Raymond James Says Stock Market Capitulation Requires Further Credit Spread Widening

Investing.com - The stock market continues to decline, with Raymond James describing it as an “orderly sell-off.” Major indices have fallen about 2% over the past week, with no clear signs of capitulation yet.

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Analyst Tavis McCourt wrote in a report that since the outbreak of war, the energy and utilities sectors have performed notably well, while cyclical sectors have been hit hardest amid rising U.S. Treasury yields and risk aversion.

Raymond James believes that the key to any capitulation moment is not the stock market but the bond market.

McCourt stated, “The stock market will follow the credit market, and the credit market will follow the oil market,” adding that credit spreads have only widened slightly and remain far narrower than levels seen during past stress events, including yen carry trade unwinds and the Russia-Ukraine shocks.

He believes that spreads are “even far from levels consistent with a significant recession in the U.S.”

The firm also warns that the bond market often misjudges during exogenous shocks.

McCourt wrote that the initial bond movements since the COVID-19 pandemic “are almost always completely wrong.” He cited the early stages of the Russia-Ukraine war, when the 10-year Treasury yield fell 23 basis points but later rose as much as 300 basis points in late 2022.

The current rise of 27 basis points in the 10-year Treasury yield may also be premature.

McCourt added that the cyclical economy is “significantly improving,” noting that orders for durable goods are accelerating and consumer spending remains steady.

However, before the situation in the Strait of Hormuz stabilizes and credit spreads widen significantly, he advises investors not to expect a full market capitulation.

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