The markets surged last week with the Dow (+4.9%), NASDAQ (+5.2%), and S&P 500 (+4.8%) showing strong gains. Conversely, taxable bonds and tax-free municipal bonds fell over 1% as the 10-Year Treasury yield advanced well above 4%, to reach its highest level since 2008.
While economic data continues to pour in, it is largely met with expectations of how the Fed will react in its campaign of aggressively raising interest rates to battle inflation. If economic data is (and continues to remain) strong, then the Fed feels it can continue to raise rates, but the day will come when the economy shows signs of breaking. When it does, the Fed will need to pause on that campaign, and both the stock and bond markets will likely rally. Last week’s rally seems to have been in response to Britain’s sudden reversal in its fiscal policy that was previously viewed as being negative. In a strange and inexplicable twist, China has “indefinitely postponed” its release of economic data last week, and many economists are perplexed by it. The US Leading Economic Indicators (LEI) was reported as negative for September. LEI data has historically been a reliable predictor of the likelihood of an impending recession.
We are amid Q3 corporate earnings season, which has a similar trend as the prior quarter. Overall, 7 of the 11 market sectors reported negative earnings growth thus far, but the energy sector has been so strong, that it has turned the entire picture to be positive. However, as noted above, the earnings season seems to be masked by the Fed, and the same can also be said in advance of the midterm elections, which haven’t captured many headlines.
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About the Author: Michael Menninger, CFP®️