With 2 months remaining in 2023, stock and bond indexes are mixed.
- The Dow and the Russell 2000 are down.
- The S&P 500 and the Nasdaq are up.
- The Equal Weighted S&P 500 index is down (5%).
- The Bloomberg Barclays Aggregate Bond Index is down (2.49%).
Prior to the end of July, all of the above were in the positive. Why the change?
Interest Rates!
The 10-Year US Treasury on July 31st yielded 3.95%. Last Friday the yield closed @ 4.845%.
Inflation has moderated, corporate profits are holding up, employment has remained strong, the Fed appears to be either on hold or done. Logic would assume interest rates would have either held tight or moderated.
The housing industry has certainly felt the interest rate impact with 30-year mortgage rates hovering around 8%. The automobile industry is now starting to feel the pinch of higher rates.
Where do we go from here? Will stocks gain traction? Will interest rates moderate moving bonds higher?
Let’s begin with bonds. If interest rates move noticeably higher, bonds will continue to lose value and stocks will also be negatively impacted. If the economy accelerates from here, rates will most likely increase.
With the current level of rates, most expect the economy to slow and interest rates to move lower. Higher rates typically, eventually, translate into a slower economy.
Using that logic, bonds appear to be a favorable asset class to invest going forward. If rates stay range bound, investors should receive a steady dividend and principal value. If rates move lower, treasury investors should receive a steady dividend with an increasing principal value.
For stocks, it appears corporate profits are holding up well. For this earning season, so far, 76% of companies reporting have beaten estimates. This week brings 30% of the S&P 500 companies reporting, including Apple, McDonalds, Pfizer, AMD, Starbucks and more.
Many prognosticators are forecasting corporate profits to accelerate going into 2024. If that happens and interest rates moderate, stocks can certainly perform well.
As we continue to transition from rock bottom interest rates to whatever turns out to be “normal”, volatility will be front and center. The good news, bonds are now attractive and most stocks are not overly valued.
Patience and diversification are paramount in this environment. The clouds, in-time will fade with many sunny days ahead!
The Week Ahead
The Federal Reserve will meet this week to decide if they will either hold interests steady or raise and additional .25%. Most believe the Fed will hold. Chair Powell’s comments about the future of rates, as always will be front and center.
30% of the S&P 500 companies will report profits. We expect overall reports to be favorable. As always, we are interested in what CEO’s are saying about the next several quarters.
On Friday we’ll hear the October Jobs reports. September’s report came in much stronger than anticipated. Moderation would be welcome.
Just around the corner is the next round in dealing with the government spending package. I’m sure you recall the budget was simply pushed out 45 days. In mid-November we’ll see if the new speaker of the House can get this done. Hopefully yes, so we can all move forward.
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The opinions presented in this blog are for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Individual circumstances vary. Please see a financial profession regarding your own situation.
Dividends are not guaranteed, and the dividend yield may fluctuate.
Bonds are subject to availability and market conditions; some have call features that may affect income. Bond prices and yields are inversely related: when the price goes up, the yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity.
Diversification does not assure a profit or protect against loss and cannot guarantee that any objective or goal will be achieved.
