Interest Rates and Market Performance
With the treasury yields spiking higher the past few weeks, we’ve had some questions about higher interest rates and market performance. We looked back from a historical perspective on how the S&P 500 index had performed in calendar years when the yield on the benchmark 10-year treasury note finished the year higher than it began. From 2000-2022 there were ten such years where the S&P 500 posted a positive total return in eight of those ten years. One of the outlier years was last year in 2022, which saw a record jump in the 10-year yield, with the S&P 500 having a tough year. So, even though rates are rising this year, history says that’s not necessarily bad for the markets and is something we’re observing.
Economic Data
When we talk about holding the line, we’re usually referencing a technical line and trying to see if the market can stay above it. A chart in this episode displays the S&P 500, the 500 largest stocks publicly traded in the US. The S&P 500 is the most important equity index in the world. The chart shows how all of last year, the market would rally and then fall repeatedly. That started the term where we had a higher, low beginning this year. The market rallied, and then the market fell and then held at that rising line. Can the market hold this line going forward? Will it be able to continue a new pattern of higher highs and higher lows? Technical data like this tell us what’s happening now, and fundamentals are good for looking at the past. Another chart in this episode shows market performance during earnings season. The last three rallies in the S&P 500 were during earnings season. The micro data core company earnings alone have been very positive. The market had rallied on that positive news only to fizzle when the macro data took center stage. The Macro data we’re talking about is inflation. Everyone knows that inflation has been an issue and that the Fed has been pushing prices down. We’ve passed through another earnings season, and recently the market rallied again just in time for us to receive the macro data. Can this current market line hold as we move from the micro data positivity to the macro, which has been negative over the last 12 months? We will get the jobs data on Friday, inflation data next week, and the week after that, we will have the important Fed decision regarding interest rates. As you can see, we have a lot of macro market data coming at us. It will be very important to see if the market can hold the line and get a good rally to start off the year.
Sector Realignment
The global industry classification standard oversees realigning the S&P 500 and is scheduled to do a realignment on March 17th. Over a trillion dollars’ worth of money will be realigned within the 11 sectors of the S&P 500. The money is not coming or going; it’s just being realigned within the same 500 companies, but how does that work? Some credit card companies currently in the tech sector are moving to the financial sector. These kinds of moves make more sense because credit card companies deal mainly with financials. Some companies are moving from the tech sector to the industrial sector, and some big box and discount retailers are going from the consumer discretionary sector to the consumer staple sector. These moves will align the US more with the rest of the world. The tech sector is going to lose about 3%, making up 22% of the overall sector for the S&P. Financials are going to get a 3% bump, moving up to around 15% overall. Compared to the rest of the world, in the most tech-heavy places like Japan, their tech sector only makes up about 18% of their total. In places like Europe and China, their tech sectors comprise around seven and eight percent. It is interesting that we were so tech-heavy before this realignment.
Forced Trading
The sector realignments won’t change anything but will create hundreds of billions of dollars worth of forced trades. We have a lot of rules-based investing in this world. It’s not as much as one person picking one stock and buying them. They may want to own Visa, but if Visa is no longer in the tech sector, they must sell it. If you own a financial sector, you have to buy it. There’s no human decision behind that. That’s just hundreds of billions of dollars worth of forced trading that will happen in the next couple of weeks, likely around March 16th. It will make the market look a lot more volatile and look like there’s a lot more activity. There will more than probably be a lot of press around the record volume that will take place. It’s an important event for those companies going from one sector to another. It is equally as important for the sector managers who own these companies today but won’t own them a week from now. There are a lot of moving parts that will most likely create friction for a few weeks. This is not a recommendation and will not impact a stock long-term or short-term. This is a notation that certain stocks are changing sectors due to rules set by the S&P 500.
Greg Powell, CIMA®
President and CEO
Wealth Consultant
Email Greg Powell here
Bobby Norman, CFP®, AIF®, CEPA®
Managing Director
Wealth Consultant
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here
Ty Miller
Associate Vice President
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC
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