What is the yield curve doing?
We have not discussed the yield curve in quite a while. The classic yield inversion that began in mid 2022 continues. Historically, as mentioned, this has led to a recession within the next year. Analysts developed a consensus in regard to the “inevitable” recession in 2023 that did not happen. How about 2024? Recession? What is the yield curve doing now? It is still inverted and there are now many signs that the economy is slowing including a decline in quarterly Gross Domestic Product from 3.4% last quarter 2023 to 1.3% in the first quarter of 2024. The economy is slowing right? Job numbers today indicated a surprisingly high job number released today that pushed rates higher today even though other economic numbers this week pushed interest rates lower. The confusion and contradictory signals continue. Credit card delinquencies are rising quickly, especially among Americans aged 20-35. The European Central Bank reduced interest rates for the first time from an all-time high by 1/4 %. Will the Fed follow and if yes when? The Fed says they are data dependent-what does that mean. Markets hold their breath each day looking for guidance in regard to what the Fed will do. While short term rates continue to stay high, over the past two weeks, longer term interest rates declined with bond markets looking for inflation moderating and the economy slowing down over the next year. There is a real question whether the Fed will reduce interest rates this year at all? The Feds’ favorite indicator is “personal consumption expenditures” or PCE. This number is declining but not where the Fed would like it to be, which is 2%. The PCE crossed 3% last month but is still a long way from 2%. The Fed’s next meeting is next week. The consensus is that the Fed leaves rates unchanged. We will get some indication of the Fed’s intention next Wednesday.
Despite the uncertainty about interest rates and the price the economy is paying for these high rates, the SP500 made a new high this week. We cannot ignore the fact that 7 stocks make up 20% of the SP500 with that % increasing. The stock market is expensive. Timing the market is still problematic. The risk free rate of return is still above 5%. The challenge continues.
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