Nothing’s ever certain in financial markets, but an ongoing trend is usually revealing. On that score, the signs of a bear market are on the rise after today’s rout that cut another 4% from the S&P 500 Index.
Whatever you call it, the trend for equities overall this year remains conspicuously negative and so the main advice the flows from the data is to continue to respect the downside drift.
There’s nothing subtle about the weekly chart for the SPDR S&P 500 ETF (SPY), a popular proxy for the market. The bias is clearly negative and the persistence suggests there’s more to come. After today’s close, SPY looks set to post its seventh straight weekly decline. At the moment, the fund is close to the lowest level in more than a year.
The gravity of selling was too much for even energy shares to buck, although on a weekly basis Energy Select SPDR (XLE) still looks bullish.
Ditto for utilities (XLU), which continues to hold on to a mild upside swing.
But the force and breadth of selling is starting to take a toll on sectors that have previously been perceived recently as relative safe havens. Notably, consumer staples stocks (XLP) may be starting to buckle.
Meanwhile, Treasuries appear to be regaining their mojo as a safe haven: iShares 7-10 Year Treasury Bond (IEF) is currently on track to post a second weekly gain, which would be the first back-to-back weekly advance since November.
Yes, it’s premature to assume the the run of rising interest rates is over and that bonds are poised for an extended upside run. One reason: Fed Chair Jerome Powell is eager for the crowd to assume that the recently launched run of tighter monetary policy has plenty of room to run.
“We know that this is a time for us to be tightly focused on the time ahead and getting inflation back down to 2%,” Powell said yesterday. “No one should doubt our resolve in doing that... What we need to see is inflation coming down in a clear and convincing way.”
On that basis, the modest bump in bond prices over the past week or so looks like a head-fake. What would stay the Fed’s hand and convince it to back off additional hikes? A sharp, severe deterioration in US economic conditions would do the trick, but that doesn’t look plausible for the immediate future. The latest numbers suggest that the economy is bouncing back in the second quarter after the contraction in Q1, which provides cover for the Fed to continue its tightening.
A bit of hot-off-the press support comes by way of today’s revision of the Atlanta Fed’s GDPNow estimate for Q2 economic activity, which reflects a solid bump in output: +2.4% vs. Q1’s 1.4% decline.
Tomorrow’s update on US jobless claims is expected to bring similarly upbeat for the news macro outlook. Econoday.com’s consensus forecast calls for new filings of unemployment benefits to slide to 197,000 for the week through May 15 — close to a multi-decade low and therefore another signal for assuming the labor market will continue to expand at a healthy pace.
True, there are signs that the economy is slowing, but for the moment the broad trend isn’t slowing fast enough to trigger a pause, much less a reversal, in the Fed’s tightening policy in the near term, or at least until the next poilcy meeting.
Fed funds futures are currently estimating a 91% probability that the central bank will raise its target rate by another 50 basis points to a 1.25%-to-1.50% range at the June 15 FOMC meeting.
Anyone want to guess where the S&P 500 will be at that point? Mr. Market’s forecast is always a hazy affair, but as the SPY chart above suggests there’s no mistaking the directional bias and the related outlook. ■