Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
The S&P 500 continues to slide and is now down 9.7% from all-time highs, approaching correction territory.
In the news this week, US employers continue to face rising labor costs. The US economy shows significant growth through the fourth quarter of 2021. And the major indices ae on track for their fourth weekly lose in a row.
If those last two headlines sound counterintuitive, it’s because they are. While the economy is coming out of a very strong year in 2021, the stock market tends to be forward looking and may be digesting economic weakness for the year ahead. However, the stock market itself is a poor indicator of economic weakness. The number of times that the stock market has entered correction territory with a loss of 10% or greater over the last 12 years, is, well, a lot.
In fact, over the last 40 years, the average intra-year drop throughout a calendar year is 14% yet annual returns in the S&P 500 were positive in 32 of those 42 years. Pull backs, even significant pullbacks, are the norm and not the exception. However, we are still monitoring the conditions of the economy for not just market weakness, but economic weakness. So here are a few indicators we are monitoring.
This is the high yield bond spread that measures the yield on high yield corporate bonds over treasuries. Rising high yield bond spreads indicate financial weakness amongst corporations that bond investors are unwilling to tolerate. Typically, these spreads increase in the years prior to a recession. So far, that spread has not increased. This indicator has been known to give false positives so take that with a grain of salt.
The leading economic index is a composite of different economic indicators that indicate economic weakness when the growth flips negative. So far, the leading economic index remains positive.
And finally, the 10 – 2-year treasury spread is a very popular indicator. In a growing economy, the 10-year treasury yield should have a yield well above the 2-year. When the Fed raises rates and bond investors lose faith in the long-term trajectory of the economy, the 2-year yield typically spikes and the 10-year yield typically falls, causing an inversion of the yield curve. The 10-2 spread has preceded the last 6 recessions. So far, the spread remains positive but the yield curve is flattening.
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1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved January 28, 2022, from FactSet Database.
2.J.P. Morgan Asset Management. “Guide to the Markets.” 1Q 2022, as of December 31, 2021. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/,
3.Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2, January 27, 2022.
4.FactSet Research Systems. (n.d.). Leading Economic Index (Interactive Charts). Retrieved January 28, 2022, from FactSet Database.
5.Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y2Y, January 27, 2022.
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The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
A high-yield corporate bond is a type of corporate bond that offers a higher rate of interest because of its higher risk of default.
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