Stocks and Bonds Pummeled on Interest Rate Concerns

Good morning!

The Dow (-2.3%), NASDAQ (-1.8%), and S&P 500 (-2.0%) fell sharply for the week.  In fact, the Dow rose on Friday, ending a 9-day losing streak, its longest losing streak in 50 years (1974).  Meanwhile, bonds got whacked for the second week in a row, as taxable bonds dropped 0.7% and tax-free municipal bonds fell 1.2%.  The 10-year Treasury yield climbed 0.13% to close the week at 4.53%.  This is nearly a 0.5% increase just in two weeks, which is a massive move.

The stock and bond markets were impacted last week on the speculation of higher interest rates for longer, even in spite of a lower-than-expected inflation gauge reported on Friday – the Fed-favored Personal Consumption Expenditures (PCE).  As expected, the Fed cut interest rates by 0.25% on Wednesday, but their speech afterward spooked investors.  In that speech, Fed Chairman Powell indicated that the Fed foresees only two interest rate cuts in 2025, rather than the previously expected four rate cuts.  This sent both stocks and bonds sharply lower, continuing the pressure seen the previous week.

On the political front, the US averted a government shutdown with a last-minute deal late Friday night.  That said, concerns of US spending, budget deficits, and our national debt have been climbing.  Concerns associated with the deficit and spending have caused large investors (including other countries) to sell US treasuries, causing bonds to fall and their corresponding yields to spike.  Thus, while Congress was able to “kick the can down the road” for a budget, there seems to be more focus on these issues, which will rear its head again in March.  The chart below shows the rise in interest paid by the US on its debt over the past 20+ years.  As evidenced by the chart, the combination of increased US debt and higher interest rates have caused the interest paid by the US on its debt to have almost tripled in just three years.  The US cannot maintain this trajectory, and this will become a large issue for the incoming President and Congress.

Have a great day and a terrific week.  We wish everyone a Merry Christmas and Happy Hanukkah, and a safe and enjoyable holiday season.

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