Friday's Market Minute: Equities Will Move In Tandem With The Fed

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The end of the quarter couldn’t come fast enough. The S&P 500 fell nearly 5%, and the Nasdaq declined slightly more than 9% to end the first three months of the year. Based upon market breadth, a small number of very large market-cap names kept the indices from ending the quarter in a much worse condition.

It was the first quarter of losses for the S&P 500 since the pandemic bear market in March 2020, and the market has been in a prolonged correction since November of last year, which makes the drawdown seem worse than it is. Despite war, inflation, and the start of a rate hike cycle, the S&P 500 has been resilient and is only roughly 5% away from record highs.

With oil prices falling and hawkish projections on interest rates priced into equities, the focus of financial market participants has turned to the yield curve. Before the bearish close yesterday, the closely-watched yield spread between 2s & 10s inverted again for the second time in three days. This inversion has historically been a recession indicator, but the timing of a recession and eventual bear market is inconclusive. It’s safe to say that at some point after inversion, recession risks become elevated.

One thing to note is that the Fed began their rate hike cycle campaign only two weeks ago and Treasury yields already exhibit inversion. Inverted term spreads already induce fear of oncoming recession, but the speed at which inversion occurred this time perhaps suggests the Fed is really behind the curve on raising short-term premium. It could also imply the demand for long-duration U.S. debt is high due to liquidity preference, or the supply of long-dated debt needs to increase to push yields higher.

Regardless of the reason, the reality is that recessions don’t typically occur after a rate hike cycle begins, but rather after they end. Raising rates is a signal of optimism, economic health, and high demand for investment. Markets should not be concerned now with the Fed raising rates or the inverted yield curve. However, concern is warranted when the Fed stops their rate hike campaign, which is a sign that monetary restriction has run its course.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.