-
Cost of capital has skyrocketed
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This causes downward pressure on the stock market
The Fed’s relentless fight with inflation has caused the federal funds rate
to jump 525 basis points, which is not only the steepest but also the most
aggressive rate hike cycle over the last 40 years. This aggressive central
bank policy has led to the worst sell-off in long-term US bonds in over
four decades, as the costs of capital have gone up tremendously.
On Monday, the 10-year Treasury yields surpassed the 5% mark, a level not
seen since 2007. This move has been influenced by the strong U.S. economy
and a hot labor market, causing the Fed to keep its hawkish stance.
The 10-year us debt, a key financial metric, is viewed as a safe-haven
during economic downturns and a reference rate for many financial
instruments, including those for student loans and mortgages. Following
recent quantitative tightening measures, mortgage rates climbed to an
unprecedented 8% last week – a peak not reached in two decades. Ripple
effects will lead to softer housing and consumer spending conditions.
On top of that, worries about the exploding US fiscal deficit have led to
term premiums on the yield curve going up. President Joe Biden is
seeking from Congress $100 billion in new foreign aid and security
spending, including $60 billion for Ukraine and $14 billion for Israel.
The fears of economic slowdown do not bode well for equities, which look
dangerously high, given where rates are. Nasdaq 100 stability is further
tested as the earnings season is in full swing with lots of positive and
negative surprises.
Lastly, there is the classical late-cycle warning sign from the bond market
as the yield curve steepens before the incoming recession. Flattening the
inverted yield curve, as the long end catches up to the short end, preceded
the incoming GDP contraction by an average of 15.3 months. And we are close
to that point as the 10-year minus the 2-year curve first inverted in July
2022.
Equities are in a treacherous position. The longer the Fed keeps the
“Higher for longer” stance, the more treasuries stay above 5%, and the more
stocks will suffer.
Investors can long the NASDAQ 100 using our
3x US Tech 100
and/or
5x Long US Tech 100
.
Alternatively, they can short the NASDAQ 100 using our
-3x US Tech 100
.
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