$DIA, $SPY, $QQQ, $RUTX, $VXX
FLASH: US stock markets pause on Powell’s testimony to Congress
Markets opened lower and were cautious as Fed Chairman Jerome Powell testified before the Congress Tuesday.
The Fed’s U-turn that took expectations for rate hikes this year to Zero has led to a drop in real borrowing costs and a subsequent rally in equities, creating a degree of divergence between the 2 last seen when Ben Bernanke helmed the central bank in Y 2012.
The opposite moves in rates and equities: the 5-year yield on inflation-linked Treasuries has tumbled by more than 50 bpts since mid-December, while the S&P 500 Index has surged about 20% since Christmas has been so persistent over the past 40 sessions, the pair are diverging to an extent that has only happened 2% of the time over the past 10 years.
The negative correlation between real yields and stocks was last stronger in Y 2012, as investors awaited further Fed measures to stimulate activity on the heels of ‘Operation Twist’ the prior September. The Fed would ultimately announce a 3rd round of QE later in September 2012.
The falling real yields are driving more than 80% of the movement in a whole host of asset classes, including: gold, crude oil, copper, high-yield as well as investment-grade debt and REITs.
Major assets are doing what they are doing because of the dovish shift by the Fed. Meaning the Fed has the stock market’s back.
With earnings per share estimates for S&P 500 companies in Y 2019 continuing to fall, the risk rally has been fueled by multiple expansion made easier by tumbling real rates.
“What makes the current setup in equities painful is that there is little runway for real yields to continue falling unless crude oil goes up by a very significant amount or the probabilities for an interest-rate cut are pulled forward from Q-4 of 2019,’’ 1 analyst I read wrote in a note Tuesday.
Tuesday, the US major stock market indexes finished at: DJIA -33.97 at 26057.98, NAS Comp -5.16 at 7549.33, S&P 500 -2.21 at 2793.86
Volume: Trade on the NYSE came in at 868-M/shares exchanged
- Russell 2000 +17.0% YTD
- NAS Comp +13.8% YTD
- DJIA +11.7% YTD
- S&P 500 +11.5% YTD
HeffX-LTN’s overall technical outlook for the US major stock market indexes is Bullish in here.