Investing.com -- Raymond James analysts said in a note Monday that the recent strength in economic data could have adverse effects on the equity market, noting the complex relationship between economic health and market performance.
The S&P 500 experienced a ~2% decline last week, with small and mid-cap stocks down around 3%, driven by rising yields and increasing oil prices.
The 10-year Treasury yield climbed 17 basis points to 4.77%, nearing the cycle high of 5.0%. The firm said the rise in yields, combined with a rally in oil prices due to exceptionally cold weather and additional sanctions on Russia, has brought back memories of the market conditions in 2022.
According to Raymond (NS:RYMD) James, "nearly all the data suggests economic activity accelerated late in the year/post-election," contributing to the upward pressure on yields and oil prices.
They note that the dynamic has led to a challenging environment for equities as investors anticipate the upcoming earnings season and 2025 guidance.
The analysts describe a cyclical pattern in interest rates: "Rates go up, equity investors get scared of recession, market rolls over, bond investors notice a recession being built and believe long term yields the place to be, that sends rates down, that gets equity market bulled up on soft landing narrative, which gets equity market turned around and gets bond yields up."
This pattern is said to have been observed repeatedly since 2022, with the next phase potentially involving recession fears being priced into the market.
Drawing parallels to the late 1990s, the note highlights how rate cuts by Greenspan in 1998 were followed by rate hikes in 1999 as economic conditions improved, ultimately leading to a recession.
Similarly, Powell’s rate cuts in 2024 could be reversed if economic growth accelerates, which "is why good news is likely bad news for the equity market."