3 Issues Are Testing the Market as It Hovers Near All-Time Highs
All three could potentially trigger increased volatility and shake up a complacent market.
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Although the S&P 500 is within one percent of its all-time highs, investors are increasingly nervous about market conditions.
Three factors will determine the course of the market over the near term: interest rates, earnings, and the presidential election. All three issues have the potential to trigger increased volatility and shake up a market that has been quite complacent for most of the year.
The biggest immediate issue for the market is a steady increase in interest rates. The 10-year bond has been in a steady decline since mid-September, and the yield is now around 4.2%, which is higher than when the Fed cut rates by a half-point.
Rising interest rates indicates less worry about a recession, but they also indicate increased concern about a rebound in inflation. There is a growing consensus that the Fed will not be as dovish as previously hoped. A month ago, the market anticipated rated cuts of 195 basis points over the next few years. That has now declined to around 128 basis points.
If interest rates continue to trend higher and worries about inflation build, it will produce a headwind for the market and smaller stocks in particular. The Magnificent Seven names are less interest-rate sensitive since they carry little debt, but the group has lost momentum as concerns about valuation have been increasing.
The second issue that the market is contending with is earnings. So far, earnings season has been positive, especially for banks and financials, but it has not yet been tested by any major technology reports. Netflix NFLX had a strong report, but Starbucks SBUX and Nike NKE show how many iconic names are struggling with shifting conditions. Next week, there will be a key test of earnings when Magnificent Seven names start to report.
The presidential election also has an impact as market participants consider the ramifications of various economic approaches. It is generally viewed that former President Trump could increase inflationary pressures as he ramps up economic activity, imposes tariffs, and takes other actions that could increase the strength of the dollar. With Trump taking the lead in many polls, his policy proposals are part of the reason that bonds have been under pressure and rates are rising.
The market has done a consistently good job of overcoming hurdles in 2024, but interest rates are starting to impact the Goldilocks' economic narrative. Strong economic growth will help, but it also means increased inflationary pressures.
We have a soft open due to bad news from McDonald's MCD and Starbucks.
At the time of publication, Rev Shark had no positions in any securities mentioned.
