Earlier this month, when the bank’s pseudo-famous “Bull & Bear Indicator” flashed a rare contrarian “buy” signal, BofA’s Michael Hartnett suggested the market was bearish enough that 5% could be a soft-ceiling for 10-year yields and 4,200 a floor for SPX.
Although benchmark US yields did balk after briefly breaching 5%, the S&P didn’t hold 4,200. If you ask Hartnett, that’s notable.
“Sentiment is bearish, yet SPX couldn’t defend the key 4,200 level,” he wrote, adding that indexes which haven’t benefited as much (or at all) from hegemonic mega-cap US tech (and tech-alikes) are either at or below their 200-week moving average.
He mentioned the Russell 2000 which, you’re encouraged to note, now trades below both its pre-2018 mini-bear market levels and its pre-pandemic levels. Small-caps are down four weeks in a row and seven in eight.
Late Friday, Goldman’s David Kostin likewise flagged small-cap underperformance as indicative of “a new phase of the rising rate saga” in which the market has “begun to downgrade its economic growth outlook alongside higher yields.” Relative to the S&P, small-cap underperformance is now the most acute in more than two decades.
Arguably (and paradoxically), what equities need most is evidence of economic deceleration to the extent that might offer a reprieve from the (by now entirely deleterious) read-through of the bond selloff. Higher yields are squeezing the mega-caps through the valuation channel and everything else through the implications of higher rates for weak balance sheets and corporates with upcoming refinancing needs.
For Hartnett, one tell for bonds is biotech. “The 10-year Treasury yield has thus far defended the key 5% level,” he wrote. “Q4 ‘peak yield’ would be a given if downtrodden biotech — the longest-duration equity — can bounce.”
That’s not a chart I’d typically highlight, but I have to admit: Those lows (Hartnett’s annotations) are notable. They are, in order, the worst December for US equities since the Great Depression, the pandemic crash, the escalation (from a 25bps increment to 50bps to 75bps) of the most aggressive Fed tightening campaign in a generation and today.
As noted here earlier Saturday, the irony of proliferating recession canaries across everything but cap-weighted US benchmarks (which are now correcting too) is the juxtaposition with blockbuster US growth.
Hartnett captured it well. “What could be more 2023 than a 5% US GDP print being greeted by the most recessionary daily tape since SVB?” he asked.
He added one more word of caution: If the equal-weighted S&P can’t hold 5,540, the “risk is that SPX heads to its 200-week moving average of 3,941 before any trading rally.” SPW closed at 5,426 on Friday.
I’m thinkin’ the Magnificent 7 mega caps are about to be whittled down to the Mag 4: MSFT, META, AMZN, NVDA. Hard to imagine a blowout report from AAPL next week. The Bond Vigilantes will be watching how much Treasuries bonds are offered for sale in November. If this number is bigger than expected then Treasury yields rise further on the long end and that will take us to S&P 4000. I think more capital will be allocated to the Mag 4 mega caps but not much else.
Performance on some cyclical stocks has been terrible, one of my favourite German chemical stocks with an EV of $5bn is trading back at its ’08/’09 level.