The economy is slowing?
The past week started with a selloff in markets due to fear of a slowing economy and possible recession. It was a severe sell off because formerly good news (economy slowing and lower interest rates) turned into bad news. We have discussed many times the bad news is good news, and good news is bad news and then of course the bad news is bad news is what we witnessed this past week.
Despite the terrible start of the week for stock markets, they recovered to almost unchanged by the end of the week. At the same time stock markets declined, so did interest rates. When interest rates decline, with the difference in yield between 2 year and 10-year US Treasury yields have shrinking to a new inversion low since 2022. The yield difference between 3 month and 10-year US Treasury yields is another indicator and that still remains inverted. The trend is towards a normal yield curve with the expectations that the Federal Reserve will lower interest rates at their next meeting in September. Many analysts are talking about the Fed being behind the curve as it was in 2022 when the Fed started increasing interest rates.
The good news with interest rates dropping in borrowing rates are declining including mortgages and variable rate corporate borrowings. Smaller companies tend to borrow funds with variable rate bonds so when interest rates drop, the cost of borrowing for these companies drops. This analysis, in the past month, has led to significant gains in mid and small cap stocks way outperforming large cap growth stocks such as Microsoft, Google, Nvidia, etc. That move came to a screeching halt this week during the market sell off. Will that general market move continue as we receive more inflation and economic news this week we shall see.
As the volatile week ended, recommendations by analysts were generally long-term investors need do nothing as this volatility is to be expected, shorter term analysts recommended raising cash for short term obligations and do some rebalancing of large cap growth stocks to mid and small cap stocks. This is pretty typical sensible advice regardless of market behavior.
Has the equity market priced in lower interest rates over the past six months with major stock indexes advancing 10% on top significant gains in 2023? Will Fed reductions in interest rates be greeted with a “meh” or even a sell off as market recognize rates are dropping because the economy is slowing? We shall see.
In the News
Social Security Administration makes changes that will impact millions beneficiaries
Young and in Debt? You Still Should Be Saving for Retirement. (msn.com)
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