March 8, 2023
Good morning,
All eyes were on Fed Chair Jerome Powell yesterday morning as he began giving his prepared speech to the Senate Finance Committee. Markets expected a reiteration of last Fed meeting’s higher-for-longer Fed narrative, steady 25 basis point (bps) hikes at the next few Fed meetings in March, April and maybe even July. What was unexpected was an even more hawkish Fed Chair, who pushed the Fed narrative even higher and for longer than last month’s raised prognosis for the Fed’s tightening cycle. Markets spent the day re-evaluating the effects of the stiffer tightening cycle. A euphemism for – rates went up and prices of bonds and stocks went down.
Recall the discussion in February of the equity market’s change in trend from down to up. The name market analysts give the February trend change – a new bull market or a bear market rally – has yet to be determined but is not all that important right now. The big takeaway from the Feb trend change in equities is how equities would behave in a correction and how they handled negative news like – higher rates, slower earnings growth, and sticky inflation (all related of course).
On yesterday’s surprise comments, the U.S Treas – 2yr bond yield crossed 5% and traded as high as 5.08% earlier this morning. It was at 4.03% at the beginning of February. That is a massive move. At the same time, growth stocks, as defined by the NASDAQ Composite Index and theoretically the sector most sensitive to rising interest rates, outperformed all other equity indexes yesterday, and remain the best performing equity index since 2/1 when the UST-2yr began its spike in yield. What does all of this portend? I have a theory, and it should be compliance approved for Friday. See you then.
Be well,
Mike