Rough Start | March 25, 2022 - Financial Future Services

TITLE: INVESTMENT ADVISER REPRESENTATIVE

TAGS: S&P 500, NASDAQ, Yield Curve, FRB, Rates, Nvidia

The monitor flashed quite a bit of red last month. But the market was seemingly undeterred and pushed higher anyway. Should this continue?

Fixed Income: 2-Yr Treas Yield 3.91% | 10-Yr Treas. Yield 3.91%

The bond markets saw volatility in August as questions mounted about an impromptu rate-cut by the Federal Reserve Bank (FRB). The most meaningful fall came at the beginning of the month. The perceived weakness in jobs data prompted a move to safety as expectations increased for a rate cut. At the time, people were calling for 0.50% before the September meeting. Cooler heads prevailed and the market is now expecting a 0.25% cut in September. The more impressive data point over the last month was the parody reached on the last trading day of August. This was the first time the two closed at parity since July 5^th, 2022! It is still to be determined if rate normalization (higher rates on longer dated fixed income) will prevail. It is a good sign that the anticipated rate cuts are making a large enough impact for us to reach parity.

Equities: Dow Jones 1.76% | S&P 500 2.28% | NASDAQ 0.65%

The market moves that led to a strong month for fixed income signaled weakness for the equity markets. The Nasdaq lost almost four percent in the first week of the month to spend the next two weeks crawling out of that hole. The last week of the month saw the index continue to falter. Strong earnings from bellwether Nvidia (NVDA) was not enough to bolster confidence. Investors seemed to come to the realization that the FRB will likely take a slow methodical path towards rate reductions. That path did not buoy equity markets. In a retracement of the July trades, other major market categories failed to capitalize on weaker large caps:

S&P 400 (Mid Cap Index): 0.21%

Russell 2000 (Small Cap Index): 1.59%

Conclusion

It was, in all, a good month… That’s for two reasons, 1) fixed income made up ground that equities lost, 2) the spread between the 2-yr treasury and the 10-yr treasury reached parity. Something of a signal that the soft landing the FRB is looking for has been achieved. Generally, a recession (that would be evident by this point) would have caused a normalization of the curve.

A Look Ahead…

We see two key reasons to expect further volatility in equity markets during the next month:

The 22.40 price to earnings (P/E) ratio for the S&P 500 will need to narrow further before markets can start a real rally.
September is notoriously the worst month of the year for equities:
- 2023: 5.35%
- 2022: 8.92%
- 2021: 4.89%
- 2020: 4.12%
- 2019: 2.32%

Some logic would point to the high frequency in recent years being a signal that volatility should weaken in September. I find that unlikely given the elevated P/E referenced.

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Markets have now gained for two weeks after a rough start to the year. Should the growth continue?

Monday S&P 500 0.04% | NASDAQ 0.40%

Markets started on shaky footing and found its way lower for the day. The markets were reacting to comments from Federal Reserve Board (FRB) Chair Powell. He stated inflation is running much higher than they would like, and they will take aggressive actions to combat it. He referenced 0.5% hikes as an option. Additionally, oil prices spiked as a peaceful resolution in Ukraine seemed to become less likely over the weekend. The net impact is additional concern for inflation for the FRB. The S&P 500 ended up clawing back to even to close the session.

Tuesday S&P 500 1.13% | NASDAQ 1.95%

Markets came out punching on Tuesday morning. Word that Ukraine was making ground reclaiming neighborhoods helped sentiment. Oil prices softened and the 10-year treasury yield jumped. Over the last 3 months the yield has risen .88% reflecting the stress created by the FRB policy around rates.

Wednesday S&P 500 1.23% | NASDAQ 1.32%

Markets opened in the red and stayed there all day. Sentiment was sour at the open as new home sales continued to slow. More impactful, however, was a larger than expected draw down of oil supplies for the US. Elevated concerns of an oil shortage ended up pushing oil prices above $115.

Thursday S&P 500 1.43% | NASDAQ 1.93%

Services and manufacturing both showed signs of strengthening. Additionally, jobless claims came in at a historically low level. All of these would point to a more hawkish FRB, but markets climbed. In part, oil retreated as WTI Crude came in around $111. While equity markets rallied on oil’s slide, bond markets tipped lower as rate increase odds rose.

Friday S&P 500 0.51% | NASDAQ 0.16%

Both consumer sentiment and pending home sales softened. Setting markets in the wrong direction Friday morning. The S&P managed to claw its way to positive territory. This was a statement of investor sentiment as opposed to data. Treasuries continued the sell off that has been underway for a few weeks now.

Conclusion S&P 500 1.79% | NASDAQ 1.98%

The markets climbed for the week as investor sentiment seems to be improving. Days starting in the red and investors buying into the close is pushing markets to the green. This sentiment is a clear message from investors that status quo from the global environment will still spell growth for the US economy.