Key Takeaways:
Rising Bond Yields: Increasing bond yields imply higher borrowing costs, which can negatively impact corporate profitability and investor sentiment.
Persistent Inflation: Sustained higher consumer prices, known as sticky inflation, pose a challenge to economic growth and purchasing power, potentially hindering corporate earnings and overall market performance.
Weakening US Consumer: Concerns about a weakening US consumer signal a possible slowdown in consumer spending, a key driver of economic activity. This could further dampen corporate earnings and investor confidence.
Heightened Concerns: Peter Tchir is particularly worried about a more significant market downturn exceeding the typical 5% to 10% pullback. He warns that if 10-year yields surpass the critical threshold of 4.5%, it could exacerbate market volatility and trigger further selling pressure.
Peter Tchir, a strategist at Academy Securities, has expressed growing concern about the potential for a significant pullback in US stocks. In a note published on Sunday, Tchir warned that instead of anticipating a typical 5% to 10% correction, he is becoming increasingly worried about the possibility of a more substantial downturn exceeding 10%. Tchir specifically highlighted the scenario where 10-year bond yields surpass the critical threshold of 4.5%, which could exacerbate market volatility and contribute to a more pronounced stock market decline.
Peter Tchir’s increasing nervousness about the stock market is driven by three key factors.
Firstly, Tchir points to the rise in bond yields, particularly the 10-year Treasury yield, which has climbed to 4.33%. He anticipates a potential continuation of this trend, drawing parallels to the historic crash in the bond market seen last fall. The recent consecutive increases in the 10-year yield signal a potential march towards higher yields, raising concerns about the impact on financial markets.
Secondly, Tchir highlights the persistence of inflation as another cause for concern. Despite expectations for inflation to ease, it has remained stubbornly high. Geopolitical risks, such as the ongoing Ukraine war and potential escalation in the Middle East involving Iran, could contribute to sustained elevated energy prices, further exacerbating inflationary pressures.
Lastly, Tchir focuses on the behavior of the US consumer, describing them as behaving like “zombies” who have continuously rebounded. However, he warns that this resilience may falter as consumers face mounting debt burdens and a cooling job market, potentially leading to a slowdown in consumer spending.
Overall, Tchir suggests that these risks warrant a heightened level of bearishness, emphasizing the potential for higher yields alongside a weakening economy and challenges for the Federal Reserve in addressing persistent inflation.