Stocks Mixed and Bonds Up Sharply on Inflation Data and Middle East Turmoil

The Dow (+0.8%), NASDAQ (-0.2%), and S&P 500 (+0.5%) were mixed last week, while bonds had a strong showing, with taxable and tax-free municipal bonds gaining 1% or more.  The 10-year Treasury yield fell 0.16% to end the week at 4.63%.  We keep referencing the 10-year Treasury (US bond) yield because it often serves as the driver for the value of bonds, as well as mortgage interest rates.  As the yields go higher, it also puts a strain on economic growth.

The market movements last week were caused by three main factors – the Israel conflict, inflation data, and corporate earnings.  All things being equal (which they never are), the Middle East conflict has little direct bearing on the US stock markets, except if it escalates and pulls the US into the regional war.  That said, whenever there is global conflict, the flight to safety general causes investors to move to US stocks and Treasuries, which we saw last week.  Inflation data was reported last week that exceeded investors’ expectations, but the overall downward trend continues to be favorable, reducing the chances that the Fed raises interest rates before year end.  Corporate earnings season is now upon us, with 6% of the S&P 500 companies reporting earnings, and they have exceeded expectations so far.  The consensus among economists is that corporate earnings will have their first positive quarter in a year.  According to John Hancock Investments, “Our interpretation of earnings is that revenue growth is likely to slow and the way to have earnings hold up is through cost cutting / expense management”.

As we have said before, the “Magnificent 7” technology stocks associated with artificial intelligence have represented the main driver of the markets this year, as those stocks have advanced more than 40%.  At the risk of sounding like a broken record, I encountered an interesting statistic over the weekend.  I previously explained the difference in performance between the Dow and tech-heavy NASDAQ, as the Dow is up 3.3% YTD, while the NASDAQ is up a staggering 28.9% YTD.  Looking at it differently, those seven stocks represent more than 30% of the S&P 500, which (excluding dividends) is up 12.7% YTD, while the S&P 500 even-weighted index is actually down 0.7%.  In short, market returns this year are driven by a small handful of companies are not indicative of the overall health of the US stock markets.

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