Investors looking for something to blame for the recent stock market crash need only look to the bond market. The major US stock averages recorded their worst weekly performance of the year last week, with the S&P 500 losing 2.7%. The Dow Jones Industrial Average and Nasdaq Composite lost 3% and 3.3%, respectively. Those losses come as yields rise due to hotter-than-expected inflation data, along with some Federal Reserve officials reiterating that interest rates can stay higher for longer. if inflation persists. On Monday, the yield on the 2-year US Treasury note hit a peak of 4.8% and hit its highest level since 2007 before falling back from those levels. “The recent reset by the stock market is more like a by-product of higher interest rates, rather than a [simple] JC O’Hara, director of market engineering at Roth MKM, said in a note to clients on Sunday. “Overall, we believe this pullback is orderly for the stock,” he added in his note. However, higher interest rates are becoming a big factor again.” With this recent trading action, market technicians are looking at interest rates as the main catalyst for the stock going forward. Mount US2Y YTD Two-year yield in 2023, BTIG chief market technician Jonathan Krinsky in a Sunday interview noted that the inverse correlation between interest rates and equities remains intact for clients. That correlation was evident on Monday. The Dow, S&P 500 and Nasdaq rose on the day as Treasury yields fell Stocks or bonds: Who’s right? to end 2022 in The S&P 500 had its best January since 2019 with a 6.2% gain, while the Nasdaq Composite recorded its best January since 2001 with a 10.7% gain. month up 2.8 percent But enthusiasm waned in February, with the three major averages ending the month lower. 2.2% and 0.9% respectively in February. The Dow is down 3.4% this month and is down year-to-date. Yields on 2-year and 10-year bonds have been the opposite, rising in February after sliding in January. US10Y YTD 10-year mountain in 2023 This back and forth raises questions investors should listen to listen to anyone: the stock market or the bond market. Roth MKM’s O’Hara said the latest economic data could help make that decision. The core personal consumption expenditures price index, a preferred inflation gauge for the Federal Reserve, exceeded economists’ expectations for January. That raised concerns that the central bank may have to keep interest rates high for longer than some market observers hope to successfully tame inflation. “Inflation, measured through the break-even points that affect government bond yields, has returned as the boggart the stock market assumed was dead,” O’Hara said. Each of the three indexes closed Friday down 1% or more according to the data. In contrast, yields on 2-year and 1-year notes, along with 6-month and 3-month Treasury notes, spiked. And, while interest rates on long-term securities like 10-year and 30-year bonds have yet to break through fall 2022 peaks, strategist John Roque thinks those levels could soon be broken. broken. “Without the benefit of clairvoyance, I think we’ll soon start hearing consumer complaints about ‘higher prices’ because there’s almost no way on green earth of God forbid the price you pay for a pizza will drop to Roque levels, said the head of technical strategy at 22V Research.The stock market is viewed by market participants as expecting the Fed to lower successfully heat inflation while avoiding a recession, a scenario known as a “soft landing.” The fixed-income market is seen as more pessimistic about the future of the economy, but O’Hara “The stock markets seem to have realized that the bond market might be right about inflation,” said O’Hara. higher for a longer time.” “The pressure to raise interest rates at the end of the period had a negative impact on the stock market. Bonds continue to worship inflation while the stock market begins to question whether their god of soft landing really exists.” ‘We’re buying bonds’ Some investors consider Recent market action is a buying opportunity — not stocks. Steve Eisman, an investor best known for calling and profiting from the 2007 housing crisis, said on Monday that trading loved His favorite in the current investment landscape is Short-Term Treasuries on CNBC’s “Squawk Box.” He also said he’s “laddering” Treasuries, referring to a portfolio-building strategy. “We’re buying bonds,” said Eisman, a senior portfolio manager at Neuberger Berman. bonds, especially Treasuries. “Just risk-free Treasuries at 4.8[%] is a nice place to be. Look, customers have different goals. There’s no shame in putting some of your client’s money in 4.8%.” – CNBC’s Yun Li and Michael Bloom contributed to this report.