What Crushed Stocks?

by Wolf Richter, Wolf Street:

Treasury yields don’t matter – until they do. Mortgage rates jump.

On Friday at around 1:40 p.m., during whiplash-inducing market moves, the S&P 500 index was down 1.9%, bringing the total loss for the week to 8.3%, which would have been the biggest weekly loss since November 2008, after the Lehman bankruptcy.

But dip-buyers jumped in courageously and saved the day. The S&P 500 ended up 1.5%, bringing to the total loss for the week to 5.2%, the worst week since, well, the selloff in January 2016.

Everyone has their own reasons why stocks plunged last week. Some blamed algorithmic trading. Others blamed the short-volatility financial complex that blew up. More specifically, Jim Cramer blamed “a group of complete morons” who traded in this space. Others blamed the stratospheric valuations of stocks that had been rallying for eight years with only a few dimples in between, and it’s simply time to unwind some of those gains.

Whatever the factors might have been, rising bond yields certainly had something to do with it. They tend to hit stocks, eventually.

Last week, prices of short-dated Treasuries edged down and prices of long-dated Treasuries edged down, and their yields edged up, but there was some turmoil in the middle, with some interesting consequences.

The three-month Treasury yield rose to 1.55% on Friday, the highest since September 11, 2008. Investors are beginning to price in a rate hike in March:

Read More @ WolfStreet.com