The U.S stock market is taking Federal Reserve Chairman Jerome Powell's decision to fully unleash the inflation-fighting side of his monetary policy persona in stride, despite a brief wobble.
It may surprise investors as Treasury yields soar and money-market participants price in an aggressive round of benchmark interest rate increases after Powell made clear that the Fed is ready to deliver 50 basis point rate hikes in coming policy meetings if necessary to fight inflation.
The equity rally is of clear interest, and we see in the Nasdaq 100 NDX that there is solid support below 14,000 even as the US 10 year Treasury yield TMUBMUSD 10 Y continues to surge well above 2%, and threatens to break its multidecade downtrend, said Chris Weston, head of research at Australia-based Pepperstone.
Weston said that we should consider why equities didn't get smoked.
Weston believes that the Fed is a strong Fed and that higher rates are better than entrenched inflation, as well as the fact that the big guns are being brought out in May and using forward guidance to set the scene ahead of this may be welcomed by the equity market. The Nasdaq-100 rose 1.5%, while the tech-heavy Nasdaq Composite COMP rose 1.6%. Technology and growth stocks are seen as the most sensitive to rising Treasury yields, which lessens the present value of their future earnings and cash flow and is used to justify their high stock prices. The Nasdaq fell more than 20% from November's record close, as it slumped into a bear market earlier this month.
Stocks have bounced significantly since the Fed kicked off the rate-hike cycle last week with a 25 basis point increase to the fed-funds rate and signaled that monetary tightening is yet to come. Stock indexes are trading above the level seen ahead of Russia's invasion of Ukraine on February 24th.
The Dow Jones Industrial Average, or DJIA, was up around 205 points, or 0.6%, on Tuesday. The S&P 500 SPX, gained 0.8%, with the large-cap index trading at its highest since Feb. 11.
It is important to remember that the S&P 500 index had pulled back nearly 15% through the Feb. 24 low, which means a lot of bad news was priced in, and that means the risk reward outlook has improved since the beginning of 2022, said Tom Lee, founder of Fundstrat Global Advisors. The current market environment is one in which investors shouldn't try to be a hero or make a big call, he said, with markets likely to remain volatile.
Pepperstone s Weston said that the Russia-Ukraine war has caused inflation worries as crude oil and other commodity prices have surged in volatile trading. While that has translated into periods of rough sledding for the equities, it appears that funds are well hedged, there is tons of cash on the sidelines, and rotation is real, he said, with traders moving into energy stocks as crude soars and increasing defensive positioning in sectors like utilities.