11/2/2018 Weekly Update: The Week thatWas
by Zach Marsh on Nov 2, 2018
S&P 500 +2.40%
10 Year Treasury -0.60%
Weekly Update: The Week that Was
The stock market went on another wild ride this week. Monday, the S&P 500 touched an intraday low at just about 2600. At that low point, the S&P had fallen over 11% for the month of October. However, the market bounced significantly from that intraday low and, at the high today, was up over 5.8% from the Monday low. From Tuesday through Thursday the stock market managed something it hadn’t done since September 20th, close higher for 3 consecutive days.
Today, the market rally stalled in large part due to the unemployment numbers released by the Bureau of Labor. After the release, interest rates began to rise on the back of higher employment and higher wage growth. The rise in interest rates sent the stock market falling rapidly from its highs. The intraday market reversal seems to complicate the chances for a continuation of the relief rally witnessed mid-week. Should the S&P 500 fail to stay above the 2700 level I would expect the market to attempt a retest of the Monday lows. If this turns out to be the case, I would further expect interest rates begin to ease as dampening market expectations would begin to create a flight to safety, pushing bond prices higher and yields lower.
The trade-off between stocks and bonds has become a bit more complicated lately, which is typical of late stage bull markets. The fairly consistent inverse correlation between interest rates and stock prices has broken down at times this year. During both the market sell-off in February and October interest rates were rising (bond prices falling), while stock prices were falling. Barring the US economy slipping into stagflation ala the 1970’s and early 80’s, I don’t foresee this recent phenomenon having much sustainability. In commodity trading they say nothing cures higher prices like higher prices. Eventually supplies will increase to meet demand. Likewise, either the stock market will get accustomed to higher rates and resume its march higher, or higher interest rates stifle economic growth, ultimately sending rates lower. Either way, the challenges endured by multi-asset, diversification strategies in 2018 should, quite soon, be a thing of the past.
Thanks for reading,
Zach and Dave
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