Stocks slip as investors worry if rally has legs
Stocks edged down Tuesday as the second-quarter rally cooled with investors jittery ahead of Powell’s testimony later in the week. Treasuries rose.
The S&P 500 notched its first two-day losing streak in four weeks as the U.S. equities benchmark traded off recent 14-month highs. The Nasdaq 100 ended the session unchanged as shares of Tesla buttressed the tech-heavy gauge from deeper losses. Nike fell on inventory concerns while PayPal climbed after reaching a loan accord with KKR.
Investors caught between fear of missing out and concerns markets have run too far, too fast are contending with overblown valuations and hawkish signals from the Federal Reserve.
The AI frenzy which has been driving much of the recent gains, is sure to be a topic during second-quarter conference calls. “The issue is going to be: to what degree does that show up in fundamentals?” Scott Chronert, global markets strategist at Citigroup, told Bloomberg Television.
“What we’re going to run into is this disconnect with how hard the market has run versus where earnings expectations are,” he said.
The path of U.S. monetary policy is another wild card. Federal Reserve Chair Jerome Powell will give his semiannual report to Congress on Wednesday. Policymakers at the Fed kept interest rates unchanged at their latest meeting but warned of more tightening ahead. Investors also await the outcome of policy meetings in Turkey, the U.K. and Switzerland.
“Our skepticism around the sustainability of the rally in U.S. market-cap weighted indexes stems primarily from continued investor belief that the Fed is bluffing on holding rates higher for longer,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a note.
“If a favorable soft landing does materialize, the Fed will have no incentive to cut rates, especially if labor markets are still relatively resilient,” she added. ” ‘Goldilocks’ is at risk. Watch real rates, which would likely creep higher amid a strong economic soft landing.”
The Fed decision last week came with forecasts for higher borrowing costs of 5.6% in 2023, implying two additional quarter-point rate hikes or one half-point increase before the end of the year.
That contrasts with market pricing for some 20 basis points of tightening in the remainder of the year.
“Generally speaking a high-multiple environment is only accompanied by a declining policy rate when earnings have collapsed,” Mike O’Rourke of JonesTrading wrote. “It will take a reality check in equities along with economic head winds before rate cuts emerge. High stock multiples and a high policy interest rate are not a relationship that can be sustained in the long term.”
U.S. Treasuries yields traded lower after an earlier bounce amid an unexpected surge for housing starts in May, the most since 2016. The yield on the 10-year fell 4 basis points to 3.72% while the policy-sensitive two-year was at 4.69%.
“This is strong data,” Sonal Desai, chief investment officer for Franklin Templeton Fixed Income, told Bloomberg Television. “It continues to feed into the narrative that housing, new starts, are not going to be the first place which collapsed.”
The U.S. dollar advanced, while in global currencies the Swedish krona slumped to a record low against the euro as traders expect the Riksbank to tap the brakes on rate hikes in coming months.
Gold and oil retreated after disappointment over China’s stimulus measures. U.S.-listed Chinese stocks also tumbled with Alibaba Group dropping about 4.2% following the surprise replacement of its chief executive and chairman.