GROWTH STOCKS FALL AMID STEEP RISE IN LONG-TERM RATES

The Growth Stocks -- Small And Large ‐‐ Took It On The Chin This Week, As The 10‐Yr Yield Jumped 34 Basis Points To 2.71%. The Nasdaq Composite (‐3.9%) And Russell 2000 (‐4.6%) Fell More Than 3.5%, The S&P 500 Fell 1.3%, And The Dow Jones Industrial Average Fell 0.3%.

The primary catalyst for interest rates was Fed Governor Brainard's (FOMC voter) expectations for the Fed's balance sheet to shrink considerably more rapidly than in the previous recovery, starting as early as May.

The March FOMC Minutes elucidated Mr. Brainard's hawkish mindset with the following note: Participants generally agreed it would be appropriate to reduce the balance sheet by $95 billion per month (about $60 billion for Treasury securities and about $35 billion for agency MBS) and that one or more 50 basis point increases in the fed funds rate could be appropriate at future meetings.

Shorter‐dated rates pushed higher, too, with the 2‐yr yield rising ten basis points to 2.52% amid rate‐hike expectations. Longer‐dated rates were further boosted by the March ISM Non‐Manufacturing Index, which showed the Prices Paid Index (83.8%) hit its second‐highest reading ever.

Essentially, the Fed news exacerbated concerns about the central bank potentially making a policy mistake that sends the economy into a recession, which would lower earnings prospects and valuations. The growth‐stock valuations were pressured by the rapid rise in rates this week.

The S&P 500 information technology (‐4.0%), consumer discretionary (‐3.3%), and communication services (‐2.7%) sectors, which are home to the mega‐caps, were influential weights on the benchmark index. The industrials sector (‐2.6%) was also weak amid continued bleeding in the transportation space.

Conversely, the energy sector (+3.2%) joined the defensive‐oriented health care (+3.4%), consumer staples (+2.7%), utilities (+1.9%), and real estate (+0.8%) sectors in positive territory for the week.

Separately, it's worth reminding readers that the growth stocks did catch a speculative bid on Monday after Elon Musk disclosed a 9.2% stake in Twitter (TWTR). Mr. Musk was subsequently named to the company's Board of Directors and reclassified his stake to an active position.

The S&P 500 ended the week below its 200‐day moving average (4493).

Market Recap - Mixed Week as 2s10s Spread Inverts

The S&P 500 Eked Out A 0.1% Gain This Week, Cooling Off From A Strong Start To The Week. The Dow Jones Industrial Average Decreased 0.1% While The Nasdaq Composite Finished Rose 0.7% And The Russell 2000 Rose 0.6%.

From a sector perspective, the cyclical financials (‐3.3%), energy (‐2.4%), and industrials (‐1.5%) sectors were the weakest performers, while the defensive-oriented real estate (+4.4%), utilities (+3.7%), and consumer staples (+2.3%) sectors outperformed with decent gains.

The first two days of the week saw a continuation of positive momentum - Apple (AAPL) was up for 11 straight sessions - amid reported progress in ceasefire talks. Stocks rallied even as the 2s10s spread briefly inverted on Tuesday, which is a viewed as a harbinger for a recession between 6‐24 months after the inversion.

The market retraced those gains over the next couple of days, though, as Russia refuted progress in talks with Ukraine, the core PCE Price Index for February (+5.4%) rose to its highest level since 1983, the March employment report fueled expectations for a more hawkish Fed, and investors took profits and rebalanced for quarter-end.

The employment report showed decent jobs growth (over 400,000 for both nonfarm payrolls and private sector payrolls), a better‐than‐expected unemployment rate of 3.6% (Briefing.com consensus 3.7%), and an expected 0.4% increase in average hourly earnings.

Following the report, the 2s10s spread re‐inverted amid concerns surrounding a Fed policy mistake. By week's end, the 2‐yr yield was up 14 basis points to 2.43%, and the 10‐yr yield was down 11 basis points to 2.38%. The U.S. Dollar Index increased 0.2% to 98.56.

Oil prices fell 12.6%, or $14.29, to $99.54/bbl after the U.S. and other IEA nations said they will release oil from their strategic reserves to help alleviate gas prices. The U.S. plans to release one million barrels per day for the next six months. On a related note, OPEC+ agreed to increase its output targets by 432,000 barrels per day in May.

Market Recap - Commodity-Linked Sectors Maintain Strength

The Stock Market Faced Some Volatility In Recent Days, But The S&P 500 (+1.8%) And Nasdaq (+2.0%) Were Able To Record Solid Gains For The Week While The Dow (+0.3%) Underperformed, Ending The Week Just Above Its Flat Line.

The Russell 2000 also lagged, shedding 0.4%. The S&P 500 battled with its 200‐day moving average since last Friday, but it was able to end the week above that mark after touching a six‐week high during the final session of the week.

Ten sectors ended the week in positive territory with energy (+7.4%), materials (+4.1%), and utilities (+3.5%) leading the way while health care (‐0.2%) recorded a slight loss after outperforming earlier this month.

Energy remained supported by crude oil, which gained $10.80 or 10.5% to end the week at $113.83/bbl. The ongoing Russia‐Ukraine conflict remained a supportive factor for oil and other commodities, explaining the outperformance in the materials sector where steelmakers and fertilizer producers led the way.

The week ended with reports of the potential for another release of oil from the strategic reserve while Chevron (CVX) reportedly received clearance to resume operations in Venezuela. On a related note, a Russian energy official reportedly said that friendly countries like China and Turkey could pay for oil and gas in rubles, domestic currency, and bitcoin while unfriendly countries would have to pay in rubles and/or gold.

The top‐weighted technology sector (+2.3%) finished the week ahead of the broader market, but it faced some pressure on Friday as Treasuries widened this week's losses, sliding to fresh lows for the year, after Citigroup forecast that the Fed will raise rates by 50 bps at the next four policy meetings. Both, the 2-year yield and the 10-year yield increased by 34 bps for the week to a respective 2.29% and 2.49%.

The S&P 500 Rallied 6.2% This Week On The Back Of A Four‐Day Winning Streak, As The Market Preferred To Look At Things From A Positive Perspective.

The Dow Jones Industrial Average (+5.5%) and Russell 2000 (+5.4%) each rose over 5.0% while the Nasdaq Composite surged ahead with an 8.2% gain.

Ten of the 11 S&P 500 sectors closed higher with nine sectors rising between from 2.7% (real estate) to 9.3% (consumer discretionary). The energy sector (‐3.6%) was the only sector that closed lower.

There wasn't a single catalyst for the rally. Instead, there was a confluence of factors that helped revive the market's spirits, including:

• Oil prices losing 5.6%

• Fed Chair Powell saying the probability of a recession within the next year is low

• Early reports indicating progress in ceasefire talks between Russia and Ukraine

• China vowing support for its economy and markets

• The Producer Price Index for February increasing "just" 0.8% month‐over‐month

• Higher Q1 revenue guidance from Delta (DAL), United (UAL), and Southwest (LUV)

Now, to qualify the good news:

• Oil prices still ended the week above $100/bbl ($103.03/bbl, ‐6.07, ‐5.6%) after dropping below $95.00/bbl during the week

• Fed Chair Powell acknowledged that monetary policy could weigh on growth rates in 2023 and 2024

• Russia refuted progress in talks and continued its bombing

• China still issued a weeklong Covid lockdown of Shenzhen, a major technology hub, which could exacerbate global supply chain issues

• The Producer Price Index was still up 10.0% year‐over‐year

• The airlines still forecast revenue to be below pre‐pandemic levels

Another valid interpretation of the rally, then, was that the market was simply due for a technical bounce, and the bearish sentiment entering the week provided the basis for the big rally. In turn, there was likely some short-covering activity in the mix.

Regarding the Fed's policy meeting, the central bank raised the target range for the fed funds rate by 25 basis points to 0.25‐0.50%, as expected, and signaled six more rate hikes this year. Fed Chair Powell said the Fed could start to reduce the balance sheet following the May policy meeting.

The Treasury market experienced some curve‐flattening activity with shorter‐dated rates outpacing the rise in longer‐dated rates. The 2‐yr yield rose 21 basis points to 1.96%, and the 10‐yr yield rose 15 basis points to 2.15%.

OIL PRICES DECLINE BUT MARKET TOO WORRIED TO CARE

The Stock Market Started The Week In A Hole As Oil Prices Flirted With $130 Per Barrel. Oil Prices Eventually Cooled Off, But The Hole Was Too Deep For The Market To Climb Out Of Given The State Of The Economy.

The S&P 500 fell 2.9%, the Nasdaq Composite fell 3.5%, the Dow Jones Industrial Average fell 2.0%, and the Russell 2000 fell 1.1%.

The initial spike to $130 per barrel was in anticipation of the U.S. ban on Russian energy imports, which included oil, gas, and coal. On a related note, the UK and EU said they would phase out their Russian energy imports this year, but the UK said it was still exploring options for a ban on gas imports.

WTI crude futures ended the week at $109.10/bbl, which 5.4% lower versus last Friday. The S&P 500 energy sector still rose 1.9%, while the other ten sectors in the S&P 500 sectors ended in negative territory. The consumer staples (‐5.8%) and information technology (‐3.8%) sectors were the weakest performers.

Despite the retracement in oil, the fact of the matter was that the environment was still inflationary with oil up 45% for the year and total CPI up 7.9% year-over-year in February. That understanding fueled concerns about a slowdown in consumer spending and expectations for the Fed to hike rates more aggressively this year.

More erratic than oil this week was nickel, which soared at the London Metal Exchange (LME) on Tuesday, more than doubling at one point to exceed $100,000 per metric ton before the LME suspended trading for the day.

The Russia‐Ukraine situation remained a frustrating one because one headline would lift the market's spirits only for the next headline to disappoint the market. Ceasefire talks between Russia and Ukraine broke down without any real progress, and the market didn't believe President Putin's claims that there was a positive shift in talks.

Treasury yields spiked despite the growth concerns telegraphed in the stock market, presumably because of inflation expectations and cash‐raising efforts. That didn't help risk sentiment. The 2‐yr yield rose 26 basis points to 1.75%, and the 10‐yr yield rose 28 basis points to 2.00%.

Market Recap - Spike In Oil Prices Dampen Risk Sentiment

The Stock Market Was Afflicted By A 25% Pop In Oil Prices, Which Were Driven By Worsening Developments Surrounding Russia's Invasion Of Ukraine.

The Nasdaq Composite dropped 2.8%, followed by losses in the Russell 2000 (‐2.0%), Dow Jones Industrial Average (‐1.3%), and S&P 500 (‐1.3%).

WTI crude futures finished the week at $115.27 per barrel, which was responsible for the 9.3% gain in the S&P 500 energy sector. The utilities (+4.8%), real estate (+1.7%), and health care (+1.2%) sectors also closed higher amid some defensive positioning.

The biggest laggards were found in the financials (‐4.9%), information technology (‐3.0%), communication services (‐2.7%), and consumer discretionary (‐2.6%) sectors, which dropped between 2‐5%.

This week, Russian forces attacked civilian areas and seized Europe's largest nuclear power plant in Ukraine. Russia was undeterred by an expansion of sanctions, which blocked select Russian banks from the SWIFT financial transactions system and prevented Russia's central bank from accessing its foreign currency reserves.

Two rounds of ceasefire talks only produced an agreement to designate humanitarian corridors to safely evacuate civilians from the country. The threat of nuclear conflict (President Putin also put his nuclear forces on high alert) worsened the market's low spirits.

Fed Chair Powell said the central bank would "proceed carefully" because of the geopolitical uncertainty and that he would support hiking rates by 25 basis points later this month. He acknowledged though, that a 50‐bps hike is still possible in the future if inflation is higher than expected.

On a related note, Russia's central bank hiked its key rate to 20.0% from 9.5% to protect the ruble, which plunged against the dollar. The U.S. Dollar Index rallied 1.9% to 98.50 amid weakness in the euro.

The Treasury market was a signpost for growth concerns, which were exacerbated by disappointing guidance from high‐growth story stocks, a relatively disappointing ISM Non‐Manufacturing Index for February, and stagnant wage growth for February in an escalating inflationary environment.

The 10‐yr yield dropped 27 basis points to 1.72%, and the 2‐yr yield dropped 10 basis points to 1.49% amid expectations for the Fed to be less aggressive when it comes to removing policy accommodation.

Providing more color on the move in oil, prices received little relief from an agreement among 31 IEA member countries to release 60 million barrels of oil from their reserves. Crude futures leveled off amid speculation that a nuclear deal with Iran could be signed soon, then rallied back to the highs on news that the White House is considering a ban on Russian oil imports.

RUSSIAN INVASION DRIVES VOLATILE ACTION

The Stock Market Made A Huge Comeback This Week, Initially Selling Off On A Worsening Russia‐Ukraine Situation, Then Rallying On Optimism That The Situation Won't Have A Material Impact On The Economy.

The S&P 500 ended the week with a 0.8% gain after being down as much as 5.4% from last Friday's close. The Nasdaq Composite (+1.1%) and Russell 2000 (+1.6%) each gained over 1.0% after being down as much 7.1% and 5.7%, respectively. The Dow Jones Industrial Average lost 0.1% after being down 5.3% intraweek.

Russia invaded Ukraine after receiving a host of sanctions from the U.S., UK, and EU that clearly weren't inhibitory to Russia's plans. Notably, after the invasion, the U.S. did not sanction Russia's oil and gas exports, nor did it block Russia's access to the SWIFT financial system.

By week's end, it seemed that Russia was close to completing its "special military operation" after entering Kyiv and saying it's ready to send delegation to Minsk to hold diplomatic talks with Ukraine. Russia's RTS Index might have tanked 33% amid all the sanctions, but the U.S. market acknowledged that inflation might not directly worsen as initially feared.

Eight of the 11 S&P 500 sectors closed higher, paced by the defensive‐oriented health care (+2.7%), real estate (+2.7%), and utilities (+2.0%) sectors. The consumer discretionary (‐2.2%), consumer staples (‐0.3%), and financials (‐0.3%) sectors closed lower.

The retracement in commodity prices corroborated the inflation hopes. Notably, WTI crude futures settled higher by just 0.4% to $91.59/bbl after briefly topping $100.00/bbl after the Russian invasion.

That's not to say that the market is in the clear regarding inflation. The PCE Price Index, which is the Fed's preferred inflation gauge, rose 0.6% m/m in January (Briefing.com consensus 0.5%), leaving it up 6.1% on a year-over-year basis.

The 2‐yr yield rose 12 basis points to 1.59% on continued expectations for the Fed to hike rates at least six times in the near term. The 10‐yr yield rose six basis points to 1.99%. The U.S. Dollar Index rose 0.5% to 96.54.

Tough Week as Russia‐Ukraine Situation Dampens Sentiment

The S&P 500 Fell 1.6% This Week, Driven Primarily By Worsening Russia‐Ukraine Developments. Risk Sentiment Was Further Pressured By Disappointing Growth Stock Earnings Reactions And Lingering Concerns About A Fed Policy Mistake.

The Dow Jones Industrial Average fell 1.9%, the Nasdaq Composite fell 1.8%, and the Russell 2000 fell 1.0%.

Russia‐Ukraine headlines were all over the place, but at the end of the week, the possibility of a Russian invasion of Ukraine appeared "imminent," even as Russia's foreign minister accepted an invitation to meet with Secretary of State Blinken next week. That is, if Russia doesn't invade over the three‐day weekend.

Investors de‐risked and sought shelter in Treasuries, where the 10‐yr yield declined three basis points to 1.93% after touching 2.06% midweek. Ten of the 11 S&P 500 sectors ended the week in negative territory.

The energy sector was the weakest performer with a 3.7% decline as oil prices ($91.21, ‐1.88, ‐2.0%) briefly fell below $90 per barrel amid reports indicating that a nuclear agreement with Iran was within reach. The consumer staples sector (+1.1%) was the only sector that closed higher.

In the growth‐stock space, NVIDIA (NVDA), Shopify (SHOP), Roblox (RBLX), Roku (ROKU), DraftKings (DKNG), Fastly (FSLY), and Redfin (RDFN) suffered steep losses following their earnings reports.

Regarding the Fed, St. Louis Fed President Bullard (FOMC voter), New York Fed President Williams (FOMC voter), and Cleveland Fed President Mester (FOMC voter) separately prepared the market for a rate hike in March.

The fed‐funds‐sensitive 2‐yr yield, however, declined five basis points to 1.47%, suggesting the Fed's policy shift has been priced in or that the geopolitical situation could sway the Fed into being less hawkish than feared. The probability for a 50‐bps hike in March decreased to 21.1% from 49.2% last week, according to the CME FedWatch Tool.

LARGE‐CAPS FALTER AMID RATE‐HIKE FEARS AND GEOPOLITICAL ANGST

Large‐Cap Indices Struggled This Week As Risk Sentiment Was Pressured By Increased Rate‐Hike Expectations And Fears Of A Russian Invasion Of Ukraine.

The S&P 500 fell 1.8%, the Nasdaq Composite fell 2.2%, and Dow Jones Industrial Average fell 1.0%. The Russell 2000, however, rose 1.4%

Eight of the 11 S&P 500 sectors closed lower, led by the communication services (‐3.9%), information technology (‐2.9%), real estate (‐2.8%), and consumer discretionary (‐2.3%) sectors. The materials (+1.1%) and energy (+1.8%) sectors ended the week with gains decent gains.

The real action started midweek when more U.S. states announced plans to relax mask mandates amid improving COVID‐19 trends and an observation from Dr. Fauci that the U.S. is heading out of the "full blown" pandemic phase. That catalyzed a broad‐based advance, which was upended on Thursday following the Consumer Price Index (CPI) report for January.

Briefly, total CPI increased 0.6% month‐over‐month in January (Briefing.com consensus 0.5%), and so did core CPI (Briefing.com consensus 0.5%), which excludes food and energy. On a year‐over‐year basis, they were running at their highest levels since 1982 at 7.5% and 6.0%, respectively.

After the report, St. Louis Fed President Bullard (FOMC voter) told Bloomberg that he supports the Fed hike rates by 100 basis points by July 1, including one hike being 50 basis points. The market, which had brushed off the negative reaction to the CPI report, rolled over following these comments.

The CME FedWatch Tool assigned the probability of a 50‐basis‐point hike in March to 93.8% on Thursday. More noteworthy, the 2‐yr yield spiked 22 basis points to 1.56% in one day ‐‐ its largest increase since the financial crisis.

Stocks weakened further on Friday after National Security Advisor Jake Sullivan acknowledged there was a "distinct possibility" that Russia could invade Ukraine before the end of the Olympics. Oil prices rose modestly while Treasury yields fell.

Rate‐hike fears were somewhat tempered, though, after a Bloomberg report suggested that the Fed is unlikely to issue an emergency hike in between policy meetings and that a 50‐basis‐point hike is not a given.

At week's end, the 2‐yr yield was up 20 basis points at 1.52%, and the 10‐yr yield was up three basis points to 1.96%. The U.S. Dollar Index rose 0.6% to 96.03.

MARKET OVERCOMES RATE‐HIKE EXPECTATIONS

Each Of The Major Indices Rose More Than 1.0% This Week, As The Market Continued To Stabilize From An Oversold Condition Despite Increased Rate‐Hike Expectations.

The Nasdaq Composite led the advance with a 2.4% gain, followed by the S&P 500 (+1.6%), Russell 2000 (+1.7%), and Dow Jones Industrial Average (+1.1%).

Eight of the 11 S&P 500 sectors closed in positive territory, paced by the energy (+4.9%), consumer discretionary (+3.9%), and financials (+3.5%) sectors with impressive gains. The materials (‐0.2%), real estate (‐0.2%), and communication services (‐0.3%) sectors ended the week with modest losses.

The market had plenty going for it this week, including month‐end rebalancing activity, first‐of‐the‐month inflows, an improved technical posture, a fear of missing out on further rebound gains, and better than expected (and feared) earnings reports. The S&P 500 reclaimed its 200‐day moving average (4444).

Alphabet (GOOG) and Amazon.com (AMZN) saw big gains following their earnings reports but not as big as Snap's (SNAP), which provided investors a huge sigh of relief after Meta Platforms (FB) plunged over 25% following its disappointing earnings news. SNAP popped off with a 60% gain after falling 24% prior to its report.

Expectations for the Fed to raise the fed funds rate by 50 basis points in March increased noticeably after the January employment report displayed surprisingly strong jobs growth and higher‐than‐expected wage gains. According to the CME FedWatch Tool, the probability of that happening increased to 36.6% on Friday, versus 14.3% one week ago.

On a related note, both the ECB and the Bank of England acknowledged the inflation risks in the economy. The Bank of England responded accordingly with a 25‐basis‐point rate hike for the second meeting in a row, and the ECB said it couldn't rule out a rate hike this year after previously indicating that was an unlikely possibility.

For good measure, the Prices component of the January ISM Manufacturing Index increased to 76.1% from 68.2%, and WTI crude futures topped $92 per barrel ($92.30, +2.08, +2.3%) at week's end.

Treasury yields pushed higher amid the inflation pressures and hawkish Fed expectations. The 2‐yr yield rose 15 basis points to 1.32%, and the 10‐yr yield rose 15 basis points to 1.93%. The U.S. Dollar Index fell 1.9% to 95.44 amid a stronger euro.