It was an ugly day in the stock market yesterday as the 2.4% drop in the S&P 500 and the 3.5% dive in the Nasdaq came on a decent sized increase in volume and very poor breadth. In fact, the breadth on the S&P 500 was almost 10 to 1 negative...and it was 6.6 to 1 negative on the Nasdaq Composite Index. However, it was even worse on the NDX Nasdaq 100 Index...where the breadth was a whopping 50 to 1 negative! So as you can see, it was a broad decline. However, we’ve seen a several days like this in the last two months...only to see the stock market bounce-back strongly (rather quickly). Therefore, we’re going to have to see more downside follow-through to confirm that the correction we’ve been calling for recently has indeed begun.
Most of the blame for the decline went to the rise in long-term interest rates. Yesterday’s move was particularly strong...as it took the yield on the U.S. 10yr Treasury note above 1.6% in the middle of the day before settling in at 1.52% at the close. This move in the bond market...and the reaction it has created in the stock market...is not a surprise to us at all. Yes, most people thought that Chairman Powell’s comments in front of Congress was very dovish...and thus it should be very bullish for the stock market. However, we thought that the most important takeaway was that the Mr. Powell reiterated that the Fed will let inflation run hot for a while. THAT means that the Fed will not act if long-term interest rates rise more than the consensus has been thinking they will (for much of the rest of this year).
These higher long-term interest rates have an impact on what investors are willing to ...