US stocks fall as rate hike looms and investor sentiment deteriorates

Stocks in the United States fell last week.

The Standard & Poor’s 500 Index had started last week on a record-breaking note. It rose 0.6 percent on Monday to reach a new high of 2117.39.

It was mostly downhill after that, however. It fell back on Tuesday and Wednesday, edged up on Thursday, then fell 1.4 percent on Friday to finish the week down 1.6 percent.

Stocks declined on Friday despite a report from the Labor Department showing that employment rose by 295,000 in February, pushing the unemployment rate down to 5.5 percent, the lowest in almost seven years.

The employment report, though, suggested that the economy is strong enough for the Federal Reserve to raise interest rates soon, a move that would reduce the attractiveness of equities. Following the report, fed funds futures on the Chicago Mercantile Exchange priced in a 21 percent chance the Fed would raise rates at its June policy meeting, up from 16 percent late on Thursday.

Accordingly, US Treasuries also declined last week. The 10-year yield rose to 2.24 percent on Friday, its highest so far this year, after having bottomed at 1.64 percent on 30 January. The 30-year bond yield rose 25 basis points last week to 2.84 percent, extending the rise since January to 62 basis points.

While the employment report on Friday had an obvious impact on markets, sentiment in the stock market had in fact been weakening even before it. A survey by the American Association of Individual Investors showed that the percentage of investors who were bearish rose for a second consecutive week to 23.4 percent in the week ended last Wednesday. In contrast, the percentage of investors who were bullish fell for a second consecutive week to 39.8 percent.

Despite the deterioration in US investor sentiment in the past two weeks, it remains relatively bullish. Based on the AAII survey, the percentage of bearish sentiment last week remained significantly lower than the long-term average of 30.3 percent while the percentage of bullish sentiment was slightly higher than the long-term average of 38.9 percent.