The S&P500 climbed about 1.2% last week on light to moderate volume. Volatility dropped—the VIX index dipped back near, but not quite to, the lows of the year which were established in the summer months. While the S&P rose last week, it’s still not close to setting new highs, highs that were also established in the summer months.
Several key economic reports were announced last week. While the housing market index beat expectations, both housing starts and existing home sales (arguably both more important gauges than the housing market index), missed expectations. Initial jobless claims are still hovering near cycle lows. But the Chicago Fed national activity index, leading indicators and PMI flash manufacturing all missed. The big announcement of the week came from the Fed which decided not to raise rates….again. Instead, they’re keeping short term rates pinned near zero even longer, all the while arguing that the economy is recovering yet again. The problem with this is that more and more regular American—who know that the economy has never truly recovered after the Great Recession —are beginning to understand that the Fed can’t argue that the economy is getting better while keeping rates so low and for so long. It’s a contradiction. The Fed is beginning to lose credibility not only with Wall Street, but lately even with Main Street.
And speaking of losing credibility, the US Treasury market rates have started to slide back down recently. After touching 1.75%, the 10 year Treasury yield has now fallen back below 1.60% and shows no signs of rising soon.
The reason this matters is that rising Treasury rates are typically associated with an improving economy, and therefore falling rates are associates with a deteriorating economy. After the 10 year rates jumped up from about 1.35% in late June (immediately after the Brexit vote was cast), the world took a breadth and realized that everything was not about to fall apart. So rates crept higher for most of the summer.
And it’s not just that lower rates are associated with lower prospects for economic growth; it’s also the case that falling rates are associated with lower prices for risk assets, such as stocks. When owners of stocks sell, they tend to buy up Treasuries to park their capital in a safe harbor. This lowers yields. And this is precisely what may be happening now as someone seems to be pushing the prices of US Treasuries higher…..in anticipation of a market decline.