Why 'dramatic' rate repricing could leave stock market facing 'fits and starts' rest of year

Another round of interest-rate adjustments struck financial markets on Wednesday, putting equities further at risk of missing out on a sustainable return to an early 2023 rally.As the policy-sensitive 2-year Treasury yield inched closer to 5% and the benchmark 10-year rate briefly pierced 4%, investors and traders sold off the broader S&P 500 and Nasdaq Composite in tandem with bonds, underscoring just how wobbly risk assets could remain for the rest of 2023.

Meanwhile, the 1-year T-bill rate TMUBMUSD01Y moved further above 5%, making cash and cash-like instruments more appealing than either stocks or bonds for many investors, said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management in Philadelphia. As a result, traders slightly nudged up the likelihood of a half-of-a-percentage-point rate hike this month, and boosted their expectations for where rates are likely to end up by September: which is at least 5.5% to 5.75%, or possibly higher.

The bond market has regularly set the tone for risk assets, as Treasury yields move higher in conjunction with the most likely path for interest rates. U.S. stocks DJIA SPX COMP were mostly lower Wednesday afternoon, a day after closing out a tough February with losses that left Dow industrials with a 4.2% monthly drop, the sharpest decline since September. By contrast, January’s monster rally left the S&P 500 with a solid 6.2% monthly gain and the Nasdaq Composite with an even better 10.7% showing.

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