Santoli: S&P 500 falters at a familiar level as Fed’s Brainard comments on balance sheet reduction

Published Tue, Apr 5 20221:05 PM EDTUpdated Tue, Apr 5 20223:20 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. Hesitation at a familiar spot and with a familiar prompt: The S & P 500 blips lower from the 4,600 area as Federal Reserve Governor Lael Brainard comments that a relatively fast reduction in the Fed balance sheet could start in May as the central bank hustles to get policy toward some estimate of "neutral." The S & P has stalled just below last week's highs, also around the February highs, as some of the growth-stock bid from yesterday unwinds. Still looks like there's a 3% cushion down through "normal pullback" territory to a potential higher low that would keep the downside from getting out of hand, for what all that is worth. Treasurys sell off and, just like that, the 10-year and two-year yield curve reversed its inversion as longer-term yields jumped more than short-term rates on the idea of faster Fed balance-sheet runoff. Fair enough. This has always been considered a possible tool to take pressure off the yield curve, though no one knows for certain how the market would price any of these scenarios. My take on quantitative easing/balance-sheet growth has long been that beyond the restoration of basic market functioning, the only real effect of QE is for messaging rate intentions and as a placebo to offer the impression that the Fed is there to help. Well, the messaging is now all about quickly jacking rates and tightening financial conditions, not easing them. Employment, overall nominal growth, consumer/corporate leverage are all in a spot that says the economy should be able to handle the withdrawal of real and psychological accommodation. We'll see. Aside from market levels, the overall aura is one of "late-cycle" dynamics. Moderating profit growth, Fed turning tighter. Equity leadership has remained defensive/counter-cyclical, with consumer discretionary, banks, semis and housing-related all having rolled to varying degrees. Today the utilities/staples/health-care energy has been revived. Could this just be a temporary rotation/interlude? Perhaps. It would probably require an inflection lower in inflation and confirmation that services spending is taking up the slack from retreating goods demand. The recent relative recovery in Big Tech can be read in part as a rediscovery of its defensive properties of earnings reliability. Also, just a catch-up move, though as the Nasdaq 100 in mid-March hit what looks like a support level vs. the equal-weighted S & P. More headroom here to the upper end of the range? The low-quality speculative stuff that ripped yesterday is now giving it back, with ARKK, cloud stocks, fintech now flat to down on the week. No one said it was easy to play countertrend moves in bearish parts of the market, though all these areas could still be viewed as trying to create bases above the recent lows, albeit choppy ones. Market breadth decidedly negative: 2:1 down:up volume. Credit is weaker but no more so than Treasurys, so not a warning flare. VIX now popped above 20. Seems like it might be jumpy into the Fed minutes tomorrow? The recent big spike has been a plus, but the index still is showing an uptrend from the late-2021 lows, something that would have to break for there to be a true relaxation back to some kind of orderly uptrend.

Traders on the floor of the NYSE, March 28, 2022.

Source: NYSE

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.

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