Consequences of Narrow Breadth
US equities traded notably lower Friday and finished down on the week as May Non-farm Payrolls surprised to the upside and pushed the rates outlook back into focus.
Impact Snapshot
CPI Inflation -Wednesday
PPI Inflation - Thursday
Unemployment Claims - Thursday
Consumer Sentiment - Friday
Macro Viewpoint
The S&P 500 shed roughly $2 trillion in market cap within hours of a May payroll print that came in more than double consensus expectations on Friday, ending a 94-day streak without a single-day decline of 2% or more.
A run of strong growth and inflation prints has pushed rates volatility higher, a dynamic made more acute by the transition to a new Fed chair. The correlation between equities and rates has moved to record negative extremes.
History, reinforced several times over the past four years, points to a consistent pattern: equities pull back when rates volatility rises, but tend to recover once it settles, even when the level of rates itself stays elevated.
Prime Intelligence
One week ago, we warned in our brief about stretched positioning in large-cap tech, which stood out as the clearest imbalance to watch.
Fast forward to the end of last week: tech saw the biggest drop since Liberation Day. Its outperformance over the rest of the S&P 500 has turned down from the top of its decade-long trend channel, as it has at prior extremes.
Through late May, the S&P 500 technology sector’s performance relative to the average S&P 500 stock climbed to roughly 1.5 standard deviations above its post-2016 trend, briefly pushing above the top of its decade-long channel for the first time since the 2020 mega-cap surge. That stretch has now begun to unwind.
Positioning in equities overall is not stretched, but it is in large-cap tech.
The gap between the two is a direct expression of how narrow the market's leadership has become.
The Market Brief
In today’s brief we break down why vol finally woke up, and what it means that it took a 3.9 standard deviation move to do it.
We map the systematic selling pressure building into next week and the exact threshold that could turn an unwind into a cascade.
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