The central theses
- Markets back near summer lows
- Interest rates significantly higher
- Gold does not hedge effectively
With the official start of autumn yesterday, markets are largely back to where they were at the start of summer. In premarket activity, the S&P 500 is trading just above 3720. In June, the index hit a low of just under 3640. The Nasdaq is trading right at 11,400, a little less than 400 points off its June low. And the Dow is likely to test its June low of 29,639. Amid recent weakness, Goldman Sachs released a report this morning that put the S&P 500 price target at 3600 by the end of the year.
Meanwhile, bonds have also been shaken, with 10-year note yields now above 3.79%. Interest rates have been steadily higher and Jerome Powell’s comments after the recently concluded FOMC meeting did not suggest the march higher was about to end. After announcing a three-quarter-point rate hike, Powell proposed further rate hikes and expects rates to be around 4.6% a year from now. Bonds’ quick response to Fed comments is something markets aren’t used to. Markets are often slow to adapt to political demands; However, the speed of this latest movement has been violent. At the same time, Powell acknowledged that the continued rise could push unemployment up to 4.4% from the current 3.7% and reduce the chances of a soft landing.
Rising rates are being felt in the housing market, where mortgage rates are now just under 6.3%. This is the highest level since 2008 and the effects are beginning to show. Existing home sales in August fell 0.4% from July. Potential home buyers are being squeezed out of the market as interest rates continue to rise but house prices remain high.
Elsewhere, gold is trading near a two-year low premarket at just above $1650/oz. The interesting thing is that gold is usually viewed as a hedge against inflation. That prices have fallen so much despite rising inflation is a bit confusing. Not long ago, there was a lot of talk about crypto assets becoming the new inflation hedge. However, as I’ve mentioned many times before, Bitcoin trades much more like a confidence indicator for stocks. Its value has fallen along with the shares, trading below $19,000 premarket.
If we start today with the VIX around the 29 I wouldn’t be surprised to see a choppy trading session. Fridays can often see selling as traders try to de-risk heading into the weekend. Next week will be another heavy week for economic data which may make traders a bit reluctant to hold positions. Yet at the same time, some see bleak prospects, others see opportunities. For this reason, I tend to end these columns by reinforcing the message that you stick to your individual trading schedule and goals. Markets move, as we like to say. As self-directed investors, our only job is to stay the course.
delicioustrade, Inc. commentary is for educational purposes only.