Week Ahead: Earnings In Focus As Inflation, Rate Hikes Pressure Stocks, Treasuries

 | Jan 09, 2022 22:00

  • Stocks and bonds selling off in tandem...that's highly unusual
  • Big banks kick off Q4 earnings season

    • The first week of trading in 2022 proved to be volatile, with the turbulence likely to continue into the week ahead.

    Though last week started with a new record high for the S&P 500, it was mostly downhill from there for all the major US indices. At the close of trade on Friday, all four benchmarks had been sold off. Adding to the unsettled nature of equity markets last week, and likely next, the CBOE Volatility Index (VIX) rose, for the first time in three weeks.

    The two biggest losers for the week were the NASDAQ Composite, -4.5%, and the Russell 2000, -2.94%; perhaps equally telling, the mega cap Dow Jones, which primarily lists blue chip value stocks, was down, albeit just 0.3% over the same period.

    Treasuries were sold off too, pushing yields to their highest levels since January 2020, when the coronavirus outbreak appeared to be a regional health problem limited to just China.

    The midweek release of the FOMC's December minutes, which indicated the Fed had become more hawkish than markets had perhaps anticipated, and Friday's disappointing Nonfarm Payrolls, which printed well below expectations, contributed to the gloomier outlook on risk as the week progressed.

    h2 Unusual Market Pairings, Multiple Accelerating Risks/h2

    Usually, government bonds tend to possess a negative correlation to stocks, but last week equities and Treasuries declined in unison—a rare occurrence. In general, investors sell debt in order to free up cash with which to purchase stocks. As such, stocks typically rise with yields as traders rotate between capital preservation and growth. 

    However, with the current outlook for rising interest rates via upcoming Federal Reserve rate hikes, which many believe could start as early as March, there's a different dynamic at play. Higher rates from the Fed render current Treasury yields too low. That's why, on a relative basis, last week, short-dated bonds outperformed.

    Typically, a spike in yields—such as occurred for the 10-year note and other Treasuries—after the single biggest fundamental threat to the economy in at least a generation, the COVID pandemic, would be considered a distinctly positive signal for stocks. However, given that the bond selloff was not risk-based, we don't see this as a reliable bullish indicator.