(Bloomberg) — For the past two months, under threat of tariffs and tighter Federal Reserve policy, it’s been the mighty US economy that gave investors cover to keep shoveling money into markets.
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Friday signaled there may be a limit to how far that protection can be taken.
What looked like another week of numbingly low volatility across asset classes was shattered in the last session, as reports on consumer sentiment, housing and services sent the S&P 500 to its biggest loss of the new year. Bonds rallied as traders looked past potentially renewed inflation anxiety to bid up haven assets for a third straight day.
Single-session drops have had a history of morphing into buying opportunities in post-election America, and nerves were particularly jumpy Friday when China researchers discovered a new coronavirus in bats. But for investors who have been piling record cash into investments of all stripes lately, even tentative signals that the US growth story was under pressure were reason enough to bail.
The S&P 500 wiped out its weekly advance on Friday and tumbled 1.7%. Bonds surged, pushing the yield on 10-year Treasuries down nearly 8 basis points on the day to 4.43%. The VIX Index, a measure of volatility known as the “fear gauge” jumped to one of its highest levels this year but still remained below 20.
Prior to Friday’s selloff, the market bulls were “supported by speculation and hopes of President Trump’s policies fostering disinflationary growth,” said Michael O’Rourke, chief market strategist at JonesTrading. “The data we are receiving now is not supporting that thesis.”
While consistent economic data has been one of the pillars of the America First investment case, it can also set the stage for quick shocks. Inflation data has been far from harmonious — its uptick in recent months torpedoed hopes for imminent Fed rate cuts.
On Friday, a report showed US consumer sentiment fell in late February as long-run inflation views jumped to the highest since 1995. To add to the uncertain outlook, sales of existing US homes fell last month for the first time since September.
‘Pro-Risk,’ Until Now
For bullish investors, it was a resilient economy leading up to the latest prints that was calling the speculative tune. January’s employment report showed 143,000 jobs added to nonfarm payrolls, just below last year’s average of 166,000, and the unemployment rate has held between 3.9% and 4.2% in its last 12 readings.
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