This morning, SPX & SPY Stock showed up and moved higher by some 1.35%. At the time of this writing, the index is near the day’s high – there is still plenty of time in the day. What brought on this buying mood after last week’s inflation data, the employment report from the week previous, not to mention the disfunction in the US House of Republicans and geopolitical concerns? The short answer is that maybe stocks are looking cheap relatively. However, although stocks may have rebounded, the same concerns still exist and more than likely moves upward may be forestalled by interest rates moving higher, or inflation data showing more concerning increases.
I wanted to put together a few key concerns that may derail any moves higher – or, lower.
SPX Stock Chart
Fro now, the SPX is contained within the latest ranges and there is nothing in the way of overwhelmingly good news to push individuals in to a buying frenzy. Stocks are still relatively expensive when compared to the 10-year US Treasury yield – currently 4.712% and moving higher:
Last week, on Sunday – Monday, the 9th & 10th of October, there was a move in to US Treasuries on the heels of the Israel & Hamas war. These were safe-haven driven moves. The war will likely not spread into a much larger regional conflict, or at least for now that is the prevailing thinking. So, safe-haven drives are being replaced with inflation-expected drives. If the 10 year yield continues through past 4.750% again, it may very well take out the 5.000% level. That would be the end of the relief rally in stocks. It would likely take a few days, if not about two weeks for the 10-year to really push for this level.
What is odd is that both the 2 year & 20 year are trading above the 5.000% level right now. I expect this little dip in the yield curve will likely be elevated to be more in line with the shorter end and longer end of the yield curve.
US Dollar Index On The Rise
The dollar continues to move higher. This is a major concern simply because multi-national companies repatriate funds to the US when they declare profits. With the move higher in the US dollar, this will mean profits overseas will be lower, comparatively. The move higher in the dollar is being driven by higher relative interest rates. Investors are buying US debt because on a comparative basis, the differential is much better for investors. As more and more money is attracted in to the US economy, this inflates the money supply. This is the exact opposite effect that the Federal Reserve is trying to steer the economy toward.
The fix for the flow of money in to the US economy would be higher interest rates. This would attract more investors, which they would deposit more money in to the US economy, expanding the money supply even further. This would drive the Federal Reserve to raise interest rates further.
Put the pieces together
When looking at all of these little pieces, specifically SPX Index & SPY Stock, you need to look at the entire, organic landscape. No one stock or index is an island. Everything is in balance with each other. That being said, keep an eye on the employment situation, inflation data, the bond market, and the US dollar. If the economy remains robust, this may continue to pressure inflation, which that will pressure interest rates. That will attract more and more money in to the US economy, and thereby force the Federal Reserve to continue to pressure interest rates higher.
I see the relief rally as being a bit premature and not likely to hold on for very long.