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CHART OF THE WEEK: A significant regime shift in the stock-bond relationship
US stocks continued their weekly losing streak as fears grow that inflation is causing consumers to pull back on discretionary spending, setting the stage for a coming recession. At its low point on Friday, the S&P 500 Index entered into bear market territory, exceeding the 20% drawdown threshold. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. Disappointing earnings and revenue results from several US major retailers (Target, Walmart, Lowe’s, and Home Depot) weighed on the broader market sentiment. Investors seemed to worry that major retailers would be forced to pass on more of their higher input costs to customers in coming months, keeping inflation elevated. Comments from Fed officials during the week did little to calm inflation and interest rate fears. The week’s economic data offered mixed signals. However, a gauge of manufacturing activity in the Mid-Atlantic region fell short of expectations by a wide margin, and weekly jobless claims rose more than expected. The yield on the benchmark 10-year U.S. Treasury note fell as low as 2.77% in intraday trading on Thursday, its lowest level in nearly a month. Shares in Europe pulled back amid fears of slowing economic growth and faster interest rate increases. Core eurozone government bond yields fluctuated, ending roughly unchanged. Chinese stocks rose as the central bank cut interest rates to support the country’s property sector.
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Most US equities indexes ended the week lower, although the tech-heavy Nasdaq Composite advanced modestly and cleared the 20,000 mark for the first time. The Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500 Index. Growth stocks posted a third consecutive week of outperformance versus value, thanks in part to gains in shares of Tesla (12%) and Alphabet (8.4%). On the macro-economic side, stagflation fears started to rise once again. Indeed, YoY CPI and PPI both accelerated. Meanwhile overall macro surprises disappointed for the fourth week in a row: on Thursday, the Labor Department reported a surprise jump in weekly initial jobless claims to a two-month high of 242,000.