Santoli: Investors’ worries around the Fed’s rate hikes have found a new focal point — risks to growth

Published Wed, May 25 20221:15 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. There is a modest, tentative tension-relief lift in the indexes on hints that, in the short term, markets have sufficiently repriced expectations for the U.S. consumer. This is allowing stocks to feed off existing depressed sentiment, oversold conditions and light fund-manager equity exposures. It's hard to make too much of the moves, given the S & P 500 barely nosed above the week's prior high and is less than 4% above the correction lows from Friday. It's worth noting that so far the index has refused a few chances to close below 3,900 even after sinking below it four of the past 10 days. Signs of traction and a drying up of heavy supply from sellers or a delay of the inevitable? The firmness in chain retailers today on a sharp guide-down from Dick's Sporting Goods is at least a thin reed to grab for those willing to bet that the ravaged sector – with most stocks cut in half or worse — has roughly accounted for the high-friction supply backdrop, margin pressures and consumers reordering their spending priorities. Federal Reserve minutes at 2 p.m. ET might in theory tilt the market's expectations, but the meeting was three weeks ago. In that time, the economic data has softened enough and market-based inflation expectations have eased sufficiently to consider the minutes a bit stale. Prevailing fear has turned firmly to the risks to growth from the Fed chasing runaway inflation. The bond market has taken one anticipated hike out of the futures curve, and Atlanta Fed's Raphael Bostic this week opened the window to a pause in the tightening pace in September. This still leaves a summer of (very likely) a full percentage point of rate hikes and plenty of suspense about whether and when inflation data will confirm or refute the peak inflation data, even if we are past "peak Fed-hike expectations." It argues for a market that's capped and perhaps prone to waves of worry even if it can find some relief from the downtrend in the near term. Trading liquidity is quite thin and likely will only erode more into a holiday weekend and summer beyond, too. Citi Economic Surprise Index sinking well below zero (tracks data relative to forecasts), explains the retreat in bond yields and rising slowdown anxiety. But not unusual as expansions ebb and flow: Despondent sentiment has now become a feature of this market, largely unmoving but so far not a great contrarian buy signal. It's a precondition but not a catalyst for stocks to recover. The pros at Investors Intelligence have shown no brightening of their mood this week. Much talk of this being the worst start to a year since 1970 for the S & P 500. This is partly just an artifact of the bull-market peak coming, by chance, on Jan. 3. Still, worth noting most starts this bad or worse preceded partial recoveries by year-end. Bill Ackman's tweetstorm insisting the Fed is behind the curve and should front-load tightening to overwhelm inflation seems like an artifact of the early-spring backdrop. Arguably, it overlooks the amount of real-world tightening that the Fed's forward-guidance alone has brought forth: Nasdaq down 30%, average S & P 500 stock 30% off its high, S & P price-earnings from 22x to 16.5x, investment-grade debt yields from 2.25% to 4.5%, junk yields from 4% to 7.75%, 30-year mortgage rates from 3% to 5.25% and monthly new home sales down 25% since December. Market breadth solid today with 75% upside volume and fewer than 100 new NYSE lows for once. VIX stuck near 30, probably a chance for decent downside if FOMC minutes don't upset the market with the long weekend ahead. It's still at a level showing abiding low-level anxiety rather than either comfort or panic.