The big ups and downs hitting stock indices of late are being driven by stock investors rushing to adjust to the risks that the corporate bond market warned about months ago.
That’s the view of Mike Lewis, director of US equity cash trading at Barclays Plc, who attributes the sudden spike in stock volatility to stock traders finally accepting the end of the Federal Reserve’s free-flow stimulus. . It’s something that credit markets began to take into account in September, suggesting that the process has to be executed elsewhere.
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Divergent signals have bounced off the markets throughout 2021 as investors tried to control the post-Covid economy. Bullish equity investors, fueled by the Fed’s largesse, repeatedly pushed benchmarks to record highs, while their inflation-obsessed fixed-income brethren saw much more reason for pessimism.
“The fundamental question was who was right: the credit or equity markets? Now it seems that the credit markets were more in tune with reality, ”Lewis said by phone. “While the Fed was saying ‘no, we won’t have to go up’ and equity markets were hitting all-time highs, credit markets were saying ‘yes, you will.’
Equity indicators are going through their worst spell of volatility in a year after Fed Chairman Jerome Powell abandoned his view that inflation is transitory and raised the possibility of ending asset purchases earlier than scheduled. Concern about the new variant of the coronavirus is also contributing to the malaise, which has pushed the S&P 500 up or down by more than 1% in five consecutive days, something that has not happened since November last year.
While stocks have turned turbulent, credit markets have been reporting trouble for months. In September, high yield debt tracked by iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) posted its worst performance in a year. It also fell in October and November, and although it was up in Thursday’s session, it has fallen in nine of the last 11 days.
“We believe that the long period in which liquidity ‘lifts all boats’ is coming to an end,” wrote Michael Shaoul, chief executive officer of Marketfield Asset Management LLC, in a note to clients. “Earnings and valuations may start to matter much more in 2022 than they have for most of the current year and many of those that have preceded it.”
Stocks rose Thursday as falling buyers scrambled to grab some of the worst-hit stocks. The top 11 industries advanced, lifting the S&P 500 1.4%, the best gain since October.
For Lewis, with the Fed in the process of relinquishing its role as the bull market’s biggest ally as a new strain of Covid-19 takes hold, it is too early to say that all is clear.
“Bounces like the ones we saw today don’t happen because investors are all of a sudden thinking, ‘wow, I really love stocks.’ This rebound is due to the enormous selling and selling pressure that was completed since yesterday, ”he said. “So when the dust settles, people will still have a lack of certainty, given the narrative shift at the Fed. Neither investors nor markets like uncertainty, and I anticipate more selling until we have clarity” after the meeting of the Federal Open Market Committee.
© 2021 Bloomberg