Friday's Market Minute: Investor Sentiment Is Still Fragile

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

In the heart of earnings season, market sentiment has been fragile to say the least. Equity markets stabilized in the middle of the week, yet big tech earnings have failed to steer them significantly one way or another. The data for corporate profits and the broad economy have been mixed, which is expressed in the volatility index trading above the 30 level. Real gross domestic product decreased at an annual rate of 1.4% in the first quarter of 2022 according to the "advance" estimate released by the Bureau of Economic Analysis. In comparison, the fourth quarter of 2021 printed real GDP higher by 6.9%.

Most investors knew to expect enhanced volatility in the first quarter given the war in Ukraine and tighter monetary conditions, as well as an economy grappled with inflation. But the speed at which a leading barometer of the Fed funds rate (two-year Treasury yields) has risen this year is forcing the Fed to move rates in a more aggressive manner. Markets are pricing in half-percentage-point interest rate rises from the Fed at each of its next three meetings. As a result, the dollar keeps rising, and 10-year bond’s yields are holding firm around the 3% mark. This suggests gradual economic weakness and GDP growth normalizing back to the pre-COVID trend.

Markets often find a tradable bottom in a bad news environment. Along with a weaker-than-expected GDP print, the AAII measure of investor sentiment – the number of bears who think stock prices will fall over the next six months – jumped to 59.4% for the week ended April 27, up from 43.9% the week before. These levels have not been seen since the first quarter of 2009, which was a ripe time for a tradable bottom. With such bearish sentiment confirmed by weaker-than-expected lagging economic data, equities continue to grind lower. Short-lived and profound countertrend rallies are to be expected, and the most eager bulls appear to be waiting for a waterfall capitulation sell-off that may or may not come to fruition.

Image sourced from Unsplash

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