Positive growth projections are ‘spooking’ investors as they await Fed response

Yahoo Finance’s Alexis Christoforous and Tony Rodriguez, Head of Fixed Income Strategy at Nuveen, discuss the latest market action.

Video Transcript

ALEXIS CHRISTOFOROUS: Welcome back to Yahoo Finance Live. As we move closer to the final hour of trading, we are seeing the stock market come off its session lows. The Dow was down nearly 700 points earlier, now down just 330. We've got the NASDAQ composite off more than 200. It was down more than 400 points earlier, and the S&P 500 now down about 40 points.

Want to just take a look at the 30 Dow stocks at the moment. We've got 27 of them in the red. The only stocks in the green right now UnitedHealth, Chevron on the back of that big spike in crude today, and American Express also slightly higher, as we see financials do pretty well, as yields over in the bond market continue to move up. And that is continuing to spook stock investors.

I want to talk more about it now with Tony Rodriguez. He is head of fixed income strategy at Nuveen. Tony, put this in perspective for us. I mean, the yield on the 10-year are reaching 1.54% today, second highest level of the year. Historically speaking, these are still low rates. So why are investors getting so spooked?

TONY RODRIGUEZ: Well, hi, good afternoon. Good to be with you. You know, I think that what has spooked investors are these two things. One is kind of the speed with which we got from essentially just the 1% to 1 and 1/2% here in the first two months of the year. Forecasts were certainly for getting to this level and up as high as 2% by the end of the year, but it happened rather quickly.

And then I think also, it's the positive information that we've gotten in terms of fiscal policy, in terms of actual economic data, and in terms of kind of the successful or really sped up rollout of the vaccine, leading to much, much more positive projections for growth. And that spooked investors in terms of whether the Fed was going to have to respond by potentially tightening sooner. You've seen the market price in the Fed-- first Fed tightening up to one year sooner than it had been priced in as we came into 2021. And so, I think that's kind of spooked investors.

ALEXIS CHRISTOFOROUS: Tony, I'm going to ask you the question I asked our two other markets guests earlier today. One of them suggested that we could be seeing a crisis of confidence in the Federal Reserve right now. We saw Jay Powell's comments at that Wall Street Journal Job Summit really add to the sell-off momentum that we've been seeing today, even though he reiterated that they're going to keep rates low for long. Are we having a crisis of confidence in the Fed right now?

TONY RODRIGUEZ: It's a good question. I think that's possible, maybe among some investors. From our perspective, I think the Fed has been pretty clear that they're incredibly focused on employment and that inflation is going to take a secondary backseat to that. And number two, I think the Fed has been pretty clear that while we all know that we're going to see some very high prints on inflation when we kind of anniversary the levels from last year, as we started-- as the pandemic started, that they believe that that's going to be transitory. And therefore, they think inflation expectations will remain somewhat contained.

I think that'll be the crux of the either loss of confidence in the Fed or uncertainty by the Fed or volatility driven by the Fed, is whether or not that truly proves to be transitory and the Fed can be patient, or that the Fed actually stays patient, and if it's not transitory, leads to a bigger problem down the road, as we get to the end of the year and into 2022.

JARED BLIKRE: Jared Blikre here-- I just want to follow up on that. Is it possible that the bond vigilantes could really force the Fed's hand more quickly than Powell would like to deal with or like to admit? And you go back to September of 2019. The bond market forced the Fed's hand because of what was happening in the repo market. There are similar things going on nowadays. We have this FOMC press meeting and a decision on March 17th. What are the odds that Powell has to act before that?

TONY RODRIGUEZ: You know, I certainly think it's possible. I mean, you already saw, for example, in Australia, that the central bank had to react in terms of the big rise in rates and respond. I think that we would have to happen prior to the Fed's hand being forced, is that you actually saw the equity market investors really capitulate more so than they have. We're still, while we're down today, we're still pretty close to all-time highs. We're still relatively high equity market levels.

And we've also seen the credit market's high yield, emerging markets, investment grade credit preferreds have held them pretty well. There's been a little bit of softness, but nothing material. So, as Powell has said, he's looking at multiple indicators. If overall financial conditions-- so looking at equities, looking at credit markets-- remain relatively steady, then I think the bond vigilantes will have a harder time forcing his hand.

But a few more dominoes start to tip over, then I think he definitely would see the Fed move from acknowledging that they're looking at rising rates to actually talking about what actions they would take in order to tamp them down.

ALEXIS CHRISTOFOROUS: You know, Tony, it's not often that we see these two things happening in tandem, where yields are rising in the bond market, and we're seeing such an aggressive sell-off in the equity market. What does that tell you about investor psyche right now?

TONY RODRIGUEZ: Yeah, I mean, part of it, I would say, is that, again, very good point. Part of it is positioning that people are definitely in the equity market trade. And so, while we expect good earnings, for example, this year, good solid growth, our view has been that that's going to keep the equity market relatively steady and only rising modestly, because a lot of the good news got priced in back in 2020.

When you look at the bond market, I think they were-- the bond market was more hesitant to price in that good news. And therefore, we came into the year below 1%. And so the bond market has been catching up this year. So what I think would be a level now, if you call 10-year a little over 1 and 1/2%, a little more consistent with the positive tone that the equity market has had about the post-pandemic recovery, not only in the US economy, but globally. So I think that it's the bond market catching up to what had been a more optimistic positive view by the equity markets.

ALEXIS CHRISTOFOROUS: Tony Rodriguez of Nuveen on the phone with us, thanks so much for your time. I know it's a busy day.