After Friday’s brutal session for stocks, it appears equities were the last asset class to accept the notion that the Federal Reserve likely won’t be pivoting to a less aggressive monetary policy stance soon.
Judging solely by movements in yields and exchange rates, it seems like bonds, gold and the dollar all days ago started pricing in the idea that the Fed funds rate would remain higher for longer.
Stocks, on the other hand, experienced a few hiccups over the past week. But it wasn’t until Friday, when Fed Chairman Jerome Powell put the “Fed pivot” narrative to rest, that stocks saw their big pullback.
See: Euro returns to parity vs. the dollar as energy price spike raises eurozone economy fears
To be sure, it’s not like stocks were completely blindsided. The S&P 500
SPX,
very clearly hit a wall right around the 200-day moving average more than a week ago.
But Friday’s session was more akin to the market carnage of the first half of 2022, with the Dow Jones Industrial Average
DJIA,
falling 1,000 points in a single session for the first time since May, while the S&P 500 and Nasdaq Composite
COMP,
each recorded their biggest daily losses since mid-June on a percentage-point basis.
Indeed, for stocks, Powell’s remarks about the economic pain that might result from the Fed’s rate hikes seemed to hit like a brick. By comparison, the Treasury yield curve barely budged on Friday, while the U.S. dollar moved just 0.3%.
This dynamic didn’t go unnoticed by market watchers, including a team from Evercore ISI, who pointed out that “pivot optimism seems to have lingered longest in equities.”
So why did equity traders seemingly need to hear the news directly from Powell himself, leaving stocks to play catch up?
Many economists and market analysts anticipated that Powell would seek to discredit the notion of a Fed pivot after the stock market latched on to a dovish interpretation of Powell’s remarks during the Fed’s post-meeting press conference in July.
And since then, investors have heard from a parade of senior Fed officials over the past month who tried to gently reinforce the idea that the Fed isn’t anywhere close to finishing its program of rate hikes.
See: Financial markets are bracing for what could be a ‘very hawkish’ Jackson Hole speech by Fed’s Powell
When asked about this apparent discrepancy in markets, Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co., commented that this kind of disconnect is unusual, although it does sometimes happen.
“It is unusual that the equity market was anchored to a pivot view and got disappointed. It was clearly not on the same page as the bond market,” Conger said.
There’s an old saying in markets circles that the bond market is “smarter” than the stock market — in that it reacts more quickly to changes in the macroeconomic outlook, including where the Fed plans to take interest rates.
When asked about this, Conger said that bonds are generally “a little bit better” than the equity market when it comes to spotting these types of changes.
This is perhaps why many market technicians pay close attention to Treasury yields. Case in point: earlier this week, Nicholas Colas, co-founder of DataTrek Research, told MarketWatch that stocks tend to fall “like clockwork” when the 10-year Treasury yield climbs above 3%.
On Friday at least that dynamic has held true.
