Stocks and Bonds Fall Sharply on Strong Economic Data

The Dow (-1.6%), NASDAQ (-3.2%), and S&P 500 (-2.4%) fell sharply for the week, while taxable bonds and non-taxable municipal bonds fell even sharper, losing about 1.5% - 1.7% of their value.  The 10-year Treasury bond yield eclipsed 5% at one point last week, climbing 0.21% and settling in at 4.92%.  The rise in the 10-year bond yield has caused mortgage rates to approach 8% for the first time in over two decades.

Yes, it is very counter intuitive that the markets fell sharply last week in the face of mostly good economic news.  Corporate earnings season begun and has mostly brought earnings that have exceeded expectations, except for Tesla’s weak earnings report last week at plunged 40% compared to last year.  Economic data was very strong as retail sales, industrial production, and housing starts all exceeded expectations, wrapping up a stellar Q3 for the US economy.  Conversely, the Leading Economic Indicators (LEIs) index fell for the 18th consecutive month and building permits (a leading indicator) also fell sharply.  The markets fell on the strong economic data, because investors are concerned that the Fed will maintain higher interest rates for longer to combat inflation, and an extended period of high interest rates typically causes the economy to slow down. We just haven’t seen it yet.  So, while the strong economic data seems attractive, it’s also rear-looking, while forward looking indicators have been lousy, foreshadowing signs of economic weakness ahead.  High interest rates having an expected adverse impact on the economy, and has been providing downward pressure on stocks and bonds.

In the week ahead, more earnings reports will continue to flow in, including four technology behemoths in Microsoft, Amazon, Google, and Meta (formerly Facebook).  These earnings will tell a big story, but more importantly, their forward-looking guidance will be carefully viewed by investors.  Lastly, the Fed-favored inflation index, PCE (Personal Consumption Expenditures), will be reported on Friday.  Unless if this report shows unexpectedly high inflation last month, most investors believe the Fed will pause on raising interest rates at its meeting next week, but other Fed officials have implied that the Fed may (or should) raise rates again during the December meeting.  Expect some volatility over the coming weeks, especially with geopolitical tensions adding to investors’ angst.

^{Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.}

^{The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.}