After Friday’s brutal session for stocks, it appears that stocks were the last asset class to accept the idea that the Federal Reserve likely won’t be shifting to a less aggressive monetary policy stance anytime soon.
Judging solely by movements in yields and exchange rates, it appears that bonds, gold, and the dollar all days ago began pricing in the idea that the Fed funds rate will remain higher for longer.
Stocks, on the other hand, had a few hiccups last week. However, it wasn’t until Friday, when Fed Chairman Jerome Powell put an end to the ‘Fed Pivot’ narrative, that stocks saw their big drop.
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To be sure, it’s not like stocks have been completely blindsided. The S&P 500 SPX,
clearly hit a wall right around the 200 day moving average more than a week ago.
But Friday’s session looked more like the market carnage of the first half of 2022, with the Dow Jones Industrial Average DJIA,
fell 1,000 points in a single session for the first time since May, while the S&P 500 and Nasdaq Composite COMP,
Each posted their biggest daily losses since mid-June on a percentage basis.
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Indeed, for stocks, Powell’s remarks about the economic pain that could come from Fed rate hikes seemed to hit home like a brick. By comparison, the Treasury yield curve just inched on Friday, while the US dollar moved just 0.3%.
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That momentum didn’t go unnoticed by market watchers, including a team from Evercore ISI, which noted that “pivot optimism appears to have lingered longer in equities.”
So why did stock traders seemingly need to hear the news directly from Powell himself, leaving stocks to play catch-up?
Many economists and market analysts expected Powell to seek to discredit the notion of a Fed pivot after the stock market latched onto a damaging interpretation of Powell’s remarks during the Fed’s post-meeting press conference in July.
And since then, investors have heard from a parade of senior Fed officials over the past month who have tried to gently reinforce the idea that the Fed is nowhere close to completing its rate hike program.
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When asked about this apparent difference in markets, Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co., commented that this kind of disconnect is unusual, although it does happen sometimes.
“It’s unusual for the stock market to get hooked on a bullish view and get disappointed. Clearly they were not on the same page with the bond market,” Conger said.
There’s an old saying in market circles that the bond market is “smarter” than the stock market – as it reacts more quickly to changes in the macroeconomic outlook, including when the Fed plans to raise interest rates.
When asked about that, Conger said that bonds are generally “a little bit better” than the stock market when it comes to spotting these kinds of changes.
This is perhaps why many market technicians pay close attention to Treasury yields. Case in point: earlier this week, Nicholas Colas, co-founder of DataTrek Research, told MarketWatch that stocks tend to fall “like clockwork” when the 10-year Treasury yield climbs above 3%.
On Friday at least this dynamic applies.