Artwork Cashin expects extra inventory ache as merchants worry the Fed will lose management of the bond market
Long-time trader Art Cashin told CNBC on Friday that investors should prepare for a period of volatility in the stock markets as Wall Street digests soaring bond yields.
“You have to be very careful. There is a fine line. When the market starts to believe that the Fed has somehow lost control of where the bond market is going, all this idea of a ‘taper tantrum’ is going to come up,” the Der said UBS’s Director of Floor Operations said about “Squawk on the Street”.
Cashin’s comments on Friday came early during a volatile session, with 10-year government bond yields above and below 1.5% and the Nasdaq Composite fluctuating between gains and losses. The Dow Jones Industrial Average fell over 275 points, or 0.88%, but was below its session lows.
“If the market starts to believe that the Fed is out of control and the Fed is feeling it, there is a chance the Fed is overreacting,” said Cashin, who has spent roughly six decades on Wall Street. “We are in a potentially volatile period, possibly for the wrong reasons.”
Markets sold strongly on Thursday, led by the 3.5% decline in the Nasdaq on its worst day since October 28. The return on the 10-year course was briefly above 1.6% on Thursday, its highest level in just over a year and about 0.5% higher than levels in late January.
When rates rose in early February, Cashin said that based on historical standards, it was a sensible move for investors who believe in a strong economic recovery from the coronavirus pandemic. However, he has believed those who see inflation fears, which are also helping returns to rise.
“You know, the real estate boom is evident. We have lumber at an all-time high and copper that is used in the plumbing and whatever is rising really fast so we’re starting to see some inflationary pressures on the whole reopening aspect,” said Cashin.
Growth stocks, especially in the tech sector, are believed to be the most vulnerable to higher bond yields as low borrowing costs have helped the business grow. The returns move inversely to the prices.
Cashin said investors should watch the tech-heavy Nasdaq when trying to manage volatility. The index traded around 13,200 on Friday. He said 13,000 is an important short-term level of support.
“That was the intraday low on Tuesday. You stayed on the washout sale above it yesterday. That helped some of the late buys to be made,” Cashin said. “If you went downstairs and hit that, I’d be holding onto my seat belt.”
Correction: This story has been updated to reflect Cashin’s belief that 13,000 is a support level for the Nasdaq.