Our Take: Safety in Numbers Outside the Stock Market

The following article was written by Briefing.com, one of the several market analysis firms to which we subscribe. We've decided to share it with you because it aligns with our perspectives in the present market environment.

Safety in numbers outside the stock market

The month of September is coming to an end. It lived up to its reputation of being the worst month historically, on average, for the S&P 500, which is down 4.6% for the month.

As we have discussed in prior columns, that setback was preordained in a way by how well the stock market had done in prior months. In other words, it was due for a consolidation period as it had gone a long way in a short amount of time.

What snuck up on many participants as a catalyst for the September setback, however, was the rapid rise in market rates. As of this writing, the yield on the benchmark 10-yr note, which had gone as high as 4.68%, has surged 50 basis points this month to 4.59%, reaching its highest level since 2007.

So, what began as a technical move by the stock market eventually became a fundamental move, too.

What Comes Next?

There is supposed to be a soft landing for the U.S. economy. There still might be. The way long-term rates have behaved this month, though, one would have good reason to think that the economy isn't coming in for a soft landing, but, instead, is getting ready for take-off.

We don't think the latter is necessarily the case, but if the Atlanta Fed GDPNow model estimate for real GDP growth of 4.9% in the third quarter is correct, one can rightfully say that the economy was flying high from July-September.

What comes next is a source of great debate.

There are certainly some "issues" out there to support the view that things should be slowing down:

Oil prices are stubbornly high; and drivers continue to be saddled with high gas prices.
The U.S. government seemingly looks headed for a shutdown.
The disinflation momentum has slowed.
China's post-Covid economic recovery efforts have been sluggish and are being threatened further by cracks in its property market.
The UAW is about to enter its third strike week against the Big Three automakers.
The Fed, ECB, Bank of England, and many other central banks all seem inclined to keep rates higher for longer.
The lag effect of prior rate hikes has yet to show up in a meaningful way in a broad sense.

A Carve Out

Another item we have purposely carved out from the bullet point list above is the jump in market rates. The rate of interest change accelerated in September and has caused a good deal of angst for investors.

One reason why is that the jump in rates more recently doesn't appear to be tied to a fear of more rate hikes by the Fed. We say that knowing that the fed funds futures market sees only a 19.3% probability of a 25-basis points rate hike at the November FOMC meeting, versus 26.3% a week ago and 62.3% a month ago, according to the CME FedWatch Tool.

The probability of a rate hike at the December FOMC meeting is a little more elevated at 36.0%, but that is also down from 45.1% a week ago and 57.6% a month ago.

Last week, we made some assertions why market rates might stay higher for longer even when the Fed is done raising rates. We won't rehash those items here, but we dubbed them "other factors," and we suspect these "other factors" are starting to enter the zeitgeist as factors that are becoming more problematic for the market.

If nothing else, they are making life more difficult for the Treasury market, and when life is difficult for the Treasury market, it is often difficult for the stock market.

What It All Means

Alas, our intention this week is not to turn this piece into a discussion about economic prospects. The intention is to turn it into a discussion about the stock market's prospects.

Do we think the stock market is oversold on a short-term basis and due for a bounce? Yes, we do.

Do we think the stock market can get back to its all-time highs in short order? No, we do not. That is a big ask given the changing dynamics of the interest rate environment.

Higher rates don't necessarily have to be bad for the stock market, especially if they are associated with stronger economic activity that is good for earnings prospects. Higher rates become more problematic for the stock market, though, when they become the basis for safety trades in an uncertain environment.

In other words, when there are risk-free, or nearly risk-free, alternatives offering attractive income potential along with capital preservation, the willingness to step out on the risk limbs of the stock market diminishes.

Why chase the possibility of a 5% rally in the stock market when you can stay parked in a money-market fund, for instance, which yields 5.0%, or in a 3-month T-bill that yields nearly 5.50%? The answer, we suppose, will come down to risk tolerances and assumptions the stock market can do much better than that.

Truth be told, the stock market will do much better than that -- in the long term. It's the near term that is in question, and it is our expectation in this elevated period of uncertainty about the near-term outlook that investors will seek more comforting answers outside the stock market.

Why? Because they finally can again without feeling like they are getting nothing in real return for playing it safe.

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In closing, as we navigate the market's fluctuations, we stand resolute in our approach, anticipating a future marked by shared success. If you have any questions, please feel free to get in touch.

Sincerely,

Ken & Michelle

This information has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the information, however, the accuracy of this information is not guaranteed. All investing is subject to risk, including possible loss of money you invest. Diversification does not ensure a profit or protect against a loss. The information provided in this commentary is for informational purposes only and is not a solicitation to buy and/or sell. Investors must consider the investment objectives, risks, charges and expenses of any investment carefully before investing. Avisen Wealth Management (Member FINRA/SIPC) does not provide tax or legal advice. Please consult your accountant &/or legal counsel for guidance.