U.S. stocks posted slight losses last week as investors were cautious about the solid gains stocks have posted over the last few weeks. In fact, the bottom of last year’s bear market ended in October when a new bull market began. That was proven when the S&P 500 measured a 20% gain from last year’s low a couple of weeks ago.
The main question on everyone’s mind is: Where do we go from here? No one knows what direction markets will take, but we do know that the doom-and-gloom scenario has not played out. Some economists believed 2023 would definitely be the year of our next recession. But it seems like someone forgot to tell the recession. Jobs are plentiful. Corporations are being prudent with their spending but still see solid earnings. And, consumers continue to spend (especially on leisure travel).
This brings me to something several clients have been saying to me. How can we sustain this growth and current stock prices with interest rates so high? That’s a good question. Let’s look at where we are with interest rates from a historical perspective.
The chart below is from Nasdaq Dorsey Wright. The blue line shows the yield for the 10-year treasury. The black line is the target interest rate for the federal funds. Currently, the yield on the 10-year treasury is lower than it was at the end of the 1990s. That means all of the incredible growth in the economy and stock prices that took place in the 1980s and 1990s occurred when interest rates were significantly higher than today.
Interest rates are just one piece of the economic puzzle. The key is not to focus too much on just one piece, but rather the whole picture.
If you have any questions, please contact me.
The Markets and Economy
- U.S. existing home prices posted the largest year-over-year decline in more than 11 years last month as rising interest rates and a dwindling supply of available homes continued to weigh on the housing market.
- In a move that was much more aggressive than its peers, the Bank of England raised interest rates by half a percentage point. England is suffering form the highest inflation of any of members of the Group of Seven wealthy nations. In England, there are two basic types of mortgages, fixed and variable. Variable rate mortgages adjust automatically to the Bank of England base rate, which has risen 13 consecutive times. Many homeowners are finding themselves unable to adjust to the significant increase in borrowing costs. Fixed rate mortgages, unlike the 15 or 30 year ones you find in theS., adjust every 2-5 years and are also based on the Bank of England base rate. Analysts are not only concerned about current mortgage borrowers pain, but also a pending flood of defaults that may occur next year when some fixed rate mortgages begin to reset.
- Nearly two-thirds of adults in the S. age 65 or older, own equity through individual stocks, mutual funds or retirement savings accounts, according to an April, 2023 survey by Gallup. That’s up significantly after the financial crisis of 2007-2008 when the figure was only about half.
- 3M is the next company in a long list of S. corporations settling national class-action litigation over products deemed to be a public health risk. Rather than involving products such as tobacco, opioids or asbestos, this one deals with chemicals used in firefighting foam. The main chemical in question is called PFAS and has been linked to drinking water contamination in cities. The estimated $10.5-$12.5 billion is one of the largest settlements on record.
- I read a very interesting article last week that I thought was worth sharing. Historically, S&P 500 bull markets have lasted 5 times longer than bear markets. Since 1928, the S&P 500’s 27 bear markets have lasted on average 286 days. However, the average bull market has lasted 1,011 days on average.
- World-wide inflation isn’t taking the steam out of leisure travelers plans. Jet manufacturers can’t keep up with the sharp increase in global demand for planes. The industry’s limited ability to suddenly increase production hampers major jet manufacturers Airbus and Boeing.
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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.
This newsletter was prepared by David M. Kover®. To unsubscribe from the Weekly Market Update please write us at 555 Eastport Centre Dr., Suite B, Valparaiso, IN 46383 or click this link: Unsubscribe .
Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
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