Nvidia was down on the day so the rest of the market took a pause on the day as well. It was the eve of today's jobs report, which had a lot to do with it, but I don't think many bulls were complaining about a flat day. Yields were down slightly, but obviously nothing market moving, and once again a decline in yields did not help the small caps. The dollar was down and that did help the I-fund lead on the day.
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The Fed is in a tough situation. With inflation showing signs of improving, the Fed has a reason to keep a wait and see approach to cutting rates. I think they'd prefer to not move interest rates this close to an election out of fear of appearing political. They have done it before but it was situations like 2008 when the economy was crashing.
Here's a history of the Fed Funds rate, currently 5.25 - 5.50. Comparing the current rate to historical rates, there's no urgent reason to lower them, unless there is some kind of economic challenge. Looking at this chart however, it looks like the act of raising interest rates rapidly, like we witnessed over the last coupe of years, can and often does, trigger a negative financial event. But every time they pulled the rug on interest rates it was because of a desperate need to do so.
So if investors want to see the Fed cut back on rates with any seriousness, we could see another red title above the current peak, and a recession shortly afterward.
Maybe they landed it just right and we can coast with an interest rate between 4% to 5% for a while, but don't expect to see 0% to 2% again anytime soon, unless we are in the midst of the next recession.
That's good news and bad news because stable "higher" (relatively higher to those near 0% rates) is that rates can be higher because the economy has been holding up very well. The bad news is mortgage rates, car loans, credit card interest rates, etc., will stay higher for longer. We were spoiled from 2008 through about 2016 when they stayed near 0%, and when they finally started to try to bring them back toward normal levels, we got hit with the Covid recession.
The 10-year Treasury Yield is currently about 4.3% and that's after the Fed was forced to raise rates because of inflation. At the start of 2022 it was 1.5% and after the Covid crash it was under 0.5%, if you believe that. So the economy is dealing with that dramatic increase and it takes a couple of years for those rate hikes to impact the economy, and we are starting to see that now. If you recall last week we had a dreadful Chicago PMI report - the worst since the financial crisis, so something is coming.
With this morning's jobs report, we could have a better idea if the economy is holding firm or starting to leak and show more signs of cracking. And if it is cracking how proactive will the Fed be this close to an election?
The stock market is certainly showing no signs of worrying, but as we have been talking about, the stock market is more concerned with interest rates than the economy, so a weak jobs number means potentially lower rates - again, if the Fed is willing to move this close to an election. But the stock market is also getting a little giddy.
We have seen many bubbles or at least over valued markets over the years, and eventually something comes along to bring it back to reality. The problem for market timers is that momentum can be tough to stop, even when there are signs that it should be stopping. This is a weekly chart of the S&P 500 over the last 20 years and how it traded in relation to its 200-week moving average. It can stay above that average for a very long time before correcting, but it is now 22% above that line, and it rarely gets much more above it than that before some corrective action.
Again, it could stay 20% or more above that average for a long time, so there's no immediate reason to be concerned, but sometimes those corrections come quickly. Stay on your toes. The buy and holders are doing well again, but they will take the full brunt of any upcoming decline. Will you, or will you stay on top of things?
Estimates for today's jobs report are looking for a gain of 185,000 jobs and an unemployment rate of 3.9%. As interest rate level concerns start to turn toward economic concerns, perhaps strong data will be good news. Whatever it is, it may take some time for investors to sort out what the numbers mean for the economy, rates, and the stock market.
One more thing... meme stock Gamestop was up 47% yesterday.
The S&P 500 (C-fund) stalled yesterday but there are no complainers out there. There is some resistance just overhead and any kind of trouble from the jobs report could trigger some selling near these all time highs. But it's all been about Nvidia and large tech AI influenced stocks. This tech bubble (debatable) is nothing like the dot com bubble when some tech stocks were going up 10% to 20% a day and IPO's were doubling on their first day of trading. But outside of the largest stocks, there are signs of weakness in the broader indices so a little concern is warranted.
DWCPF (S-fund) is in a downtrend below a couple of layers of resistance. However, there's a chance that the inverted ahead and shoulders pattern will help push this above that resistance, in which case filling out the inverted H&S pattern could mean testing the prior highs in the near future. But until that happens, I am respecting the resistance.
The EFA (I-fund) made new highs again yesterday as the dollar moved lower helping out the situation. But new highs are not always a green light.
Not that this will repeat, but the summer of 2023 showed us that sometimes new highs need to be sold, not bought.
BND (bonds / F-fund) was flat as it dealt with the resistance from the March peak. It's in a new uptrend with several open gaps below. That may suggest pullbacks are coming that will hopefully fill some of those gaps, and those could be good buying opportunities for bonds.
Thanks so much for reading! Have a great weekend!
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
[TABLE="align: center"]
[TR]
[TD="align: center"]
[TD]
[/TD]
[TD="width: 283, align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"][/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]
The Fed is in a tough situation. With inflation showing signs of improving, the Fed has a reason to keep a wait and see approach to cutting rates. I think they'd prefer to not move interest rates this close to an election out of fear of appearing political. They have done it before but it was situations like 2008 when the economy was crashing.
Here's a history of the Fed Funds rate, currently 5.25 - 5.50. Comparing the current rate to historical rates, there's no urgent reason to lower them, unless there is some kind of economic challenge. Looking at this chart however, it looks like the act of raising interest rates rapidly, like we witnessed over the last coupe of years, can and often does, trigger a negative financial event. But every time they pulled the rug on interest rates it was because of a desperate need to do so.
So if investors want to see the Fed cut back on rates with any seriousness, we could see another red title above the current peak, and a recession shortly afterward.
Maybe they landed it just right and we can coast with an interest rate between 4% to 5% for a while, but don't expect to see 0% to 2% again anytime soon, unless we are in the midst of the next recession.
That's good news and bad news because stable "higher" (relatively higher to those near 0% rates) is that rates can be higher because the economy has been holding up very well. The bad news is mortgage rates, car loans, credit card interest rates, etc., will stay higher for longer. We were spoiled from 2008 through about 2016 when they stayed near 0%, and when they finally started to try to bring them back toward normal levels, we got hit with the Covid recession.
The 10-year Treasury Yield is currently about 4.3% and that's after the Fed was forced to raise rates because of inflation. At the start of 2022 it was 1.5% and after the Covid crash it was under 0.5%, if you believe that. So the economy is dealing with that dramatic increase and it takes a couple of years for those rate hikes to impact the economy, and we are starting to see that now. If you recall last week we had a dreadful Chicago PMI report - the worst since the financial crisis, so something is coming.
With this morning's jobs report, we could have a better idea if the economy is holding firm or starting to leak and show more signs of cracking. And if it is cracking how proactive will the Fed be this close to an election?
The stock market is certainly showing no signs of worrying, but as we have been talking about, the stock market is more concerned with interest rates than the economy, so a weak jobs number means potentially lower rates - again, if the Fed is willing to move this close to an election. But the stock market is also getting a little giddy.
We have seen many bubbles or at least over valued markets over the years, and eventually something comes along to bring it back to reality. The problem for market timers is that momentum can be tough to stop, even when there are signs that it should be stopping. This is a weekly chart of the S&P 500 over the last 20 years and how it traded in relation to its 200-week moving average. It can stay above that average for a very long time before correcting, but it is now 22% above that line, and it rarely gets much more above it than that before some corrective action.
Again, it could stay 20% or more above that average for a long time, so there's no immediate reason to be concerned, but sometimes those corrections come quickly. Stay on your toes. The buy and holders are doing well again, but they will take the full brunt of any upcoming decline. Will you, or will you stay on top of things?
Estimates for today's jobs report are looking for a gain of 185,000 jobs and an unemployment rate of 3.9%. As interest rate level concerns start to turn toward economic concerns, perhaps strong data will be good news. Whatever it is, it may take some time for investors to sort out what the numbers mean for the economy, rates, and the stock market.
One more thing... meme stock Gamestop was up 47% yesterday.
The S&P 500 (C-fund) stalled yesterday but there are no complainers out there. There is some resistance just overhead and any kind of trouble from the jobs report could trigger some selling near these all time highs. But it's all been about Nvidia and large tech AI influenced stocks. This tech bubble (debatable) is nothing like the dot com bubble when some tech stocks were going up 10% to 20% a day and IPO's were doubling on their first day of trading. But outside of the largest stocks, there are signs of weakness in the broader indices so a little concern is warranted.
DWCPF (S-fund) is in a downtrend below a couple of layers of resistance. However, there's a chance that the inverted ahead and shoulders pattern will help push this above that resistance, in which case filling out the inverted H&S pattern could mean testing the prior highs in the near future. But until that happens, I am respecting the resistance.
The EFA (I-fund) made new highs again yesterday as the dollar moved lower helping out the situation. But new highs are not always a green light.
Not that this will repeat, but the summer of 2023 showed us that sometimes new highs need to be sold, not bought.
BND (bonds / F-fund) was flat as it dealt with the resistance from the March peak. It's in a new uptrend with several open gaps below. That may suggest pullbacks are coming that will hopefully fill some of those gaps, and those could be good buying opportunities for bonds.
Thanks so much for reading! Have a great weekend!
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
