VTI - Will The Stock Market Fall?

2023-09-27 16:18:05 ET

Summary

• The value of the dollar is increasing, along with interest rates, which is currently the most important factor in the market.
• Michael Antonelli, a market strategist at Baird, emphasizes the significance of these two factors.
• And, the Federal Reserve is still expected to raise its policy rate of interest further.
• Longer-term interest rates have not been this high since before the Great Recession in 2007.
• Investors seem to believe that the Federal Reserve is not going to back off, and this is bad for the stock market.

000"Dollar up, rates up-that's really all that matters right now."

This, according to Michael Antonelli, market strategist at Baird .

The yield on the 10-year U.S. Treasury note (US10Y) jumped up over 4.6000 percent.

The yield on the 10-year Treasury note has not been this high since August 2007, before the U.S. economy got hit by the Great Recession.

And, the yield is expected to go higher!

The yield on the 2-year Treasury note (US2Y) has exceeded 5.1500 percent.

Yes, we have a negative yield curve. We have had a negative yield curve since June 2022, less than three months after the Federal Reserve began tightening up on monetary policy.

And, the Federal Reserve is expected to raise its policy rate of interest at least one more time this year.

The U.S. Dollar

The value of the U.S. dollar has rapidly moved up again.

The dollar can now buy one Euro (EUR:USD) for less than $1.0500 and one British pound (GBP:USD) for $1.2100.

It was in the November/December 2022 space that the value of the U.S. dollar was so strong.

And, with Europe and Great Britain facing real recessions, the European Central Bank and the Bank of England are not expected to be raising their policy rates any higher in the near term.

So, the value of the U.S. dollar going higher and higher.

Is it possible that the dollar cost of the Euro might drop below $1.0000 and the pound drop below $1.1500 as they did in the September-November space in 2022?

Many analysts believe that this might happen this year.

And, the Stock Market?

So what about the stock market?

Well, the stock market doesn't like the narrative and the picture that has been drawn above.

The S&P 500 Stock Index (SP500) is down another 25 points today.

On July 31, 2023, the S&P 500 closed at 4,589, the near-term high. It has been downwards since then.

The question is, will the market continue to decline?

The chart projects a serious decline!

Is this the end of the stock market rise?

For the past 20 months, investors have been, in a sense, fighting the Fed.

Federal Reserve Chairman Jerome Powell has contended that he will fight through to the end to defeat inflation.

Investors have not been convinced.

Investors have continued to believe that Mr. Powell, who, during his term in office, has consistently seemed to want to err on the side of monetary ease so as to avoid a financial collapse, believed that he would, sooner or later, back off from the Fed's "tight" monetary policy.

The question is… is Mr. Powell really going to stick with the battle against inflation?

Quantitative tightening has now gone into its 19th month.

Wow! Who would have even thought that Mr. Powell and the Fed would stick around for this long?

True, there has still been lots of money around, money that was spread through the financial and economic markets as a result of the COVID-19 pandemic and following the recession.

But, the Fed has kept up its quantitative tightening and the Fed has overseen a rise of over 500 basis points in its policy rate of interest.

The Fed has continued to support the negative yield spread in the term structure of interest rates.

Federal Reserve officials continue to talk about raising the Fed's policy rate of interest.

If there is going to be a break in the market outlook, I believe that it will come in the stock market and will come because the Federal Reserve has maintained its position.

A break in the stock market would probably lead to an economic recession.

And, the timing of all this could be very bad for the 2024 election.

But, nothing happened as fast as people expected things to happen in the past year. The uncertainty in the economy continues to dominate all else.

For further details see: