Skip to main content

Watch our latest video: "3Q2023 Market Review and Outlook for 2023"

Stock market price display

MCWS Answers Two Common Questions Raised by Investors

Our investment strategy team, with experienced investment representation from across all of our offices, is responsible for monitoring economic indicators and market metrics. Through a rigorous decision-making process, this team's efforts ultimately lead to a formal assessment of our outlook for economies, markets, valuations and interest rates. Here are two key questions raised by our investors as related to the current bull market:

Q: The Federal Reserve has raised its benchmark interest rate for the past 3 consecutive quarters. Why have bond and even mortgage rates fallen, albeit modestly, despite the Fed’s actions?

While the Fed recently raised its benchmark Fed Funds rate (what banks charge each other to borrow overnight) for the third time since last December, the yields, or current interest rates, on longer maturity Treasury Bonds have actually declined since the start of this year. This, in turn, has caused the difference between short term rates and longer term rates to narrow and create what is commonly referred to as a “flattening yield curve.”

Economists and other market watchers closely monitor the shape of the yield curve for what it is telling us about the economy. For instance, when the shape is inverted it means that current short-term interest rates are higher than long-term interest rates. The inversion can be an extremely reliable predictor of economic recession. However, a flattening yield curve like we are experiencing today is not as concerning. A flattening yield curve does not necessarily guarantee an inversion is on the immediate horizon. In fact, the level and direction of today’s yield curve is similar to that of the mid-1990s and mid-2000 bull market periods. Each period, though, is a bit unique. We believe the current environment can be interpreted as follows:

  • While the Fed is signaling continued economic improvement in their actions to raise short-term rates, the markets are indicating lowered expectations of future inflation and economic growth.
  • Declining longer-term rates are likely a reflection of the global nature of the bond markets. Continued accommodative polices by foreign central banks and lower rates in developed markets abroad make U.S. government debt relatively attractive. It would probably be more unusual if there were a greater difference between U.S. rates and other developed markets during this period of relatively strong U.S. economic conditions.
  • Demographics may also be playing a role as aging investors in developed market could create increased demand for safer income-producing investments like bonds. Increased demand will push bond prices up and yields down.
Q: The markets have had quite an extended run since last November with very little pause. Should investors be concerned?

The S&P 500 Index closed June with a positive return, making it the eighth consecutive month of positive returns. Many U.S. stock indexes have made new all-time highs in recent months with the support of strong market breadth, meaning 70% of the ten S&P 500 sectors have also made new all-time highs. This type of price momentum is typically bullish in the near-term and tends to carry market indexes higher over the next several months.

You might be interested in what history tells us about market streaks:

  • As we headed into June, there were only 10 instances in which the S&P rose for seven consecutive months and, interestingly, it closed higher in the following 3-6 months every time. During the following 12 months, the S&P 500 closed higher in nearly 90% of the time with an average annual return of 12%.
  • Since 1991, the S&P 500 has risen eight consecutive months only four times: 1996, 2007, 2011 and 2016.
  • The S&P 500 has risen more than eight consecutive months only once - in 1995 for 10 consecutive months.

While the current price momentum and breadth is bullish for the next 6 to 12-month period, it is also very rare for these types of streaks to continue uninterrupted for this long. To put periods of market strength in perspective, it is helpful to look back at 2013 when the S&P 500 rose more than 30%, it also fell between 3% and 8% at six different points during the course of the year.

A 3-5% decline in the near future would be consistent with the historical pattern and should be expected at any point. But given the strong trend to this point and the mostly positive economic backdrop, any weakness is likely to be only temporary, debunking the inevitable media hype of the “end” of the bull market.

{{cta('f4d919cf-9c18-4d3c-b6d9-0387f9fdcc54','justifycenter')}}

Related Insights
I Stock 471219895

Investing 101: It's Not Just a Man's World

As Socrates once said, “Awareness of ignorance is the beginning of wisdom.” If you recognize a lack of proficiency, don’t be afraid to educate yourself. Of course, we all know we can’t be experts on every topic, but gaining a basic understanding that will help you ask the right questions will benefit you in the long run.

Personal finance is no different. Dismiss the notion that "the world of finance is a guy’s thing” and become more proactive about learning the basics. It will truly benefit your personal financial freedom! Check out these basic Investing 101 terms.

Read More
Trick Or Treat

Tricks or Treats – What Comes Next?

As a kid, I always enjoyed Halloween. I would dress up in some particularly fun costume, usually something scary. As I went from house to house gathering candy with my friends, I would often see someone’s carved pumpkin lying in the road, clearly a victim of some hooligan’s prank. It was a reminder that, even in good times, negative influences exist around us.

Today, as we approach the Halloween holiday, we wonder whether the rest of the year will find our meticulously carved pumpkin (stock and bond) portfolios smashed on Wall Street. Just as we see on Halloween, there are now many frightening and disturbing “tricks” in the economy today, and we’re hoping to safely make it home (the end of the year) to enjoy what “treats” we hope to have in our investment bags.

Read More
HUDDLE Investment Blog Banner Image

The Fed vs. the Consumer

Since the Federal Reserve began raising interest rates in March of 2022, there has been a pitched battle of “chicken” between the Fed and the average consumer. The Fed began raising rates about a year after inflation started a dramatic climb to its highest level in some 41 years. Those rate hikes have amounted to five percentage points on the Fed's benchmark to a level not seen since 2007. As a result, all sorts of loans tied to short-term interest rates have skyrocketed. These include credit card rates, home equity lines of credit, car loans, personal loans, and business loans.

The Fed has done its best to force higher borrowing rates on individuals and corporations in the hope that meaningful layoffs will follow, thus driving inflation down over time by lessening demand for products and services. What the Fed did not count on was the resilience of the U.S. consumer, who is experiencing solid wage growth and continues to spend on travel and dining out. Learn more about 2Q2023 and what may be ahead in remainder of 2023.

Read More
Play