Oil prices hit 6-month highs. Credit spreads are near one-year highs. A.I. stocks moved lower. Yet, the S&P 500 hovers a few percentage points below all-time highs. Diversification reigns supreme for most long-term investors.
Last week, Tech stocks declined over concerns of the AI buildout. Adding to the pressure… Hotter than expected inflation data means interest rates could be higher for longer. Higher bond yields are creating new investment opportunities. As yields rise, they start to compete with stocks. The fundamental backdrop and mega trends in the market remain intact. Corporate earnings are outpacing stock prices. Economic growth continues to expand. Consumers continue to spend. Interest rates are rising, but a recession does not look likely in the near term. The equity market continues to expand. Corporate earnings will take the spotlight this week.
Global bonds had another volatile week before settling down fairly flat/slightly lower. Oil prices remain volatile. Big bank earnings and inflation data will be in focus this week. Inflation data may shift Fed expectations (either direction – we don’t know) as well as Treasury yields. Higher yields impact capital markets. As the risk-free rate rises, bonds compete with stocks. We’ve seen some of this response through lower stock valuations, but earnings have been supporting higher stock prices.
Last week, Inflation came in hot, but weaker than expected. Oil prices fell. The jobs report was soft. - The previous 2 months were revised lower, and the jobless rate increased. Yet, 10-year bond yields continued higher.
The AI buildout is tapping the debt market for funding. Government borrowing hasn’t slowed. We’re witnessing an uptick in the competition for capital, and this is driving yields higher. (More bonds being issues means the price of bonds goes down = Higher Bond Yields). The Fed’s rate hike strengthens their credibility. The economy is growing and it would probably take a larger change in Fed policy to derail markets.
Quick Comments: Higher rates and strong equities can coexist. We have oil above $100, the 10-year treasury crossed 5%, yet stocks are near all-time highs. This week’s Fed meeting will be in focus. The futures market is showing odds over 90% for a rate hike.