Financial basis

Investor pessimism rises as more Fed rate hikes loom

A trader works on the floor of the New York Stock Exchange shortly after the market opens in New York on September 1, 2015. REUTERS/Lucas Jackson/Files

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NEW YORK, May 4 (Reuters) – Stock investors are heading into the U.S. Federal Reserve’s rate-fixing announcement in a particularly pessimistic fashion, with new milestones for bond yields and concerns over a surge in the inflation weighing on sentiment as the central bank is expected to raise rates further .

The benchmark S&P 500 is down more than 12% year-to-date after posting its biggest monthly decline in April since the pandemic began. Meanwhile, the yield on the US Treasury note hit 3% for the first time in more than three years on Monday, doubling since the end of 2021.

Higher yields on U.S. government debt, considered virtually risk-free, means “you’re probably starting to lose some of those people who maybe piled into dividend-paying stocks and maybe needed to take a little bit more risk for that”. income,” said Sameer Samana, senior global markets strategist at Wells Fargo Investment Institute.

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“The implication for equities is that you start losing demand for equities relative to fixed income,” Samana said.

Some investors are clearly very gloomy. Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corp, told CNBC on Tuesday that he could not think of a “worse environment than the one we currently find ourselves in for financial assets.”

As the 10-year yield climbed this year, the S&P 500 slipped

In another equity weighting, 10-year Treasury Inflation-Protected Securities (TIPS) yields — also called real yields because they subtract projected inflation from the nominal yield on Treasuries — pushed solidly into territory. positive after being in negative territory since March 2020.

Negative real returns mean an investor would have lost money on an annualized basis when buying an inflation-adjusted 10-year Treasury note, a dynamic that has helped deflect from money from US government bonds into stocks and other risky assets. Read more

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The Cboe Volatility Index (.VIX), known as Wall Street’s “fear gauge”, rose from 20 a few weeks ago to over 36 on Monday and ended just under 30 on Tuesday. A high VIX reflects heightened investor expectations for choppy markets in the near term.

Wall Street’s ‘fear gauge’ has risen well above its long-term median

Amid the market slide, stock investors reached new levels of pessimism. Bearish sentiment, which is expectations that stock prices will fall over the next six months, rose sharply to 59.4% in the latest survey from the American Association of Individual Investors. The last time bearish sentiment exceeded this level was in March 2009, during the financial crisis.

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Such weak sentiment can be an opposite positive indicator for stocks. The net gap in the AAII survey between bulls and bears fell to minus 43 percentage points in the latest survey, with a four-week average of minus 29 percentage points.

Since 1987, when such a four-week average gap was less than minus 10 percentage points, the S&P 500 has risen 15.5% on average over the next 12 months, according to RBC Capital Markets.

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Indeed, some investors say the stock market could be set up for a near-term rally, if nothing from Wednesday’s Fed meeting catches them off guard. Following the Fed’s last meeting in March, the S&P 500 rebounded 8% in the two weeks after the central bank raised rates by 25 basis points, as expected.

According to Trade Alert Data. Excessive bearish positioning can help generate strong upsides if sentiment suddenly reverses.

“The sentiment is really bad… Everything is starting to get very oversold and oversold in the short term,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina. “Assuming you don’t get a big hawkish surprise from the Fed, you might see a rally.”

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Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; edited by Bernard Orr

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