Is the Party Over? | April 1, 2022

AUTHOR: Jason J. Roque, MS, CFP®, APMA®, AWMA®
TITLE:       Investment Adviser Rep – CCO
TAGS:   S&P 500, NASDAQ, Rates, Inflation

Markets flashed a recession signal last week. Is the party over or do we still have room to grow?

Monday   S&P 500 0.71% | NASDAQ 1.31%

The markets started the day and week in the green, but quickly faded as the 5-year and 30-year yields inverted. This means you could get more interest from a 5-year bond than a 30-year bond. This leads to fears of a recession. The key rate that would forward project a recession is the 2-year vs the 10-year (foreshadow). Markets bounced back late to end in the green as investor sentiment continues to support market valuations.

Tuesday   S&P 500 1.23% | NASDAQ 1.84%

Markets rose, but it was in spite of some poor performance out of key categories. The Energy complex struggled as the shutdown of Shanghai, due to COVID testing, is taking a toll on demand. Optimism over a stock split in TSLA strengthened sentiment late in the day.

Wednesday   S&P 500 0.63% | NASDAQ 1.21%

Russian demand for energy payments in rubles caused concern as sanctions have attempted to force a reduction of ruble use. Additionally, a classic signal for a future recession (6 to 24 months out) triggered. The 2-year vs the 10-year treasury rates inverted. The meaning can be seen that rate of growth beyond 2 years will be lower than current growth rates.

Thursday   S&P 500 1.57% | NASDAQ 1.54%

Oil prices slid as another round of Ukraine/Russia talks gets underway. The US also announced a release of 1M barrels of oil per day from strategic reserves. Initial jobless claims rose last week and was an ominous foreshadowing of tomorrow’s job report.

Friday   S&P 500 0.34% | NASDAQ 0.29%

Jobs Friday! Job data impressed as the unemployment rate fell to 3.6% and 431K nonfarm payrolls were added in March. The all-important participation rate moved a notch higher to 62.4%. So why didn’t the markets soar? The strength of the job market means the FRB is more likely to do a 0.50% rate hike in May. This pushed the 2-year yield over the 10-year yield again. As a classic sign of a coming recession (within the next 2 years) markets took the signal hard.

Conclusion   S&P 500 0.06% | NASDAQ 0.65%

Though the intra-week volatility was elevated, markets ended the week slightly unchanged. The Nasdaq edged higher than the S&P 500 as bonds flashed a classic recession signal for the future. Inversion of the yield curve happens more than just leading into a recession; however, it precedes every recession. The last two times it has happened, the S&P 500 has grown pretty substantially for the 12 months. So, even if the signal is right, the party is not quite over. Think of it as last call…

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