Are we there yet?
Yesterday’s news that the US economy grew at an annualised rate of 4.9% should in theory have been good news for stocks and not so good for bonds. What happened was the reverse, treasury yields fell and so did stock prices. Once again proving that stock markets look forward and not back. Investors took the view that the probability is the economic news will get worse from here not better, in other words, this in the short term is as good as it gets. It was noteworthy that the 2-year maturing US treasury yield fell again, back close to touching 5%, as the market may be starting to consider when the first cut will come, not when will the Fed hike again. The Vix index rose as did the dollar. The correction in the tech sector continues despite earnings reports that are not on the whole disappointing at the headline level, but some expressed concerns looking forward. There is also something of a case of travel and arrive as the saying goes.
Stock market speculators will also be keeping one eye on the increasing geopolitical backdrop as overnight the United States attacked two sites in eastern Syria, described by the Pentagon as self-defence. The sites US believes were used by Iran’s Islamic Revolutionary Guard Corps and other groups
As we said the other day there feels little to entice investors back into the stock market at present. We wrote a piece a while ago putting several reasons forward why a retrenchment to 4000 for the S&P 500 was plausible, and that’s the level the buyers could get tempted back in. We are not far from there now, just over 2% away. The average US stock in the S&P 500 is down 20% from this time last year. The S&P equal-weighted index is now down over 5% year to date, if that remains the case that will be 2 years on the trot the index will be down, which does not often happen. The sell-off has been broad, just over 25% of the S&P 500 stocks now sit above their two-hundred-day moving average.
Later today we get the release of the core Personal consumption index, which is expected to rise 3.7% year over year. What could tempt investors to start dipping their toes back? Possibly if the 2-year yields fall back below 5%, that would encourage investors to feel greater confidence that interest rates in the US have peaked and the Fed’s next move could be down.