The Market’s Hidden Weakness Is Finally Too Big to Ignore
Mainstream media coverage is catching up to the damage under the surface, while debt and refined-fuel shortages keep rates stubborn.
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Oil is down about 4% early Friday and the iShares 20+ Year Treasury Bond ETF (TLT) is flat as we wait for the September jobs report. Economists surveyed by The Wall Street Journal expect 84,000 new jobs, down from 162,000 in August. That would be a more moderate number, but likely still strong enough to keep the Fed concerned about inflation.
The Media Catches Up
Bloomberg ran a piece this morning that sums up what I have been writing about for months. With the S&P 500 less than 2% from a record, it looks as if investors have shrugged off the jump in bond yields, but under the surface the damage is already widespread.
Small-caps, banks and utilities are getting battered, and many of the most speculative corners of the market have lagged since the Fed raised rates last month. The indexes are being held up by the AI trade while the rest of the market deals with rising rates and geopolitical risk.
It is interesting that the mainstream business media is starting to appreciate and address what is happening. It is a good illustration of how much the media focuses on indexes that don’t tell the whole story.
For much of the media, the senior indexes are the market. They only change their view when the damage underneath becomes too big to ignore. Anyone watching breadth and the new lows has seen this coming for weeks.
Why Rates Won’t Let Go
Two issues continue to affect interest rates that we have to watch closely.
The first is oil. Tankers are moving through the Strait of Hormuz again, which was supposed to bring prices down, but it hasn’t. Brent crude jumped 4.4% Thursday to $102.31 a barrel, because the shortage is in refined fuel, not just oil.
Diesel futures have been trading at roughly double the price of crude. J.P. Morgan estimates fuel exports from the Gulf are still about 40% below prewar levels, and the cost of shipping oil has soared. Those costs flow into everything from trucking to farming, and that keeps inflation pressure on the Fed. The link between energy and rates loosened a bit on Thursday, but energy is still one of the main forces behind higher rates.
The second issue is the level of debt. The 10-year Treasury yield rose 0.83 percentage point in the third quarter, the biggest quarterly jump since 1994. Countries with the heaviest debt loads, such as France and Italy, saw even bigger jumps in their yields.
As The Wall Street Journal put it, oil is the spark that triggered the fire in rates, but accumulated debt is the fuel that is feeding it and there is a very big pile of it. Governments are competing with the hyperscalers for long-term money, and investors are demanding higher returns to supply it. The competition for capital will keep pressure on rates.
The Quarter-End Noise Is Fading
We had a couple of days of unusual volatility in both bonds and stocks that was driven to a great degree by the end of the third quarter and the start of the fourth. The big moves in bonds triggered rebalancing that distorted the normal flows, but that is settling down now, and we will see whether some of the worst has been priced in and whether rates can stabilize.
More rate hikes may still be coming, and the pressure is far from over, but there are already signs that the tight link between rates and everything else is loosening. Thursday, oil jumped 3% and the market reversed higher anyway.
Game Plan
A lot is going on, but my approach is to stay patient and let things sort themselves out. I’m optimistic we are moving closer to some kind of positive trend change, but it is too early to embrace that idea.
My plan is to stay vigilant and be ready to increase my buying as technical conditions improve.
At the time of publication, Rev Shark had no positions in any securities mentioned.
