The State of the Rotation Trade

Crude Tops $100, Sinking Stocks and Treasuries

By Joe Mazzola

Stocks took another dive early Monday after crude oil prices surged above $100 per barrel for the first time since 2022 and market volatility spiked. Hedging activity ramped up, sending the Cboe Volatility Index (VIX) above 30 for the first time since last April's tariff-fueled leap, and sectors like industrials and financials closely tied to economic growth led early selling. Rising VIX suggests choppier trading ahead, and there are signs that hedge funds may be betting on further pressure as conflict continued and Gulf countries reportedly reduced oil production.

Beyond crude and VIX, the week ahead includes Wednesday's February Consumer Price Index and Friday's January Personal Consumption Expenditures, or PCE, prices—the Fed's favored inflation metric. None of these reports, along with Friday's job openings data, will include any impact from the war. On the corporate side, earnings are light this week, but Oracle (ORCL) tomorrow afternoon could serve as a tech barometer, and Adobe (ADBE) offers another software check Thursday.

On Friday, major indexes dove after crude oil spiked 35% last week and the government reported a surprise February U.S. jobs decline of 92,000. While the data hurt markets Friday, crude and war remain the primary drivers. A test of the November S&P 500 Index (SPX) low near 6,550 seems probable, which would mean falling below the 200-day moving average of 6,582, a line the index hasn't dropped under since May. "Any stability that we might find in oil prices lends stability to the equity market," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research (SCFR), in a podcast Friday. "In the meantime, we're seeing incredible swings."

Three things to watch

Earnings vie for prominence: The war temporarily distracted Wall Street from earnings when it ultimately could have a big impact. Margins are at risk due to rising energy costs, though transports might be the most obvious companies affected. The cost of oil and natural gas seeps into almost every industry. The thing to watch heading into first quarter earnings next month is whether analysts and companies pare forecasts due to the war and a weak jobs market. FactSet forecasts 11.5% earnings growth for the first quarter and 15% for the full year. Keep those in mind. A dip between now and April would likely indicate companies and analysts expect energy prices to take a bite. Consumer discretionary could be a canary in a coal mine, with many companies in that sector exposed to higher energy costs. United Airlines (UAL) CEO Scott Kirby said Friday that rising fuel prices will have a "meaningful" impact on the company's financial results this quarter, CNBC reported. "The spike in oil prices suggests markets believe the conflict could last longer than initially expected," said Michelle Gibley, director of international equity research and strategy at SCFR. "Keeping production going is important. Even if the war ends quickly, if output is shut in or wells are capped, ramping output back up could mean the impact of higher energy prices lasts longer than the war."
Treasuries up for a bid: The week ahead includes a handful of Treasury auctions that could help set direction for yields. A 3-year note auction tomorrow and a 10-year note auction on Wednesday could be the most influential. They're the first major auctions since the war began, and weak demand—if that's the case—might suggest investors expect to be paid higher yields to hold U.S. debt amid rising inflation fears. It's unclear how the poor February jobs data might play into auction demand. On the one hand, rising inflation worries could have investors holding out for higher yields. On the other, evidence of a weakening economy might make them more eager to scoop up debt at current levels. "The market continues to grapple between the inflationary shock from the war in Iran and higher oil prices and the potential slowdown in growth," said Cooper Howard, director of fixed income research and strategy at SCFR. "The risk of higher inflation is winning out and pushing rates higher. There are many possibilities with the war but going forward, we don't expect too much downside on longer-term rates."
Are homeowners feeling less "locked in?" Few signs have emerged that the recent slide in mortgage rates has encouraged existing homeowners to let go of their ultra-low COVID-19-era rates and enter the market, which would provide much-needed supply. A supply scarcity has kept prices elevated and sales weak. Investors will get a fresh look at the housing market this week, when data on existing home sales comes out Tuesday. On Thursday, home builder Lennar (LEN) will report quarterly earnings, and data on housing starts and building permits is due. Average mortgage rates have sat below 6.25% for the past two months, and in late February briefly dipped under 6% for the first time in more than three years. Yet in January, existing home sales fell 8.4% from the previous month to 3.91 million units, the lowest level in more than two years. Extreme weather was likely partly to blame for that, but the Briefing.com consensus for February existing home sales is worse: 3.88 million units.

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