Carl Court
Stocks so far in April are suffering from a “triple whammy” of factors including rising interest rates and further short-term losses are in sight for equities, Wells Fargo said Friday.
The S&P 500 (SP500) this week was on course to extend its April decline of ∼4%. Higher rates with the US 10Y (US10Y) Treasury yield up more than 10 basis points this week alone, ongoing political tensions between Iran and Israel and cautious Q1 comments around consumer demand have been weighing on the benchmark, Wells Fargo said.
“April’s stock pullback and attendant VIX increase are not surprising with the 10YR UST becoming kryptonite,” Wells Fargo Equity Analyst Christopher Harvey said in Friday’s note. Wall Street’s so-called fear gauge, the CBOE Volatility Index, has roared to about 19 from 12.5 at the start of 2024.
“Recent history suggests the VIX has scope to rise as fixed-income duration buyers disappear — a short-term risk for stocks and bonds,” Harvey said.
Rising rates with diminishing prospects for the Fed’s easing cycle to start this summer have pressured longer-duration equities, Harvey said, noting drops for the S&P 500 Information Technology Sector, the Russell 2000 index of small caps and the Russell Microcap index, as well as the firm’s own Growth-at-Any-Price basket.
The 10Y yield caught attention this week by briefly surpassing 5%, a result of investors selling bonds as the price out the prospect of numerous rate cuts by the Federal Reserve this year. Consensus now estimates that less than two interest rate cuts are set for 2024 compared with about seven expected when the year started.
“Near term, we see more downside but longer term ~10% SPX upside,” Harvey said, adding that Wells Fargo’s own Communications Services and Healthcare/Utilities barbell continues to perform well.
As for consumers, companies during the first-quarter earnings season have been expressing growing concerns about shoppers, Wells Fargo’s equity research team said this week. The brokerage said demand has been lighter than expected although more affluent consumers remain resilient. The Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) serves a proxy for consumer activity.
