The markets edged lower last week as the Dow (-0.4%), NASDAQ (-0.8%) and S&P 500 (-0.7%) finished the week lower, despite the Dow and S&P 500 setting record highs last week. Taxable bonds continued their slide, losing about 0.3% - 0.4%, and tax free muni bonds also fell about 0.5%.
The stock and bond markets continue to react adversely to the rise in interest rates, as the 10-year Treasury (a “standard” measure of interest rates) continued its rapid rise, eclipsing 1.7% and reaching its high since January 2020. The rise in interest rates is occurring “naturally”, as the value of Treasuries is dropping and the interest rates are rising accordingly. Thus, the rise in rates is NOT because of the Fed – in fact, the Fed said they don’t expect to raise rates until at least 2023. In short, investors are selling Treasuries because they fear that inflation is lurking out there, and that causes those rates to rise.
Let’s step back and look at it logically, though. Interest rates were at about 1.6% immediately prior to the pandemic and were at historical lows. They just happened to drop further in 2020 because of the pandemic, and even after the recent rise, they are still at historic lows. Heck, rates were over 2.5% (historic lows at the time) less than two years ago! Once interest rates stabilize, we can expect the focus to be back on the strengthening economy and corporate earnings, and the markets should behave more rationally and with less volatility.