Stocks Fall as Election Rally Fades; Bonds Mixed

Good morning,

The Dow (-1.2%), NASDAQ (-3.1%), and S&P 500 (-2.1%) all finished the week lower.  Meanwhile, taxable bonds fell about 0.9%, but tax-free municipal bonds gained 0.1%.  The 10-year Treasury rose 0.14% to finish the week at 4.44%.

The election rally seems to have faded, but we were also presented with a bunch of positive economic news last week that fueled the old saying, “Good news is bad news”.  Inflation and interest rates are taking center stage again, and are being influenced by many factors.  Before proceeding, let’s be clear that high inflation is bad, and that results in higher interest rates, which is also bad.  Additionally, high interest rates on the 10-year Treasury and longer-term yields negatively impact risk assets (such as stocks), and also weakens economic growth.  It has been shown that the US economy begins to experience weakness once the 10-year yield hits 4.5%, which is partly why I announce that rate at the beginning of this weekly recap.  Further, the direction of interest rates in a given week also can serve as a catalyst for stocks and bonds to rise or fall.

Last week, we had numerous economic reports that showed continued strength in the US economy, which tends to drive interest rates up.  Further, a strong US economy tends to be inflationary, which also drives interest rates up.  Lastly, higher interest rates cause the US to pay more on its debt, causing stress on our national budget and deficit, as the deficit has now grown to over $35 trillion.  Interest payments now exceeding $1 trillion per year, and has become a growing part of our annual budget.  Thus, the strength of last week’s economic data has caused question as to whether or not the Fed cuts interest rates in December.  To magnify the inflation worries, there has been some concern that President-elect Trump’s policies may cause additional inflationary pressure, but that has also caused some debate among economists.

In summary, the US economy continues to forge ahead with few signs of weakness, which is good.  However, there are concerns that we may be experiencing a return in inflationary pressure, causing interest rates to rise, which could inevitably cause the economy to slow and stocks to fall.  In the end, there are too many variables that still have not unfolded, so let’s be happy that we continue with a strong economy.  That sure beats the alternative!

Have a great day and terrific week!

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^{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.}