Bloomberg Intelligence's 'Equity Market Minute' 1/13/2023

Gina Martin Adams discusses the bond market's growing comfort with the idea of the Fed pausing or pivoting its monetary policy in 2023. She highlights the significance of the two-year Treasury yield crossing under the Fed funds rate, a reliable indicator of changes in monetary policy. However, she notes that stock valuations suggest the market may already be anticipating these changes. The S&P 500 is trading above its typical forward earnings ratio, implying expectations of a CPI decrease. Given this context, a moderate Fed policy shift may not significantly boost equities.

What recent development in the bond market suggests a potential change in Federal Reserve policy?

• The ten-year Treasury yield crossing above the Fed funds rate

• The ten-year Treasury yield crossing under the Fed funds rate

• The two-year Treasury yield crossing under the Fed funds rate

• The two-year Treasury yield crossing above the Fed funds rate

What is the historical significance of the two-year Treasury yield crossing under the Fed funds rate?

• It suggests an increase in inflation

• It signals potential changes in monetary policy

• It predicts a stock market crash

• It indicates a stable monetary policy

What does the current S&P 500 forward PE ratio suggest about market expectations?

• The market expects no change in CPI

• The market expects CPI to rise above 5%

• The market expects CPI to remain high

• The market expects CPI to fall to 0 to 2%

How is the S&P 500 currently trading compared to expected levels given the high CPI?

• Above 17 times forward earnings

• At 20 times forward earnings

• At 15 times forward earnings

• Below 15 times forward earnings

What is the implication of the current economic backdrop for equities?

• Equities are expected to remain stable regardless of Fed policy

• A moderate Fed policy shift may not be enough to boost equities

• Equities are expected to decline sharply

• A moderate Fed policy shift will likely boost equities significantly