This is a seasonally weak time of year. The US economy remains strong. But bonds are under pressure, sending yields even higher, with 5% riskless now the norm. That’s giving stocks a run for the money, explains Kenny Polcari, Chief Market Strategist at SlateStone Wealth.
In case you missed it, the US economy continues to show strength, the labor market remains strong and inflation expectations remain front and center. So, the bond market came under pressure as selling intensified and that sent Treasury yields higher.
The 10-year is now yielding around 4.3%, the 2-year is at 4.9%, and the 3- and 6-month bills are yielding 5.5% Twelve-month CDs will also give you around 5.5% (all riskless trades and all offering opportunities to lock in attractive rates).
Meanwhile, mortgage rates are now averaging 7.37%. And stocks? They continue to get beaten up. Investors, traders, and algo’s are suddenly now recognizing that 19X forward earnings in a RISING rate environment might just NOT be what the doctor ordered
The Dow was recently down 3.25% from its most recent high. The S&P was off 5.1% and the Nasdaq and Russell were both down 7.6%, while the Transports were off by 6.2%. This is not out of line. This is not a reason to change your mind on stocks. But it is a reason to make sure you are comfortable with being a bit uncomfortable.
Again, a 10% decline would be considered “normal” in regular trading, so the indexes are still acting normal. But we all know that individual names can already be in correction territory – that would be a greater-than-10% move lower.
Now look, what did I tell you in July? I told you that we were entering a usually “weak time of the year.” I defined that by saying that I expected it to be August/September/October, and so far that is what we are seeing
That’s also why I continue to tell you to be patient. Aren’t you glad you weren’t one of those FOMO buyers? Aren’t you glad that you stayed in the game, you reinvested your divvies and you added new money to the underperforming sectors in your portfolio vs. the “sexy” stretched names in your portfolio?
Analysts, strategists, and some economists are “sharpening their calculators” and adjusting equity models to reflect rising interest rates as well as higher rates for longer. The idea that the Fed is readying to CUT rates has now been taken out of the model (for now).
As for the S&P 500, we just breached short-term support. That should leave us in the 4,290/4,450 trading range (intermediate support and short-term resistance). We want to see the index test intermediate support and hold. But we also want to see sellers shake the branches a bit to see who falls out.
So, do not make emotional decisions. Get comfortable with being uncomfortable. If you are anxious, put new money into Treasuries or just leave it in the money market fund that is paying you 5%. There is no reason to have to do anything until it feels comfortable for you.
