Despite the recent weakness in equities, Raymond James CIO Larry Adam expects positive stock growth over the next 12 months.
Equity markets were weak on Thursday as the three major U.S. indices and all S&P 500 sectors were in negative territory. There were three main reasons for the weakness in equities: rising Treasury yields, inflation concerns and stretched technicals.
Rising Treasury yields
Longer-duration bond yields continue to move higher, as the yield on the 10-year Treasury has increased 100 basis points since August and is now at the highest level since February 2020. The sell-off in bonds was exacerbated in Thursday’s session as the 7-year Treasury auction saw the weakest demand on record. Rising Treasury yields raise concerns that the current price-to-earnings multiple – the highest since 2000 – may be overextended.
Additionally, the move higher in interest rates brought the 10-year Treasury yield above the S&P 500 dividend yield for the first time since December 2019.
As a result of record accommodative fiscal and monetary policy, improving economic activity, supply chain bottlenecks and base effects, investors are beginning to price in rising inflation expectations for the near future. Rising inflation has brought concerns that a sharp acceleration in price pressures may lead the Federal Reserve to either taper its quantitative easing purchases or raise interest rates earlier than the expected 2023 timeframe.
Following the strong start to February and the best start to a bull market in the post-WWII era, technicals for the S&P 500 had moved to stretched levels. The 14-day Relative Strength Index (RSI) neared overbought territory last week and the equity put/call ratio declined to the lowest level on record.
Volatility is part of the fabric of the market and not uncommon, particularly after the market’s impressive run since the pandemic lows on March 23 of last year. Despite the weakness in equities over recent days, we remain optimistic on equities for a few reasons.