CNN Business/Matt Egan
Wall Street is in for a rude awakening, former NY Fed president says
Wall Street threw a fit last week when Treasury rates spiked. The stock market tanked and investors feared the economy was overheating. Former New York Fed President Bill Dudley is warning that the temper tantrums are only just beginning.
“They want the economy to overheat,” Dudley told CNN Business, referring to the Fed. “And my personal opinion is, I wouldn’t sell them short. I think they are going to be successful.”
Inflation worries lifted the 10-year Treasury rate to 1.6%, well above the 0.3% it tumbled to last March. That unnerved investors, who have become accustomed to rock-bottom rates that make stocks look attractive by comparison.
Low bond rates underpinned the V-shaped recovery on Wall Street and encouraged investors to pile into risky assets — everything from unprofitable tech companies and GameStop (GME) to trading cards and blank-check companies known as SPACs.
But Dudley, who was speaking after appearing virtually at a conference held by the Institute of International Bankers, thinks stocks are going to have much more competition from boring bonds in the months and years ahead.
“Moving to 1.6%, that’s nothing,” said Dudley, who left the NY Fed in 2018 after nearly a decade there. He predicted Treasury rates will eventually climb to between 3% and 4% — or higher.
And that’s a big deal because risk-free Treasuries are the yardstick by which all other investments are valued. Just as ultra-low rates make stocks look attractive, higher rates would steal serious thunder from stocks.
Yahoo Finance/Emily McCormick
Stock market news live updates: Stocks end lower, Nasdaq slides by 2.7% as tech stocks sink further amid rising rates
Stocks dipped Wednesday, extending losses from a day earlier as investors weighed optimism over widespread post-pandemic business reopenings against concerns over economic overheating.
Technology stocks again endured a selloff, and the Nasdaq sank by 2.5% as investors rotated to cyclical shares poised to benefit from easing stay-in-place orders. Airlines, cruise lines and hotel stocks increased. The S&P 500 dipped by more than 1%, while the Dow erased earlier gains to trade near the flat line.
Treasury yields resumed advancing across the curve, and the yield on the benchmark 10-year Treasury note closed in on 1.5%. A disappointing report on private payrolls growth in February also weighed on many risk assets Wednesday, suggesting the labor market was still struggling to make headway amid the ongoing pandemic.
Elsewhere, shares of online mortgage provider Rocket Companies (RKT) pulled back during the pre-market session. The stock surged 71% to a record high on Tuesday and triggered a volatility halt after investors on Reddit appeared to target the heavily shorted stock as another short-squeeze candidate.
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Bank of America pointed out that Wall Street bullishness in already overvalued equities could be a signal to sell. The last time the bullish sentiment was this high, it was a troubling sign for equities, the bank said in a note.
The gauge used by the bank looks at the average recommended allocation to equities by sell-side strategists.
“The last time the indicator was this close to ‘Sell’ was June 2007, after which we generally saw 12-month returns of minus 13%,” the strategists said. “We’ve found Wall Street bullishness to be a reliable contrarian indicator.”
Current bullish levels already reflect below-average equity returns over the next year, they added.
Optimism on Wall Street is hard to miss, with the S&P 500 up around 4% year-to-date and around 32% over the past 12 months.
“The current level is forecasting 12-month returns of just 7%, a much weaker outlook compared to an average 12-month forecast of 16% since the end of the Global Financial Crisis,” the bank wrote.
On top of this, China’s top banking regulator said he is “very worried” about potential risks from emerging bubbles in U.S. and European markets.
“I’m worried the bubble problem in foreign financial markets will one day pop,” Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Party secretary of the central bank, said on Tuesday.
He added that strong gains in the U.S. and European markets were made possible due to ultra-loose monetary policies and that they “seriously diverged” from the real economy, noting that corrections will be coming “sooner or later.”
Private payrolls growth well short of expectations for February, ADP says
Private payroll growth disappointed in February despite otherwise encouraging signs of economic growth, according to a report Wednesday from ADP.
Companies added just 117,000 positions for the month, well below the 225,000 forecast from economists surveyed by Dow Jones.
The total also represented a sharp decline from the upward revised 195,000 jobs in January.
The ADP report “is a disappointment given that the drop-off in coronavirus case numbers and the resulting lifting of containment measures should be giving the economy a bigger shot in the arm,” said Paul Ashworth, chief U.S. economist at Capital Economics.
The weak ADP reading comes despite solid projections for economic growth in the first quarter. According to the Atlanta Federal Reserve’s GDPNow tracker, the U.S. is on track for a 10% gain to start 2021.
“The labor market continues to post a sluggish recovery across the board,” said Nela Richardson, chief economist at ADP. “We’re seeing large-sized companies increasingly feeling the effects of COVID-19, while job growth in the goods producing sector pauses.”