Markets struggle but stave off the bears
Stocks have been struggling against rising bond yields, the strong dollar, and disappointing earnings. Nonetheless, equities are stubbornly holding above an important level. The sideway action in the stock market continued this week with minor losses on the S&P 500 Index.
Bulls and bears are battling over the all-important technical line called the 200-Day Moving Average (DMA), which stands at 3,940. Historically, below this line, investors can expect to become cautious, since a break of that support signals the trend is down.
Above the line, markets, having broken resistance, indicate the trend is higher. In the latter part of this week, we broke below that line for a moment or two and then rebounded sharply higher. Friday saw a continuation of the bounce off the 200 DMA.
Pressuring stocks has been the continued rise in bond yields. The all-important, benchmark, U.S. Ten-year Treasury bond rose above the psychologically important 4% level to a high of 4.06% yield before pulling back. Given the inverse correlation between bonds and stocks, the last time we were above 4% on the Ten-Year, the S&P 500 Index was trading below 3,700. The bears believe that is where we have headed once again.
The U.S. dollar, which also has an inverse relationship with the stock market, continues to climb. The higher the yields on bonds, the higher the greenback will rise, and theoretically, the lower equities should fall. That has not happened. The macroeconomic factors are being largely ignored by the stock market, not the bond market.
Bond vigilantes are listening to Fed speakers. Several FOMC members indicate that the recent spate of economic data (hotter inflation numbers and stronger economic growth) may require steeper interest rate increases for a longer period. It is why yields on bonds are climbing.
In comparison, many equity players believe that the next batch of economic data points is going to show the opposite—lower inflation, slower economic growth, and a weaker job market. There is a whiff of ‘hopeification’ in that scenario to be sure. We have two more weeks before we will know for certain. That is when the latest batch of inflation data will be released.
Overseas, China appears to have rebounded from its' COVID-19 economic malaise. Industrial production in December 2022 rose 1.3% year over year, which was far higher than market estimates of a 0.2% rise. Why is this important?
As the world's second-largest economy, a rebound in the Chinese economy would be an engine of growth for much of the world. They are voracious users of commodities, which fuels their manufacturing sector and exports. China's massive consumer sector appears to be recovering quickly and that is good news for global companies that have a presence in China.
The risk, however, is that if their economy spurts ahead, it could make reducing global inflation a more difficult prospect. Certain commodity prices such as copper, steel, and other basic materials have seen prices rise recently anticipating future Chinese demand.
Next week, I suspect we will continue to see stocks trade higher as long as the S&P 500 Index remains above 4,000. Key to a continued rise in equities depends on two factors—the dollar and bond yields. If both remain where they are, or even better decline, then stocks can climb higher to 4,050 at least in the short term.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.