Interest Rate Hikes: Time To Panic?

The preacher man says it's the end of time

And the Mississippi River, she's a-goin' dry

The interest is up and the stock market's down

And you only get mugged if you go downtown

I live back in the woods you see

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My woman and the kids and the dogs and me

I got a shotgun, a rifle, and a four-wheel drive

And a country boy can survive

-Hank Williams Jr.

A Country Boy Can Survive

Wednesday was definitely one of those sessions that make you want to sharpen up your survival skills.  The fear of interest rates moving higher sent the stock market way down. 

But you don’t have to be a ‘Country Boy to Survive.’  That doesn’t mean this ride won’t be bumpy.  There was no safety net for stocks, which gained downside momentum. With almost each tick, bond yields kept going higher and higher. The ten-year is moving back toward key resistance at 1.75%.

Thirty-Year 10Y Yield Chart

Bond Demand Materializes

During the session, the auction of $41.0 billion in 10-year treasuries was a strong success with an uptick in both foreign and institutional demand. Usually, that would be an elixir to counter bond market jitters.  But downside pressure had already morphed from a snowball at the start of trading into a giant boulder. 

While the market was melting down and foreigners were buying our bonds, the talking heads of the Federal Reserve were chatting it up, although nobody said anything that stemmed the tide:

Raphael W. Bostic, President & CEO of the Federal Reserve Bank of Atlanta:

“Noise around inflation could last four to five months before trends become clearer.”

“Impossible for the Fed to help growth without also increasing asset values.”

Richard Clarida, Vice Chairman of the Federal Reserve:

“We could have more persistent imbalances between aggregate demand and supply that would put more persistent upward pressure on inflation than we and outside forecast expect.”

“If stronger demand relative to supply persisted and pushed up inflation higher than the Fed’s stable 2% target, the central bank would not hesitate to act.”

“I expect inflation to return to – or perhaps run somewhat above – our 2% longer-run goal in 2022 and 2023. This would fit under the Fed’s new policy framework.

Don’t Panic:

Looking at the Consumer Price Index (CPI) numbers, I come away with two distinct points:

Baseline issues played a big role, and so did the reopening combined with stimmy checks. I sincerely believe this will fade. And at some point, in 2022, the Street will start to worry about deflation. That said, we are in an interesting squeeze at this very moment paying people not to work but urging them to spend.  I like old-school wage inflation, in which the sweat involved would temper those wages, meaning there would be more prudence when spending that “income.”

Plus, who makes these Wall Street consensus numbers?  Time for a new team that sometimes goes outside.

Message of the Market

As I said, the gates opened on top, and the market moved straight down, gaining momentum as selling took out stops and potentially key support points. And every step added another level of panic. Blue chips on the NYSE were hammered, and there were more 52-week lows than highs on the NASDAQ.

While Energy was eking out a gain, old safe havens and new safe havens were getting smacked around pretty good.

Consumer Discretionary took the brunt of selling, perhaps the market is suggesting limits to passing on the higher cost for more retailers. 

Level of Fear?

While the Fear Index (VIX) was surging 26.3%, the S&P 500 saw a volume of only 2.3 billion shares, almost half the 4.7 million daily average. 

VIX Index

These kinds of swoons will nick your portfolio. But be smart and be ready because there will be chances to make this pullback work for you. 

Today’s Session

The Producer prices final demand was up 0.6% from April, adding to the 1% increase in March, topping estimates for 0.3%. The rise was primarily due to a jump in services prices of 0.6%.  The index for the final demand goods also rose 0.6.  Year over year, PPI rose 6.2%, the largest increase since November 2020.

To see the chart, click here.

Portfolio Approach

We are adding a new position to Industrial this morning in our Hotline Model Portfolio. To get sign up for our premium Hotline service, email Info@wstreet.com