While many of Wall Street’s major firms are maintaining their bullish year-end price targets for the S&P 500, one research firm has taken a different approach. Seaport Research Partners announced on Monday that they have revised their outlook for the large-cap benchmark in 2023, citing the ongoing impact of rising Treasury yields on risky assets.
Seaport Research Partners lowered their S&P 500 index target for the end of this year to 4,500 from 4,650, highlighting increasing volatility in financial markets as an indication of growing liquidity concerns.
According to Victor Cossel, macro strategist at Seaport Research Partners, the rising MOVE Index of U.S. Treasury Volatility and the DXY Index of relative Dollar crosses both point to a risk-off environment, signaling tightening liquidity conditions.
As evidence of these concerns, the ICE BofA MOVE Index, which measures fixed-income volatility, reached a reading of 130.69 on Monday, marking its highest level since July 10, based on FactSet data. Additionally, the ICE U.S. Dollar Index DXY, which tracks the performance of the greenback against a basket of rivals, rose 0.3% to 103.57 on Tuesday afternoon, positioning it for one of its highest closes since June 12.
Although the CBOE Volatility Index (VIX), also known as the "fear gauge," remains relatively subdued compared to the increased volatility in bond and currency markets, Cossel and his team anticipate it will eventually catch up with other global macro volatility indicators. They predict that the current pullback for the S&P 500 will likely extend further towards the 4,200 level in the near term.
As of Tuesday afternoon, the S&P 500 was trading 0.3% lower at 4,385. This places the large-cap index on track for its most significant monthly decline of 2023, as per FactSet data.
Seaport Research Partners suggests that declining inflation break-evens and rising yields indicate fiscal concerns for sovereigns, leading to higher real interest rates. Cossel warns that further tightening of real rates could pose additional risks to equities.
Note: U.S. stocks may experience a temporary bounce this week, but analysts caution that a summer selloff is only halfway through.
Rise in Treasury Yields Driven by One Factor, Says Strategist
The yield on U.S. Treasury bonds has pulled back slightly from multiyear highs but remains elevated. On Tuesday, the 10-year Treasury yield stood at 4.311%, marking its highest level since November 2007, according to Dow Jones Market Data. The 30-year Treasury yield also dipped by 3 basis points to 4.416%, having reached its highest level since 2011 in the previous session.
Simultaneously, real interest rates, which refer to yields adjusted for expected inflation, have climbed to around 2%. This marks the highest level since 2009, as reported by the Board of Governors of the Federal Reserve System.
The spike in real interest rates is a key concern for strategists because the dollar has not responded in kind. A stronger dollar would undermine the risk asset and liquidity tailwind that has supported past optimism.
Despite these developments, some analysts believe that market forces will push the Federal Reserve to adopt a more dovish stance to maintain financial stability. They anticipate potential policy intervention in the second half of 2023, which could provide support for risk assets and potentially drive equities higher by year-end.
On Tuesday, U.S. stocks experienced a decline, with the Dow Jones Industrial Average falling over 200 points (or 0.6%) to reach 34,265. The Nasdaq Composite also saw a minor drop of less than 0.1%.
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