By Charles-Henry Monchau, chief investment officer, Syz Bank
S&P 500 slips briefly into a bear market, stocks and bond yields finally diverge, the ECB sets its rate hikes in motion while fears of a Monkeypox outbreak mount. The Syz investment team takes you through the last seven days in seven charts.
Chart #1 – S&P 500 slips briefly into a bear market
US equities continued their run of negative weekly performance. The S&P 500 index is suffering its 7th consecutive week of losses. Investors fear that rising inflationary pressures may cause consumers to cut back on discretionary spending, effectively increasing the risk of a recession. During Wednesday’s market session, US stocks suffered their biggest daily decline since June 2020.
Disappointing results from several major US retailers (Target, Walmart, Lowe’s and Home Depot) weighed on overall market sentiment. Investors appear to be concerned that the retail giants will be forced to pass on more of their rising costs to customers in the coming months, which could put further pressure on inflation. Comments from several Fed officials during the week did little to calm market fears about the pace of interest rate hikes.
US macroeconomic data fell for the fifth week in a row, with the Citigroup Economic Surprise Index slipping back into negative territory and reaching its lowest weekly close since last November.
In Friday’s session, the S&P 500 briefly entered a bear market, breaking the 20% threshold from its highs. The S&P broke through the 3855-point support, reaching its lowest level since March 2021. But the main US index rebounded at the end of the day to close the session unchanged.
S&P 500 – Briefly entered a bear market
Chart #2 – Equities and bond yields are finally diverging
The US 10-year bond yield approached 3.00% during the week, before falling back to 2.77%, its lowest level in a month. While bond yields and equity markets have moved in tandem in recent months, last week’s dichotomy between bond and equity markets could signal a return to a more normal relationship between stocks and bonds.
Equities and bond yields are finally diverging
Chart #3 – The big rotation
The Nasdaq strongly outperformed other major US equity indices over the past decade, with an annualised return of 18% per year between 2010 and 2019. Over the same period, the energy sector has been one of the worst performers, rising just 3.3% per year between 2010 and 2019, compared to a 13.4% annual return for the S&P 500.
However, since the start of 2021, the balance of power has completely shifted. An energy ETF ($XLE) is up 112% versus a -2.6% decline for the QQQ (Nasdaq 100 ETF).
As the chart below shows, the relative over- and under- performance trends are part of long-term trends. For example, technology stocks outperformed energy stocks between 1990 and 2000. Then between 2000 and 2008, it was energy’s turn to dominate. The trend changes again between 2008 and 2020 with a strong relative outperformance of technology stocks compared to the energy sector.
Is the outperformance of energy since 2021 part of a long- term trend that could continue into the current decade?
S&P 500 Equal – Weight Energy Divided by S&P 500 Info Tech (Cap-Weighted)