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Stocks erased their weekly gains and bond yields fell on Friday as investors reacted to a number of economic developments. Chief among them were a Treasury yield curve inversion, the first since before the financial crisis, and continued slowdown in the pace of U.S. manufacturing expansion.
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3 big threats for the S&P 500 going forward
On the previous day, the widely-followed market barometer registered its highest close since Oct. 9, 2018. Rather than a temporary bout of profit taking, this may represent the beginning of a longer-lasting reversal for stocks, in the opinion of several veteran market strategists.
"The Fed can't be dovish enough to support U.S. equity markets given the acceleration in the global growth slowdown and eventual U.S. slowdown," as Peter Cecchini, global chief market strategist at Cantor Fitzgerald, opined in a recent note to clients quoted by Business Insider. Meanwhile, massive outflows from equity mutual funds indicate that there is "simply no love for stocks," said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, in a report also cited by BI.
Three big threats for stocks going forward are summarized in the table below. The S&P 500 was down fractionally on Monday, by just under 0.1%.
3 Threats That May Spur More Stock Declines
- Net $20.7 billion redeemed from equity funds in the week ending March 21
- Inverted yield curve in the U.S.
- Yields on 10-year government bonds in Germany are now negative
Source: Business Insider
Significance For Investors
An inverted yield curve, in which short-term interest rates are higher than long-term rates, is historically a reliable predictor of an upcoming economic recession. In turn, the onset of a recession, or the anticipation of one, often triggers a bear market in stocks. On Friday, March 22, the U.S. yield curve inverted for the first time since 2007, which was the year in which the last U.S. recession and the last U.S. bear market began.
Leading fund managers across the globe surveyed by Bank of American Merrill Lynch now have their lowest allocation to stocks since Sept. 2016. Moreover, the net weekly outflow of $20.7 billion from equity funds happened before the March 22 plunge in the S&P 500. Whether this has spurred yet more withdrawals will be known when the next report by BofAML is released later this week.
As the largest economy in Europe, Germany is an important bellwether for the developed world. The yields on 10-year German government bonds turned negative for the first time since Oct. 2016, partly the result of declining exports to China, which is in the midst of its own economic slowdown. The impact is likely to extend to the U.S., as investors flee German bonds for U.S. Treasury securities, pushing their prices up and yields down, BI observes.
Looking Ahead
Despite these and other bearish developments, some market participants remain bullish. "We're very comfortable that the back three quarters of the year are going to show improvement over the first quarter," is the opinion of Philip Orlando, chief equity strategist at Federated Investors, in remarks on CNBC.
"I don't think we're going to retest the Christmas Eve bottoms," he asserted, adding, "We would use any weakness as a buying opportunity." He prefers large cap U.S. value stocks, as well as U.S. small cap stocks, and has a price target of 3,100 on the S&P 500, 10.8% above the March 25 close. His worst-case scenario is that the index slips to 2,600, or 7.1% below the March 25 close, if earnings are poor and corporate guidance is pessimistic.
The SPDR S&P 500 ETF Trust (SPY) was trading at $280.74 per share on Tuesday afternoon, up $1.70 (+0.61%). Year-to-date, SPY has gained 5.62%. SPY currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 154 ETFs in the Large Cap Blend ETFs category.
This article is brought to you courtesy of Investopedia.
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