Stocks Mixed As Earnings Season Nears Its End; Bonds Also Mixed

The Dow (+0.7%), NASDAQ (-1.9%), and S&P 500 (-0.3%) were mixed for the week, as defensive stocks (healthcare, energy, and utilities) outperformed technology stocks.  In the bond markets, taxable bonds lost about 0.6% while tax-free municipal bonds gained about 0.4% in an anomaly having these react so much differently.  The 10-year Treasury yield rose 0.11% to end the week at 4.17%, approaching the 40-year high of 4.23% it reached last October.  On a similar note, 30-year mortgage rates eclipsed the 7% rate again last week.

On the heels of its downgrade of US Treasuries, Moody’s also downgraded 10 small- to mid-sized regional banks, reflecting the challenges still facing the banking industry.  Key inflation data – Consumer Price Index (CPI) and Producer Price Index (PPI) – were reported last week with no real indicator of whether inflation is rising again, or is continuing to fall.  Regardless, Treasuries values decreased last week, resulting in the yield nearly reaching its 40-year high again, which typically doesn’t bode well for stocks.  Third quarter corporate earnings season is near its end and like inflation, has not sent a clear message either way, except that it will mark the 3rd consecutive quarter of negative earnings, which also means we are in an earnings recession.  China also reported very weak data last week, as their economy is showing signs of deflation, along with concerns over China property developers’ bankruptcies.

According to the Chief Investment Strategists from John Hancock Investment, “Inflation has been the largest risk to markets for much of the last year and a half.  By the end of this year, we would not be surprised if inflation becomes a much less focus on markets and decelerating global growth (led by China) becomes the number one driver of cross-asset performance.”  Here is my concern that doesn’t seem to be commanding much attention in the news.  The consumer represents 68% of the US economy, and the consumer (as well as the job market, which is directly related) has remained strong, as the consumers continue to spend.  However, credit card balances in the US eclipsed $1 trillion last week for the first time ever, and students will begin paying back their loans starting October 1.  These could combine to result in a swift deceleration in consumer spending, which could be harmful to the US economy, resulting in the onset of a recession.  Time will tell.

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