- The Fed continues to become hawkish
- Yields reach 3-year highs
- Investors will leave equities to bonds and growth to value stocks
A battery of new and ongoing headwinds will likely drive significant volatility over the coming week amid cyclical stock rotation. Central bank policy decisions and inflation data will determine whether investors should continue to price in monetary policy tightening.
And major global banks will usher in the latest earnings season, which could provide insight into why some international lenders may need to shift their strategies to sustain growth.
Cyclical rotation Second wave in progress
After the first wave of COVID in 2020, economically sensitive sectors outperformed. During the pandemic, investors raised and stocks, offering shares of companies whose products and platforms made it possible to shop, socialize and work from home even during shutdowns – the new normal. At the same time, stocks of companies relevant to the old normal pre-pandemic life have been neglected and their stock prices have languished.
Then came a tipping point. It appeared to investors that they had exploited growth stocks for all they could get and that monotonous businesses whose business was just “standard” fare such as food, clothing, utilities and the transports were back in favor. These neglected stocks were suddenly recognized as bargains, bringing value.
Consequently, the Wall Street herd turned to sectors such as , , and . Now investors are turning away from technology and Small cap stocks as tighter monetary policy becomes the current trigger – rising interest rates make it harder to justify high valuations for tech companies. Small domestic businesses lack the resources and flexibility to thrive in a higher interest rate environment.
So what’s left? Large caps, non-tech companies.
Friday’s market activity illustrates the situation. Investors are moving from growth stocks to value and defensive stocks. Heavy tech fell 1.41%, underperforming among major indices, but small cap followed, falling 0.76%. The only index that ended the last trading day of the week in the green was the , the 30-stock Blue Chip gauge which rose 0.4%. The large was the second best performance, with a loss of 0.27%.
The same relationship is also visible on a weekly basis: the Russell plunged 4.62%, followed by a 3.59% decline for the NASDAQ 100. Once again, the Dow Jones excelled, falling only 0.27%, followed by the 1.27% decline in the S&P. 500.
The same pattern is visible via sector analysis on the SPX: technology stocks lost to economically sensitive sectors in all time series up to one year.
On Friday, technology fell 1.4%, underperforming all sectors. Energy outperformed, jumping 2.75%, followed by +1.01% for financials.
On a weekly basis, the technology lost 3.82% in value. jumped +3.45% as shares in the sector hit record highs as investors rushed for safety. Energy stocks were the second best performers rising 3.21%.
From a monthly perspective, Health Care jumped 11.98%, followed by a 10.92% gain for the Materials sector, nearly double the performance of Technology and Communication Services. , which increased by about 6% each.
On an annual basis, Communication Services is the only sector in the red, down 11.52% while at the same time Energy leads, up 63.95%.
Another, perhaps more obvious measure is that the NASDAQ 100 and Russell 2000 are the only major US averages in bear markets, a dubious honor meaning that an asset or index is down at least 20% per from its previous peak.
The Russell 2000 fell 20.93% from its November 8 high to its January 27 low. The NASDAQ 100 fell 21.28% from its November 19 high to its March 14 low.
Meanwhile, the S&P 500 fell just 13.95% from its January 3 high and March 8 low, while the Blue Chip Dow corrected just 11.33% between its record high on January 4 and its low on March 8.
The Russell 2000 also appears to be in worse technical shape than its major US index peers.
The small cap index topped out and rejected every attempt to climb back above the previous low that has now become its top. Also, even after falling to the bottom of its range (blue shaded area), the indicators show that there is a lot more room to fall.
So, having acknowledged that a new rotation is already in place, why should investors expect it to continue? Last week’s release from the revealed that many Fed officials were set to raise rates by 50 basis points in the coming months, signaling that an ever more hawkish Fed could be ahead.
Note that even if it acts more aggressively, the central bank could still end up driving it out rather than getting ahead of it, on several occasions while remaining one step away from rising inflation.
The benchmark Treasury closed above 2.7% on Friday for the first time in three years. Investors are selling current Treasury bills, anticipating later maturing debt whose yield will reflect higher interest rates.
Yields on the benchmark note rose for four consecutive days, completing a bullish pennant. The implicit target of the model tests the critical level of 3%.
Not only will higher borrowing costs weigh heavily on equities, but these returns will provide fierce competition for equities. Many investors held stocks only because zero interest rates were decimating fixed income securities. Now that yields are back, we expect a massive exodus from equities, including from many institutional players.
Therefore, investors will keep an eye on central banks and inflation data over the coming week. BoC and ECB have upcoming interest rate decisions while inflation data is expected from China, US and UK.
Earnings season also begins this coming week, with many major banks and financial firms including (NYSE:), Goldman Sachs (NYSE:), BlackRock (NYSE:) and Citigroup (NYSE:). Analysts predict net income for the six largest U.S. banks will fall 35% year-on-year as lenders may reveal a sharp decline in deals and transactions given markets aren’t as bountiful as last year .
Still, rising for its seventh consecutive session, briefly breaking above the 100.00 level for the first time since May 2020.
The greenback extended a range penetration that confirmed the uptrend of the previous H&S continuation pattern. However, Friday’s Shooting Star demonstrated a residual bearish presence. The price may fall back towards the range as the buyers gobble up all the remaining supply before the price heads towards 101. When the dollar hits the 104 level, it will have reached its highest position since 2002.
climbed for the second day even against a strengthening dollar and despite a more hawkish Fed. Perhaps the ongoing war between Russia and Ukraine and concerns over the Fed’s future positioning are keeping demand for the yellow metal elevated.
Since February, we have considered the precious metal’s trading pattern to be a health and safety high. Maybe it’s a symmetrical triangle that broke out on Friday. After gold hit the implied target of a 1.5 year symmetric triangle, we thought the price might turn down. However, if Friday’s trading represents the trend, we may see gold making another attempt at the August 2020 high.
rose slightly on Saturday, after Friday’s decline.
The digital token blew up a supposed bullish pennant after the neckline of a large H&S flexed its muscles. Right now, the cryptocurrency is trading in an ascending channel, although still under the reversal pattern.
rebounded on Friday after a three-day sell-off, but closed lower for a second week after, and the U.S. announced it would dip into emergency reserves. Will Friday’s rebound last? Not according to the technical table.
WTI appeared to break lower from a symmetrical triangle. Unless there are dramatic changes, the price could fall back to $80 levels on the downside.
The week ahead
All times listed are EDT
9:30 p.m.: China – : would have reached 1.2% in March.
2:00 a.m.: United Kingdom – : previously printed at 6.6% YoY.
2:00 a.m.: United Kingdom – : is expected to fall to 0.3% from 0.8%.
2:00 a.m.: United Kingdom – : should go from 4.8% to 5.4%.
2:00 a.m.: United Kingdom – : The February reading was -48.1K.
5:00 a.m.: Germany – : is expected to dip further to -48.0 from -39.3.
8:30 a.m.: United States – : probably remained stable at 0.5% MoM.
9 p.m.: New Zealand – : should go from 1.00% to 1.25%.
10 p.m.: New Zealand –
2:00 a.m.: United Kingdom – : is expected to increase to 6.7% from 6.2% YoY, while declining to 0.7% from 0.8%.
8:30 a.m.: United States – : rise to 1.1% in March, from 0.8% previously.
10 a.m.: Canada – : is expected to double to 1.00% from 0.50%.
10:30 a.m.: United States – : last week’s release showed a build of 2.421 million barrels.
9:30 p.m.: Australia – : is expected to almost halve to 40.0K from 77.4K.
7:45 am: Euro zone: : remain stable at -0.50%.
7:45 am: Euro zone –
8:30 a.m.: United States – : should go from 166K to 173K.
8:30 a.m.: United States – : should have doubled to 0.6% from 0.3% in March.
8:30 a.m.: Euro zone –
Good Friday holiday: US, UK, Eurozone, Australia, New Zealand and other global markets are closed