The downgrade comes as rising Treasury yields continue to weigh on risky assets, especially growth-oriented sectors such as technology and consumer discretionary. The yield on the 10-year Treasury note, which moves inversely to its price, reached its highest level since November 2007 on Monday, while the yield on the 30-year Treasury bond hit its highest level since 2011.
How does volatility affect the market?
Volatility is a measure of how much the prices of assets fluctuate over time. Higher volatility implies higher uncertainty and risk for investors, who may demand higher returns or reduce their exposure to avoid losses. Volatility can also affect the liquidity of the market, which is the ease with which assets can be bought or sold without affecting their prices.
One of the indicators that Seaport Research Partners uses to gauge market volatility is the ICE BofA MOVE Index, which tracks fixed-income volatility. The index rose to its highest level since July 10 on Monday, according to FactSet data. Another indicator is the ICE U.S. Dollar Index, which tracks the greenback’s performance against a basket of rivals. The index jumped to one of its highest closes since June 12 on Tuesday afternoon.
Meanwhile, the CBOE Volatility Index, or VIX, which measures stock market volatility, remains “subdued” relative to the uptick in bond and currency volatility measures, but Seaport Research Partners expects it to “catch up” with its global macro volatility peers.
What are the implications of rising real interest rates?
Another factor that Seaport Research Partners considers in its outlook is the level of real interest rates, which are adjusted for inflation expectations. Real interest rates are based on the yield on 10-year Treasury inflation-protected securities, or TIPS. The yield on TIPS reflects the real return that investors expect to receive from lending money to the government.
Real interest rates have been rising recently, reaching around 2%, the highest level since 2009, according to data from Board of Governors of the Federal Reserve System. This means that investors expect higher inflation in the future, or lower nominal interest rates from the Fed, or both.
Rising real interest rates can have negative effects on the economy and the stock market. They can increase the cost of borrowing for consumers and businesses, reduce the present value of future cash flows for companies, and make alternative investments more attractive relative to stocks.
“Declining inflation break evens and rising yields suggest sovereign fiscal concerns to us as real interest rates break out higher,” said Victor Cossel, macro strategist at Seaport Research Partners. “Further real rate tightening risks a continued equity hiccup.”
How does Seaport Research Partners compare with other Wall Street firms?
While Seaport Research Partners has revised its S&P 500 target downward, some of Wall Street’s top firms are maintaining their bullish year-end price targets for the large-cap benchmark. For example, Goldman Sachs has a target of 4,700, Morgan Stanley has a target of 4,800, and JPMorgan Chase has a target of 4,900.
These firms are more optimistic about the prospects of corporate earnings growth, economic recovery, and policy support from the Fed and the government. They also believe that the recent spike in bond yields is temporary and will not derail the stock market rally.
However, some analysts warn that U.S. stocks may face more headwinds in the coming months as inflation pressures mount, fiscal stimulus fades, and geopolitical tensions escalate. They advise investors to be cautious and selective in their portfolio allocation.
