The US dollar index reached its highest level since November on Tuesday, accompanied by the US 10-Year Treasury Note yield hitting its highest level since 2007. This surge in the dollar and government bond yields came as stocks tumbled, with the Nasdaq Composite down 1.6% and the S&P 500 down 1.5%. The CBOE Volatility Index, also known as the “fear gauge,” settled at its highest level since May, signaling risk aversion in the market.
The key factor behind these market moves is the Federal Reserve. Last week’s release and press conference by the Fed accelerated the rally in rates to new multi-year highs. Investors were caught off guard and forced to price in even higher rates for an extended period. Higher sovereign yields and lower bond prices are attracting foreign investors to the US, leading to a virtuous cycle of higher rates and a stronger dollar.
However, the rapid pace of these moves in the bond and currency markets is disrupting global markets, weighing on risk assets like stocks. The US dollar index is set to close its 11th week of consecutive gains, and the 10-year yield is on the verge of signaling overbought conditions. The last time yields and dollars were overbought, it coincided with the bear market in 2022. While turbulence in the market has not always correlated with overbought signals, history suggests that stocks may still face rough air for a few weeks.
Nevertheless, once the repricing turmoil in bonds and currencies subsides, stocks have the potential to resume their upward trajectory. As rates and the dollar find a new equilibrium, risk markets can become a bit riskier, leading to higher stock prices. However, until that point, stocks may experience another patch of volatility.
It is important for stock bulls to remain hopeful and patient during this period of turbulence. Eventually, stocks will find their footing again, and the markets will stabilize. Click here for the latest stock market news and in-depth analysis, including events that move stocks. For more financial and business news, read the latest articles from Yahoo Finance.
Overall, while the current market conditions may be challenging, there is light at the end of the tunnel for stock investors. It is crucial to keep a long-term perspective and stay informed about the latest developments in the market.