The Bond Market
This is an enormous week in terms of markets and economic data. On Wednesday, the Federal Reserve will announce their decision on interest rates and then on Thursday, we’ll get the first look at second quarter GDP. The reason we used the word tornado in the title is because we’re seeing it in the bond market. There’s a big battle in the bond market between those two data points. We’ve got the Federal Reserve, which is fighting inflation and to fight inflation, interest rates are pushed higher. The market has all but priced in a 75-basis point rate hike on Wednesday. Then, on Thursday, we’ve got GDP coming out and many market participants expect GDP to be down and that we may be going into or in a recession. When you have GDP falling that brings interest rates down as people buy fixed asset. So, you have higher inflation with the Fed raising rates on one hand, and then interest rates coming down because of fear of GDP slowing, on the other. For the short-term treasury, we’re seeing interest rates for the last month, up 82 basis points. It has moved from 1.56% all the way up to 2.38%. On the other end, the 10-year Treasury has moved from 3.16% all the way down 2.79%. So, you’ve got the bond market really battling over how we need to slow down and pull down interest rates because we’re going into a recession, or the Feds fighting inflation so interest rates have to go higher. All of that won’t be resolved this week, but we’ll get data points on whether or not we’re in a recession. The bond market, which is much larger than the stock market, often can pull the stock market one way or the other and that’s where it kind of spreads to the rest of your investments. Whether or not we are in a recession, whether or not the Fed is fighting inflation, those two data points will come out strong this week.
We have been looking for momentum and investor enthusiasm in markets and we finally got that last Tuesday as the S&P 500 had a 2.8% advance, as well as 98% of S&P 500 stocks were higher for the day. That was the strongest reading since January 4, 2019. For us, strong breadth in the market is a signal of recovering demand for equities and it’s something we believe is necessary to turn this market around. Another positive development for the market, as you can see in the chart shown in this episode, is with 21% of S&P 500 companies reporting earnings so far, 75% of companies have beaten analyst earnings targets, and earnings in revenue are tracking to a 5-10.5% increase. It’s a positive sign that we’re seeing investors’ enthusiasm again and earnings growth in the midst of negative overall economic headlines.
On a recent survey done by Bank of America, they surveyed 300 money managers. In that survey, it showed that those money managers are holding around 6.1% in cash right now. That is the highest level since 2001. It also showed that 79% of those managers were bearish on the near-term future. Additionally, margin debt is at its lowest level since 2009. When you get a lot of sentiment like that all together, these signs are typically interpreted to be related to market bottoms. We are not calling a bottom, but maybe this is a sign that inflation will peak, and maybe the worst is behind this.
Last Tuesday marked the highest close for the S&P 500 since June 9th. That momentum carried through the week to Friday, closing at a price of 3,961. That gives us a new resistance level price of 4,000 and a new support level of 3,920. The 50-day moving average of the S&P 500 is currently sitting at 3,919, and we’re starting to see that stabilize. You may notice how that number is very close to our support level. As we see the Fed speak this week and more earnings coming out in the next few weeks, it’s going to be a very important number to keep an eye on.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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