns for stocks and hits the profit margins of banks because they borrow cash at short-term rates, while lending at longer ones.

Though it slightly steepened on Tuesday, the 2s/10s spread is still flattening at a faster pace than it has at any time since the 1980’s and is also closer to zero than at similar points of time during past Fed rate-hike campaigns, according to Emons of Medley Global Advisors. Ordinarily, the curve doesn’t approach zero until rate hikes are well under way, he says.

The Fed delivered its first rate hike since 2018 on March 16, and is now preparing for a 50-basis-point move as soon as May, with Powell saying on Monday that there was “nothing” that would prevent such a move, though no decision had been made yet.

Some market participants are now factoring in a fed-funds rate target that might ultimately get above 3%, from a current level between 0.25% and 0.5%.

Meanwhile, Powell says the yield curve is just one of many things policy makers look at. He also cited Fed research that suggested that spreads between rates in the first 18 months of the curve — which are currently steepening — are a better place to look for “100%” of the curve’s explanatory power.


Sources: Bloomberg, Deutsche Bank

It’s the 2s/10s spread, though, that comes with a proven half-century track record. And it’s fair to say that whenever the spread is about to invert, observers have cast doubt on its predictive capabilities.

Read: Here are three times when the Fed denied the yield curve’s recession warnings, and was wrong (April 2019)

“Usually the yield curve is an excellent look into the not-so-distant future,” said Jim Vogel of FHN Financial. “Right now, however, there are so many things moving at the same time, that its accuracy and clarity have begun to be diminished.”

One factor is “terrible” Treasury market liquidity resulting from the Fed’s move away from quantitative easing, as well as Russia’s invasion of Ukraine, Vogel said via phone. “People are not necessarily thinking. They are reacting. People are not sure what to do, so they’re buying three-year maturities, for example, when typically people are more thoughtful about their choices. And those choices usually go into the accuracy of curve.”

He sees the spread between 3-year
TMUBMUSD03Y,
2.389%
and 10-year yields, which just inverted on Monday after Powell’s comments, as a better predictor than 2s/10s — and says that a sustained inversion of 3s/10s over one or two weeks would lead him to believe a recession is on the way.

On Tuesday, Treasurys continued to sell off sharply, pushing yields higher across the curve. The 10-year rate rose to 2.38%, while the 2-year yield advanced to 2.16%. Meanwhile, U.S. stocks recovered ground as all three major indexes
DJIA,
+0.74%

SPX,
+1.13%

COMP,
+1.95%
rose in afternoon trading.

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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

Brace for a volatile 2022, but cling to this tech stalwart when the storm comes, says investment adviser

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The pain is piling up for equity investors after the long U.S. holiday weekend, with bond yields at levels not seen since early 2020, and oil prices tapping 2014 highs.

The pace of Federal Reserve monetary policy tightening amid the highest inflation in about 40 years, a bumpy start to the corporate earnings reporting season and pandemic uncertainties are just a few things on the worry list. Technology stocks
COMP,
-1.12%
are set to take the biggest hit on Tuesday, as a rapid rise in short term interest rates tends to make their future cash flows less valuable.

While a Deutsche Bank chart (below) reveals more tech-bubble worries, our call of the day makes a case for one of the biggest tech stalwarts, Apple
AAPL,
-0.43%,
saying the iPhone maker has an ace in the hole that few are paying attention to.

That call comes from investment adviser Wedgewood Partners, who kick off their fourth-quarter 2021 client letter with a warning about market volatility for 2022, triggered by central bankers who are about to usher in some market chaos by pulling the plug on years of cheap money. Even Chinese President Xi Jinping was heard warning the Fed not to hike interest rates at a virtual Davos on Tuesday.

However, the adviser also sees opportunities ahead as selling picks up speed, and they plan to stick to Apple, which they’ve owned for 16 years.

While Wedgewood said it couldn’t foresee the many products the company unveiled, “we did know that Apple’s vertically integrated [software and hardware] product development strategy was unique and extremely capable of creating products and experiences that customers thought worthwhile enough to spend growing amounts of time and money on,” said the adviser.

Today, that strategy remains intact, but more important Apple is commanding a key new realm, having developed over a dozen custom processors and integrated circuits, since launching its “A-series” processors. For example, one it produced in 2017 provided the iPhone X with enough power to operate FaceID 3-D algorithms, used to unlock phones and make digital payments.

“Apple has effectively created a semiconductor business that rivals and even surpasses some of the most established semiconductor-focused businesses in the industry,” said Wedgewood. “Apple continues to differentiate through vertical integration, which has been a hallmark of Apple’s long-term strategy to grow and capture superior profitability. It is difficult to predict what new products will be unveiled; however, we think this strategy should continue to serve
shareholders quite well.”

Other top positions recommended by Wedgewood include telecom group Motorola
MSI,
-1.73%,
another tech stalwart Microsoft
MSFT,
-0.23%
and retailer Tractor Supply
TSCO,
-1.14%.

Here’s a final comment from Wedgewood about the stock storm it sees brewing. “The graphic below reminds us that when speculation reigns, markets can go far higher than what seems sober,” but when they fall “markets will repeat their long history of falling faster and further than what seems sober.”


Wedgewood Partners

“Long term investors should root for such downside. Such times are opportunities to improve portfolios. Our pencils are sharpened for opportunities as Mr. Market serves them up.”

The markets

Microsoft shares are slipping after the tech group confirmed it will buy Activision Blizzard
ATVI,
+27.39%
in a $68.7 billion cash deal. The gaming group’s shares are flying, along with those of rival Electronics Arts
EA,
+6.72%.

Goldman Sachs
GS,
-7.72%
added to a disappointing batch of bank results from last week, with shares down as earnings came up short, with Charles Schwab
SCHW,
-4.29%
also falling on gloomy results. Kinder Morgan
KMI,
-0.14%
and Alcoa
AA,
-1.43%
are still to come.

Airbnb shares
ABNB,
-2.49%
are slumping after ratings and target cut from an analyst who sees multiple headwinds and too-few catalysts.

The New York Empire state manufacturing index for January fell well short of expectations. A National Association of Home Builders index for the same month is still ahead.

An unpublished study by an Israeli hospital showed second Pfizer
PFE,
-1.78%
-BioNTech
BNTX,
-7.77%
or Moderna
MRNA,
-4.70%
boosters aren’t halting omicron infections. Separately, Moderna’s CEO Stephane Bancel said his company is working on a combined flu/COVID booster, while White House chief medical advise Dr. Anthony Fauci, said it’s too soon to tell if omicron will bring us out of the pandemic.

Another study says COVID infections are turning children into fussy eaters due to parosmia disorders that distort their sense of smell. And China state media says packages from the U.S. and Canada had helped spread omicron, as Hong Kong gets ready to cull thousands of hamsters.

An airline lobby group is warning of “chaos” for U.S. air travelers due to 5G services rolling out this month, in a letter signed by big carriers, UPS
UPS,
-1.55%
and FedEx
FDX,
-1.39%.

Larry Fink, chairman and chief executive of BlackRock
BLK,
-1.72%
said investors need to know where company leaders stand on societal issues.

Retailer Walmart 
WMT,
-1.28%
is looking at creating its own cryptocurrency and nonfungible tokens, according to U.S. patent filings.

The markets

Uncredited

The Nasdaq Composite
COMP,
-1.12%
is sprinting ahead with losses, with the Dow
DJIA,
-1.43%
and S&P 500
SPX,
-1.24%
also lower Tuesday led by those for the Nasdaq-100
NQ00,
-1.28%
as bond yields
TMUBMUSD10Y,
1.848%

TMUBMUSD02Y,
1.034%
surge across the curve. Oil prices
BRN00,
+1.06%

CL00,
+1.56%
are surging after Iran-backed Houthi rebels launched a deadly drone attack on a key oil facility in Abu Dhabi. Goldman Sachs also predicted Brent could top $100 a barrel in 2023, while the OPEC left its 2022 global oil-demand forecast unchanged.

Losses spread to Asian
NIK,
-0.27%
and Europe stocks
SXXP,
-0.77%,
with a key German bund yields
TMBMKDE-10Y,
-0.012%
about to turn positive for the first time in three years.

The chart

A January survey of more than 500 investors polled by Deutsche Bank shows a slightly gloomier mood. For example, they are more bearish:


Uncredited

Many, especially those over 34, think tech shares are in a bubble:


Uncredited

And they continue to see inflation as the biggest risk to markets, but are also fretting a more aggressive Fed:


Uncredited

Here are the top stock tickers on MarketWatch as of 6 a.m. Eastern Time.

Ticker Security name
TSLA,
+1.47% 		Tesla
GME,
-5.61% 		GameStop
AMC,
-6.32% 		AMC Entertainment
BBIG,
+29.75% 		Vinco Ventures
NIO,
-0.71% 		NIO
AAPL,
-0.43% 		Apple
CENN,
-4.72% 		Cenntro Electric Group
NVDA,
-1.57% 		Nvidia
BABA,
-0.85% 		Alibaba
NVAX,
-4.04% 		Novavax
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Business

Get ready for the climb. Here’s what history says about stock-market returns during Fed rate-hike cycles.

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Bond yields are rising again so far in 2022. The U.S. stock market seems vulnerable to a bona fide correction. But what can you really tell from a mere two weeks into a new year? Not much and quite a lot.

One thing feels assured: the days of making easy money are over in the pandemic era. Benchmark interest rates are headed higher and bond yields, which have been anchored at historically low levels, are destined to rise in tandem.

Read: Weekend reads: How to invest amid higher inflation and as interest rates rise

It seemed as if Federal Reserve members couldn’t make that point any clearer this past week, ahead of the traditional media blackout that precedes the central bank’s first policy meeting of the year on Jan. 25-26.

The U.S. consumer-price and producer-price index releases this week have only cemented the market’s expectations of a more aggressive or hawkish monetary policy from the Fed.

The only real question is how many interest-rate increases will the Federal Open Market Committee dole out in 2022. JPMorgan Chase & Co.
JPM,
-6.15%
CEO Jamie Dimon intimated that seven might be the number to beat, with market-based projections pointing to the potential for three increases to the federal funds rate in the coming months.

Check out: Here’s how the Federal Reserve may shrink its $8.77 trillion balance sheet to combat high inflation

Meanwhile, yields for the 10-year Treasury note yielded 1.771% Friday afternoon, which means that yields have climbed by about 26 basis points in the first 10 trading days to start a calendar year, which would be the briskest such rise since 1992, according to Dow Jones Market Data. Back 30 years ago, the 10-year rose 32 basis points to around 7% to start that year.

The 2-year note
TMUBMUSD02Y,
0.960%,
which tends to be more sensitive to the Fed’s interest rate moves, is knocking on the door of 1%, up 24 basis points so far this year, FactSet data show.

But do interest rate increases translate into a weaker stock market?

As it turns out, during so-called rate-hike cycles, which we seem set to enter into as early as March, the market tends to perform strongly, not poorly.

In fact, during a Fed rate-hike cycle the average return for the Dow Jones Industrial Average
DJIA,
-0.56%
is nearly 55%, that of the S&P 500
SPX,
+0.08%
is a gain of 62.9% and the Nasdaq Composite
COMP,
+0.59%
has averaged a positive return of 102.7%, according to Dow Jones, using data going back to 1989 (see attached table). Fed interest rate cuts, perhaps unsurprisingly, also yield strong gains, with the Dow up 23%, the S&P 500 gaining 21% and the Nasdaq rising 32%, on average during a Fed rate hike cycle.

Dow Jones Market Data

Interest rate cuts tend to occur during periods when the economy is weak and rate hikes when the economy is viewed as too hot by some measure, which may account for the disparity in stock market performance during periods when interest-rate reductions occur.

To be sure, it is harder to see the market producing outperformance during a period in which the economy experiences 1970s-style inflation. Right now, it feels unlikely that bullish investors will get a whiff of double-digit returns based on the way stocks are shaping up so far in 2022. The Dow is down 1.2%, the S&P 500 is off 2.2%, while the Nasdaq Composite is down a whopping 4.8% thus far in January.

Read: Worried about a bubble? Why you should overweight U.S. equities this year, according to Goldman

What’s working?

So far this year, winning stock market trades have been in energy, with the S&P 500’s energy sector
SP500.10,
+2.44%

XLE,
+2.35%
looking at a 16.4% advance so far in 2022, while financials
SP500.40,
-1.01%

XLF,
-1.04%
are running a distant second, up 4.4%. The other nine sectors of the S&P 500 are either flat or lower.

Meanwhile, value themes are making a more pronounced comeback, eking out a 0.1% weekly gain last week, as measured by the iShares S&P 500 Value ETF
IVE,
-0.14%,
but month to date the return is 1.2%.

See: These 3 ETFs let you play the hot semiconductor sector, where Nvidia, Micron, AMD and others are growing sales rapidly

What’s not working?

Growth factors are getting hammered thus far as bond yields rise because a rapid rise in yields makes their future cash flows less valuable. Higher interest rates also hinder technology companies’ ability to fund stock buy backs. The popular iShares S&P 500 Growth ETF
IVW,
+0.28%
is down 0.6% on the week and down 5.1% in January so far.

What’s really not working?

Biotech stocks are getting shellacked, with the iShares Biotechnology ETF
IBB,
+0.65%
down 1.1% on the week and 9% on the month so far.

And a popular retail-oriented ETF, the SPDR S&P Retail ETF
XRT,
-2.10%
tumbled 4.1% last week, contributing to a 7.4% decline in the month to date.

And Cathie Wood’s flagship ARK Innovation ETF
ARKK,
+0.33%
finished the week down nearly 5% for a 15.2% decline in the first two weeks of January. Other funds in the complex, including ARK Genomic Revolution ETF
ARKG,
+1.04%
and ARK Fintech Innovation ETF
ARKF,
-0.99%
are similarly woebegone.

And popular meme names also are getting hammered, with GameStop Corp.
GME,
-4.76%
down 17% last week and off over 21% in January, while AMC Entertainment Holdings
AMC,
-0.44%
sank nearly 11% on the week and more than 24% in the month to date.

Gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are on the rise, and prompting analysts and traders to weigh the potential financial-market shock waves. Here’s what his reporting says about geopolitical risk factors and their longer-term impact on markets.

Week ahead

U.S. markets are closed in observance of the Martin Luther King Jr. holiday on Monday.

Read: Is the stock market open on Monday? Here are the trading hours on Martin Luther King Jr. Day

Notable U.S. corporate earnings

(Dow components in bold)
TUESDAY:

Goldman Sachs Group
GS,
-2.52%,
Truist Financial Corp.
TFC,
+0.96%,
Signature Bank
SBNY,
+0.07%,
PNC Financial
PNC,
-1.33%,
J.B. Hunt Transport Services
JBHT,
-1.04%,
Interactive Brokers Group Inc.
IBKR,
-1.22%

WEDNESDAY:

Morgan Stanley
MS,
-3.58%,
Bank of America
BAC,
-1.74%,
U.S. Bancorp.
USB,
+0.09%,
State Street Corp.
STT,
+0.32%,
UnitedHealth Group Inc.
UNH,
+0.27%,
Procter & Gamble
PG,
+0.96%,
Kinder Morgan
KMI,
+1.82%,
Fastenal Co.
FAST,
-2.55%

THURSDAY:

Netflix
NFLX,
+1.25%,
United Airlines Holdings
UAL,
-2.97%,
American Airlines
AAL,
-4.40%,
Baker Hughes
BKR,
+4.53%,
Discover Financial Services
DFS,
-1.44%,
CSX Corp.
CSX,
-0.82%,
Union Pacific Corp.
UNP,
-0.55%,
The Travelers Cos. Inc. TRV, Intuitive Surgical Inc. ISRG, KeyCorp.
KEY,
+1.16%

FRIDAY:

Schlumberger
SLB,
+4.53%,
Huntington Bancshares Inc.
HBAN,
+1.73%

U.S. economic reports

Tuesday

  • Empire State manufacturing index for January due at 8:30 a.m. ET
  • NAHB home builders index for January at 10 a.m.

Wednesday

  • Building permits and starts for December at 8:30 a.m.
  • Philly Fed Index for January at 8:30 a.m.

Thursday

  • Initial jobless claims for the week ended Jan. 15 (and continuing claims for Jan. 8) at 8:30 a.m.
  • Existing home sales for December at 10 a.m.

Friday

Leading economic indicators for December at 10 a.m.

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