Investors are just a few trading days into a month that’s living up to its reputation for volatility and many expect there will be more choppiness before the year closes out. This week alone, the Dow Jones Industrial Average notched its worst day since March, and dipped into negative territory for the year . The S & P 500 is teetering atop crucial support at 4,200. And, all three major averages are down for the quarter. Higher yields, worries about the consumer, government dysfunction and a too-strong dollar continue to weigh on equities and investors don’t see any relief in sight. In focus is the 10-year U.S. Treasury yield, which has jumped to multi-year highs and appears to be headed above 5%, it’s highest since before the Great Financial Crisis. Many investors expect that could be the capitulation event equities need to bottom out before rebounding. But others worry yields at those levels could continue to reverberate through the economy in coming quarters even if the pace of the increase eases. “If you get down to five and a quarter all hell’s gonna break loose,” Rob Ginsberg, managing director at Wolfe Research. “The financial system is not built for those types of rates.” Rising recession risk Rising yields have increasingly weighed on equities over the past couple months. The yield on the 10-year Treasury has spiked sharply to about 4.8% this week, about 1 whole percentage point above where it was in mid-July at around 3.7%. Over the same time period, the S & P 500 has slid more than 300 points. US10Y YTD mountain 10-year U.S. Treasury Part of what’s driving yields higher is the supply of Treasurys needed to contend with greater government debt — an issue that was highlighted by the Fitch downgrade in August . That spurred concerns of an impending debt crisis and a recession from investors such as Ray Dalio, who recently said he does not anticipate the Federal Reserve getting back to its 2% inflation target “without a lot of pain.” Elsewhere, JPMorgan Chase CEO Jamie Dimon said it would be a “huge mistake” for investors to believe a stronger U.S. economy could continue for years. Wolfe Research’s Ginsberg expects that means a lot more pain ahead for equity investors. The technician anticipates a drop as low as 3,800 or 4,000 — with a “small probability” the index retests its October lows around 3,500. Ginsberg doesn’t hold the consensus view that stocks can pull off a powerful rally in November and December. Best case, the index could rebound back to where it is now. “You’ll probably see a pretty nice rally in bonds. But I don’t think that move lower in yields is going to be taken as a positive for the macro environment, and for people to aggressively buy stocks,” Ginsberg said. “There’ll be a reason why bonds are rallying. And that’s because things are breaking and the economy is slowing.” But other market participants disagree. B. Riley Financial’s Art Hogan said the rise in bond yields thus far has more to do with data pointing to a strong economy. As investors worry less about the Fed’s monetary policy, he argued, they’ll recognize that better economic data will point to stronger top line revenues and drive earnings for businesses. In other words, good news will return to being good news. Read more in CNBC Pro’s Quarterly Investment Guide Danger, ‘pothole’ ahead: Economic growth slowing to a near-halt to end the year Oil prices and the dollar surged in the third quarter. These ETFs can help you reset your portfolio Bitcoin has limited upside in the fourth quarter as the possibility of higher rates casts a shadow over crypto After a rough third quarter, here’s what to expect from technology stocks into the end of 2023 These underperforming stocks are due for a fourth-quarter comeback, according to Wall Street Supply cuts from Saudi Arabia remain price drivers for oil heading into the fourth quarter “To me, I think the signal of the 10-year is giving us is not that there’s a recession in front of us,” Hogan said. “The signal to me is trying to signal that the economy is actually in better shape than we thought it was two months ago.” In fact, it won’t take much for the positive narrative to start to take hold in markets, Hogan said. He anticipates just three sequential positive economic reports — including Friday’s jobs report — could open the door to more bullish sentiment. “If you get a trifecta of better-than-expected news, I suspect that might break the fever of the parabolically higher Treasury yields, and it won’t take much of a pause in the ascent of Treasury yields for an oversold market to start to find some sponsorship,” Hogan said. “And I think that’s sort of the path forward here.” Looming government shutdown But there are other risks in the fourth quarter. Notably, the ouster this week of Republican Kevin McCarthy as House Speaker raises the risk of a government shutdown in the fourth quarter if a deal isn’t reached by Nov. 17. That could weigh on market sentiment at a time when rising government spending has triggered concerns of a debt crisis. “All other things equal, the leadership change raises the odds of a government shutdown in November, though with several weeks left until the deadline, many outcomes are possible,” said Goldman Sachs chief economist Jan Hatzius in a Tuesday note . Even so, many are still hopeful stocks can rally into year-end if they climb the wall of worry they have ahead of them. Hogan anticipates the S & P 500 could rise to 4,800 by year end, about 13% above where it is currently. Fairlead Strategies’ Katie Stockton said it won’t take much of a pullback from the 10-year yield for a stock market bounce from oversold conditions — something she anticipates can happen very soon. Elsewhere, Bank of America’s Stephen Suttmeier expects a capitulation event in October will precede a year-end rally. At least seasonally, November and December are historically the No. 1 and No. 3 best months for the S & P 500, according to the Stock Trader’s Almanac. The Almanac’s Jeffrey Hirsch expects October will be the “bear killer” that marks the end of the worst six months of the year. “I’m expecting the market to turn around after this bout of weakness that we had, that we were expecting, and for us to climb towards new recovery highs — if not all-time — towards year end,” Hirsch said.
