In This Article:
By Lewis Krauskopf and Saqib Iqbal Ahmed
NEW YORK (Reuters) - Stock market investors are heading into the U.S. Federal Reserve's rate-setting announcement particularly pessimistic, with fresh milestones for bond yields and worries about rocketing inflation weighing on sentiment as the central bank is expected to hike rates further.
The benchmark S&P 500 is down over 12% so far this year after posting its biggest monthly drop in April since the start of the pandemic. Meanwhile, the yield on the U.S. Treasury note hit 3% for the first time in over three years on Monday, doubling since the end of 2021.
The higher yields on U.S. government debt, which is viewed as virtually risk free, mean "you probably are starting to lose some of those folks who had maybe crowded into dividend-paying stocks and were maybe having to take a little bit more risk for that income," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
“The implication for equities is you start to lose demand for stocks relative to fixed income,” Samana said.
Some investors are clearly very gloomy. Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corp, told on Tuesday that he couldn't think of a "worse environment than where we are right now for financial assets."
Yields up, stocks down https://fingfx.thomsonreuters.com/gfx/mkt/akpezyjjqvr/Pasted%20image%201651594541397.png
In another weight on stocks, yields on the 10-year Treasury Inflation-Protected Securities (TIPS) - also known as real yields because they subtract projected inflation from the nominal yield on Treasury securities - have pushed solidly into positive territory after being in negative territory since March 2020.
Negative real yields have meant that an investor would have lost money on an annualized basis when buying a 10-year Treasury note, adjusted for inflation, a dynamic that has helped divert money from U.S. government bonds and into stocks and other risky assets.
Real U.S. yields on the rise https://graphics.reuters.com/USA-STOCKS/FED/zjvqkmdkzvx/chart.png
The Cboe volatility index, known as Wall Street's "fear gauge," has climbed from 20 just a couple weeks ago to over 36 on Monday, and finished just shy of 30 on Tuesday. An elevated VIX reflects increased investor expectations for choppy markets in the near term.
Rising risk https://fingfx.thomsonreuters.com/gfx/mkt/mopanobdava/Pasted%20image%201651593560098.png
Amid the market's slide, stock investors have reached new levels of pessimism. Bearish sentiment, which are expectations that stock prices will fall over the next six months, rose sharply to 59.4% in the latest survey by the American Association of Individual Investors. The last time bearish sentiment went above that level was in March 2009 during the financial crisis.