Investors Begin Turn With Higher Rates Here to Stay

The market is working hard to adjust to higher interest rates, and Thursday offered some signs that the process is underway. The first day of the fourth quarter looked miserable for most of the session, but a strong afternoon bounce lifted all the indices into the green and, most importantly, reversed off their intraday lows.

Signs of Adjustment

Breadth was still negative, with about 48% of stocks higher, and new 52-week lows accelerated to almost 500 against just 60 new highs. That is a lopsided ratio on a day the indices closed higher, but the way it came together had the feel of some mild capitulation. Sellers pushed hard into the lows, and then buyers stepped in and didn’t let go. That kind of action usually happens when the last group of tired holders finally gives up.

The Magnificent Seven, which has been leading recently, finished in the red which is a good sign because they have become the default area of safety. Investors were willing to play a little less defense which is good news.

Another sign was the way the market shrugged off oil. The United States Oil Fund (USO) gained about 3%, and it didn’t seem to matter. Normally, a jump like that would feed inflation worries, push rates higher, and weigh on stocks. On Tuesday, it worked the other way, when oil fell and the odds of an October rate hike dropped sharply, and bonds still couldn’t rally. Lately, the links between interest rates, oil, Fed expectations and the economic data have been much weaker than usual.

Bigger Issue Than the Fed

That tells us something bigger is going on than what the Fed does next or what the next economic report says. As I discussed on Thursday morning, governments around the world are competing with the hyper scalers to borrow huge sums of money for decades, and that is setting the level of long-term rates.

The market is starting to accept that higher rates aren’t a temporary problem that the next data point will fix. That is a painful realization, and it is what has driven so many stocks to new lows. But once the market stops waiting for relief and starts pricing in a world of higher rates, the selling pressure begins to ease. Thursday’s reversal may be an early sign of that.

It Will Take Time

An adjustment like this doesn’t happen in a day. The action around the start of a new quarter is often erratic, as big funds make rebalancing decisions that have little to do with fundamentals, and we still haven’t seen any relief in the bond market. There will be more back-and-forth before this sorts itself out.

Still, it does feel like we have made some progress toward an attractive setup into the end of the year.

Game Plan

I’ll be watching for follow-through on Friday, and I’ll care more about how stocks and bonds act after the jobs report than about the number itself. One good afternoon isn’t a turn, but if this is the start of the bounce I’ve been positioning for, it will still be there after a few days of confirmation. Better late than early. I’m continuing to add slowly to the names on my list and keeping plenty of cash for when the market proves it.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.