I Guess Every Form of Refuge Has Its Price

The peaceful, easy feeling, with which the stock market began the year, has turned into heartache. Thanks to soaring energy prices, higher interest rates and the threat of increasing inflation, stock indices are on a four-week losing streak. The contented expectation that interest rates would be declining through 2026 has suddenly flipped to panic over the potential that rates might actually increase. The favorable prospects for another year of above-trend earnings growth are probably already gone.

In the prior week, the S&P 500 Index (SPX) ended at its lowest level since November and very near its 200-day moving average. The relative lack of negative geopolitical news over that weekend allowed crude oil prices to fall back a bit on Monday morning. That was all the inspiration stocks needed to gap higher on the opening. It was business as usual. The major averages all expanded their gains and ended the day up about 1%. Tuesday brought a higher opening as well, but, unfortunately, it also brought what would be the indices’ highs of the week in the opening half-hour.

The sell-off from the Tuesday morning highs intensified on Wednesday, fueled initially by a report showing the Producer Price Index increased 0.7% in February. That was a couple ticks higher than the previous reading and more than double the consensus estimate of 0.3%. The year-over-year increase came in at 3.4%, up from a 2.9% increase in January. Coming into the Federal Reserve (Fed) policy announcement that afternoon, SPX was already down about 0.6% for the session. The averages continued to decline that afternoon as Fed Chairman Jerome Powell conceded that policymakers are in a “difficult situation.” The prospects for multiple Fed rate cuts in 2026 have vanished, and even the potential for just one rate cut is now less likely than a rate hike. SPX ended the day down 1.4%, and the NASDAQ Composite Index (COMP) fell 1.5%.

In the current volatile environment, trading is thinner, and big intraday moves both up and down will be more frequent. Those moves will almost always be triggered by overnight news from the Middle East and/or presidential rhetoric. We got a taste of both on Thursday. That morning, crude oil prices were steeply higher on news of Iranian retaliation for the Israeli attack on the South Pars gas field. Stock indices gapped lower on the opening; SPX was down to near its November low, and COMP sank to its lowest price level since September. The averages chopped sideways near the morning lows until late in the session when optimistic comments regarding the war in Iran from President Trump sparked a quick rebound that erased about two-thirds of the early losses.

Friday brought an almost all-day decline as oil prices climbed back to recent highs and longer-term bond yields spiked higher. The averages ended the day near their lows. Both SPX and COMP lost about 2% for the week. The energy sector has obviously been the new kid in town. The S&P energy sector SPDR gained 2.79% last week. It’s up more than 9% in the last five weeks and is now up 32.7% in 2026. Only one other sector, financials (+0.39%), managed a gain for the week. The other nine S&P industry sectors had losses ranging from 1.1% for technology to a near 5% loss for the utilities sector. Less than 20% of S&P 500 stocks have net gains over the past month. Prominent among the gainers are companies focused on energy and materials, especially fertilizer.

Higher bond yields contributed to the large losses in interest-rate-sensitive sectors. The yield on 10-year Treasury notes was at its low for the year, near 4.0%, as March began. That rate has spiked higher over the last three weeks on the threats of higher inflation, increased fiscal spending and fewer, if any, Fed rate cuts. Late Friday, that yield was at 4.37%, its highest level since last July. The higher 10-year yield, which is already a headwind for stocks, is likely to encounter stiff resistance at the 4.50% level.

In my last article a month ago, I wrote, “SPX has been stuck in a range between 6780 and 7000 for nearly three months. The lows on last Tuesday morning were the fourth time the index has successfully tested the 6780 level in the past two months. Watch for sustained trading below that level as the first sign of trouble.” Since early February, the market averages have traced out a series of lower highs and lower lows. SPX fell below 6780 on March 12 and has continued lower. Last week, both SPX and COMP fell below and ended the week below another key technical support level, their 200-day moving averages. SPX ended last week near 6506, about 7% below its intraday high from late January. Its technical condition has steadily deteriorated, violating several key levels in the process. Now that it’s below its 200-day moving average, there is very little technical support until down in the 6000 – 6100 range. While COMP got close to reaching a new high in late January, its intraday high of 24,020 was nearly five months ago in late October. At Friday’s closing level, 21,648, COMP was about 10% below its October high and back to levels it hadn’t seen since late summer. As is the case with SPX, the next potential band of solid support for COMP is about 10% below current levels, near 20,000.

The markets are now facing the prospect of “higher for longer” on several fronts, and none of them are good. In just the last few weeks, the outlook for energy prices, inflation, interest rates and even geopolitical disruption is suddenly higher for longer. At the Risk Hotel, you can check out anytime you want, but you can never leave. In that sense, risk is like matter, you can’t get rid of it; it just takes on different forms. Reducing exposure to stocks can only be done by taking on other risks such as credit risk, interest rate risk and the risk of opportunity lost by missing out on a market rebound. During periods of heightened volatility, portfolio hedges are more expensive, so, the risk of wasting money on a hedge that proves to be unnecessary is increased.

The message now is, “take it easy.” You should probably have a talk with your financial advisor. Don’t do anything drastic. In his Wall Street Journal article “How to Trade the War: Avoid Gimmicky Strategies and Overheated Assets” last Friday, Jason Zweig presented a useful analogy. He paralleled portfolio changes with getting tattoos and piercings. Little ones are okay, but overly large ones often lead to regret.

So far, the decline has been fairly calm and orderly. Market action in the coming weeks will be driven more by overnight news than by economic data. Any decline in oil prices will probably be met with a celebratory rally in stock prices. One of these nights, we’re likely to get either very good news or very bad news. A little good news could go a long way, but a lack of good news is probably going to be bad news. In the long run, the longer we go without good news, the more the compounding bad news will weigh on the stock market.

The weekly update on initial unemployment claims on Thursday will likely be the most significant economic report this week.

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market