Rate Shock Shakes Wall Street Money Tree

The 2022 rates shock is here. Already.

Maybe it’ll be gone before most market participants realize it made a cameo. Or maybe it’ll stick around and wreak havoc.

It’s worth mentioning that the first quarter of 2021 was also characterized by rising yields and tumult across various manifestations of “froth.” In that regard, 2022 is déjà vu all over again, so to speak. The simple figure on the left (below) tells the story.

The figure on the right (above) is from Quant Insight. It shows the largest weekly moves (in z-scores) across a universe of macro factors.

Remember, it’s not so much the level of yields that matters as much as it is the rapidity of rate rise. In that regard, the move up in real yields during the first week of the new year was rather dramatic — ~30bps across the board.

Little wonder the Nasdaq 100 logged its worst week in nearly a year (figure on the left, below). Cathie Wood’s ETFs struggled mightily. Ark’s flagship was down nearly 11% on the week. The figure on the right (below) is poignant.

“Loyal investors to the ARK strategies… are being forced to decide if the risk is worth the reward in a rising rate environment,” one analyst told Bloomberg, for another pile-on piece called “Cathie Wood Complex Jolted After Rising Yields Hammer Tech Bets.”

Last month, Wood told Bloomberg her funds were going through a period of “soul-searching.” It’s an Icarus moment. On February 5, 2021, just days before the first 30% slide illustrated in the figure on the right (above) began, Bloomberg ran a story called “Cathie Wood Amasses $50 Billion and a New Nickname: ‘Money Tree’.” The media is a fickle beast — a fair-weather fan.

“Expensive stocks along with ‘Low Quality’ types, Unprofitable Tech [and] ‘Leverage’ were crunched, with ‘highly speculatives’ like SPACs, Retail Favorites and Recent IPOs under further unwind pressures,” Nomura’s Charlie McElligott said.

“Equities ceded center stage to rates,” Goldman’s David Kostin remarked, in a Friday afternoon note. If you follow Goldman’s research, you knew Kostin would rekindle the familiar figure (below).

Two standard deviations is the pain threshold for the S&P when it comes to one-month increases in 10-year nominals.

“The mid-week pivot coincided with the release of the December FOMC minutes that reflected the hawkish predilection of policymakers,” Kostin went on to say, marveling at the 24bps jump in 10-year yields over the first five sessions of the new year.

“The speed of rate moves matters for equity returns,” Goldman wrote. “Equities typically struggle when the 5-day or 1-month change in nominal or real rates is greater than two standard deviations.”

It’s fair to ask whether the situation is perhaps more perilous now than ever, given the extent to which US equities are effectively just one giant long duration trade.