The S&P 500 & Nasdaq indexes completed their most-expensive pull-back in a decade, and were entering their best levels of year.
Last week, QE-powered ultra-low interest rates and increased volatility caused the bullish momentum both indices had swelled for weeks to slowly resume until parabolic yields stalled in both indices.
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The 25bps rate hike Federal Reserve authorized at the end of last week was little more than a slap on the wrist for the central bank.
The Federal Reserve announced in January, 2018, that they expected to tighten monetary policy 3-4 times by the end of the year, per their SEC filing.
However, the hawkish statement seems to have been carefully litigated just long enough to make sure markets do not react negatively to higher interest rates ahead.
The long-term Treasury market is generally viewed as an indicator of the short-term mood in the economy, so that the 10-year Treasury bond selling actions reflect whether economic growth is going to become stronger or weaker from here on out.
You can see this in the chart below.
This year, the Federal Reserve was very successful in preventing interest rates from going any higher than they already are.
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The unwinding of the Fed’s “Operation Twist” have driven long-term rates to historically-low levels. However, the expected hikes have stalled their internal momentum, which has caused all the big selling to slow down significantly.
The Fed has largely rested its gains this year on the assumption that rising inflation and growing capacity pressures would force them to enact rate hikes.
An example of this was provided from the FOMC minutes last month:
“Participants generally expected that changes in nominal wage rates, labor compensation, and other factors would raise inflation in coming years above the Committee’s 2 percent longer-run objective. But those members who expected inflation to rise only gradually foresaw risks to that outlook. Other participants were more confident in the outlook for inflation, in part because the rate of economic slack, which had been effectively eroding for some time, had begun to diminish.”
Major International Development
As market psychology has improved, the most-anticipated long-term events have occurred.
Chinese stocks traded over 18% higher than the previous record close, while Asian markets remained in bear market territory.
The ongoing trade talks with the US have continued in stride, with signs of progress reported for progress:
Several participants described the recent discussions between senior officials from the United States and China as “constructive,” and they noted that their offices are now engaged in “summative” talks.
Conclusion: Stock Markets Take A Breather
Though technically the market is entering its best trading week since late April, larger fundamentals have allowed for stocks to pull back for a short period.
With the Federal Reserve merely declaring a 25bps interest rate hike, is the negative reaction not an overreaction to higher rates?
Regardless, as long as continued inflation and strong economic growth do not disrupt the risk appetite we currently have, the bull market will not falter.
But, if the global debt crisis spreads in a meaningful way, stocks would likely be very hard-pressed to maintain the exuberance they have exhibited since March, 2019.
*Important Disclosure: The author did not make any specific recommendations, nor did he predict that this article would be positive or negative. This article is written solely for the purposes of general stock market advice.