After a series of downward swings in the market, the S&P 500 is opening near a seven-week low. The recent decline in the equity benchmark has been attributed to worries about China’s economy, seasonal softness, higher energy prices, and surging bond yields. According to Michael Kantrowitz, chief investment strategist at Piper Sandler, these fluctuations are part of a trend in the market since early 2022, driven primarily by changes in market multiples rather than fundamental concerns. Kantrowitz suggests that investors’ perception of risks, particularly in relation to bond yields, is currently driving market sentiment. The next moves in bond yields will determine whether there will be a rally in riskier assets or a decline in risk-on assets. While higher rates pose a risk to stocks, Kantrowitz believes that they alone will not push the market down for a sustained period of time. However, he emphasizes that P/E-driven markets can change rapidly if the perception of risks changes.
Market Volatility Continues as S&P 500 Opens Near Seven-Week Low
The S&P 500 is opening near a seven-week low after a period of electronic skirmishing in which the bears held sway on Wall Street. The equity benchmark has been down in 10 of the last 13 sessions, and there are several potential reasons for the decline.
Chief investment strategist at Piper Sandler, Michael Kantrowitz, believes that the market’s trend of swinging up and down since early 2022 is primarily driven by changes in market multiples, or price-to-earnings ratios, rather than fundamental concerns. He explains that P/Es are a figure that represents the emotional views of investors, and in the short run, it’s investors’ perception of risks that dominates.
Kantrowitz points out that the recent moves in bond yields are driving investor sentiment. In October 2022, stocks began to rally when views and data on inflation cooled down, indicating that investors believed the Federal Reserve was done raising rates and that the economy would have a soft landing. However, the current scenario is different, as the rise in bond yields is not solely due to inflation concerns but is influenced by factors such as relaxing of Japan’s yield curve control, U.S. budget deficit worries, positive economic surprises, and hawkish Fedspeak.
The next steps in the market will depend on the stability of bond yields. If yields can stabilize for good reasons, such as lower inflation, there could be a rally in riskier assets. However, if yields decline for bad reasons, such as weaker macroeconomic data, risk-on assets may underperform. Kantrowitz warns that a further rise in yields would hurt small caps, value stocks, cyclical-sensitive assets, and those with high betas.
Despite the risk posed by higher rates, Kantrowitz believes that they alone will not push the market down for a sustained period of time. He suggests that if equity weakness becomes super bearish for the macro outlook, investors may return to the safety of bonds, and policymakers will try to talk down yields to stabilize the situation. However, he emphasizes that P/E-driven markets can change quickly if the perception of risks changes.
In today’s trading, U.S. stock indices are lower at the open as benchmark Treasury yields ease from recent multi-year highs. The dollar is steady, oil prices are slightly weaker, and gold gains.
Takeaways: Market volatility continues as the S&P 500 opens near a seven-week low. Changes in market multiples, driven by investors’ perception of risks, have been the primary driver of the market’s swings since early 2022. The recent rise in bond yields, influenced by various factors, is currently driving investor sentiment. The stability of bond yields will determine the next steps in the market, with a potential rally in riskier assets if yields stabilize for good reasons. However, a further rise in yields would negatively impact certain assets. Despite the risk posed by higher rates, they alone will not push the market down for a sustained period of time.