Broadening rally in stocks hits an economic roadblock

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The bond selloff is capping the appeal of equities, a strengthening dollar is hampering liquidity and the threat of Iran war re-escalation has kept United States benchmark crude oil prices around US$90 a barrel. The deteriorating picture leaves investors, reluctant to cash out more than they have already, wondering what’s next.This advertisement has not loaded yet, but your article continues below.“It’s risk-off until the dollar peaks,” said Bank of America Corp. strategists led by Michael Hartnett, adding the greenback is spiking on credit event risk, while tighter financial conditions are crushing equity breadth.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againAfter reducing risk during the summer, investors seem to have little appetite to pull back further. Take hedge funds: they spent most of September adding hedges and short positions rather than cutting their long exposure, according to Goldman Sachs Group Inc. prime brokerage data.It is evidence that investors are far from complacent and are evaluating threats ranging from inflation, rates, oil and the midterms without any panic. They appear willing to maintain fairly concentrated exposure to a narrow number of themes or stocks, especially AI-related trades, while selling anything that may suffer from the crumbling macro-economic backdrop.While breadth has been in free fall, this has had almost zero impact at the index level. Nearly 60 per cent of S&P 500 members are trading below their 200-day moving average, while about 75 per cent are below their 50-day equivalent. These tend to be the sorts of levels where breadth produced a bounce over the past five years, staging a rally that often drove further index gains. But for this to happen, the market needs a catalyst, something it lacks for now.This advertisement has not loaded yet, but your article continues below.There are some offsets. The U.S. economy is still growing, the latest services and manufacturing numbers have been strong, the job market is resilient, and earnings growth shows no sign of weakness. This reporting season now shapes up as a crucial test in reassuring investors that corporate robustness in the face of high oil and rising rates is still a thing.“While a spike in bond yields leaves stocks looking relatively expensive, the continued rise in corporate earnings should see equities add to their gains over the coming months,” said Pictet Asset Management chief strategist Luca Paolini.Companies in the MSCI World index should deliver earnings growth exceeding 30 per cent this year, Paolini said. He expects price pressures to ease in the coming months, even if oil briefly pushed headline U.S. inflation to almost double the target level.Bond-market jitters are back, but equities are so far disregarding them. The MOVE index, which tracks implied volatility in Treasury options, has climbed to about 108, almost seven times the level of the CBOE Volatility index (VIX). That ratio is in the 91st percentile of readings since 2000 and the widest since the term-premium scare of late 2024. The last time the gap ran this wide for an extended stretch, in 2023 and early 2024, it took a sharp rise in long-end yields to drag equity volatility up with it.Ranking each index against its own history makes the divergence even starker. MOVE is in the top quarter of all its data since 2000; the VIX, at around 16, is below its long-run median. That rare elevated spread has always resolved in the same way — not with rates vol collapsing to meet equity vol, but with equity vol eventually catching up.We apologize, but this video has failed to load.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.