Stock market investors face the US Federal Reserve’s rate-setting announcement particularly dovish, with new milestones for bond yields and concerns about soaring inflation weighing on sentiment, as that the central bank is expected to raise rates further.
The benchmark S&P 500 index is down more than 12% so far this year after posting its biggest monthly drop in April since the start of the pandemic. Meanwhile, the yield on the US Treasury note hit 3% for the first time in more than three years on Monday, doubling since the end of 2021.
Higher yields on US government debt, which is considered virtually risk-free, means that “you’re probably starting to lose some of those people who had maybe been focused on dividend-paying stocks and maybe they had to take a little more risk for that.” revenue,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
“The implication for equities is that you start to lose demand for equities relative to fixed income,” Samana said.
Some investors are clearly very bearish. Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corp, said Tuesday that he couldn’t think of a “worse environment than the one we have right now for financial assets.”
Yield Up, Stocks Down https://fingfx.thomsonreuters.com/gfx/mkt/akpezyjjqvr/Pasted%20image%201651594541397.png
In another weight on equities, yields on 10-year Treasury Inflation-Protected Securities (TIPS), also known as real yields because they subtract projected inflation from the nominal yield on Treasuries, have pushed solidly into positive territory. after being in negative territory. since March 2020.
Negative real yields have meant that an investor would have lost money on an annualized basis buying an inflation-adjusted 10-year Treasury note, a dynamic that has helped divert money away from U.S. government bonds and into stocks and other risk assets.
US real yields on the rise
The Cboe volatility index, known as Wall Street’s “fear gauge,” rose from 20 just a couple of weeks ago to above 36 on Monday, and finished just under 30 on Tuesday. An elevated VIX reflects higher investor expectations for choppy markets in the near term.
Rising Risk https://fingfx.thomsonreuters.com/gfx/mkt/mopanobdava/Pasted%20image%201651593560098.png
Amid the market crash, stock investors have reached new levels of pessimism. Bearish sentiment, which is the expectation that share prices will fall in the next six months, rose sharply to 59.4% in the latest survey by the American Association of Individual Investors. The last time bearish sentiment exceeded that level was in March 2009 during the financial crisis.
bears on the prowl
Such weak sentiment can be a contrarian positive indicator for stocks. The net spread in the AAII survey between bulls and bears fell to negative 43 percentage points in the latest survey, from a four-week average of negative 29 percentage points.
Since 1987, when that four-week average spread has been below negative 10 percentage points, the S&P 500 has gained 15.5% on average over the next 12 months, according to RBC Capital Markets.
How Stocks Work When Investors Are Bearish
In fact, some investors say the stock market could be gearing up for a near-term rally, should nothing from Wednesday’s Fed meeting catch them by surprise. Following the Fed’s last meeting in March, the S&P 500 rallied 8% in the two weeks after the central bank raised rates 25 basis points, as expected.
Traders in the options market remain cautious, with some measures of sentiment including the sell-to-call ratio of open contracts in the SPDR S&P 500 ETF near the most bearish they’ve been in recent years, according to Trade data. Alert. Excessive bearish positioning can help fuel strong rallies if sentiment reverses sharply.
“The sentiment is really bad…Everything is starting to line up to be very oversold and hyped in the short term,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina. “Assuming you don’t get a big surprise from the Fed, you could see a rally.”