Market Update: February 24, 2023

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 market sold off again this week with a short relief rally on Thursday February 23rd. The market is now below the key support level at 4050 and is trading down towards another key level around 3930.

In the news this week, Fed policy is causing volatility in the municipal bond market. Previously this market has been reasonably resilient to rising interest rates. Airlines are making large profits on rising airfares. And inflation continues to remain stubbornly high as measured by the personal consumption expenditures index.

The latest round of stubbornly high inflation is causing the bond and stock market to rethink previous positions on the timing of disinflation and subsequently the actions taken by the Federal reserve. The stock market, shown here in blue, and the bond yields, shown in purple as measured by the 10-year treasury, often have an inverse relationship. As bond yields rise, the stock market typically falls simply because there’s no reason to hold high risk stocks when you can get a safe yield from treasury bonds. In the post-covid economy, bond yields and the stock market actually had a positive relationship because bond yields were so low that the 10 year treasury bond was not a proper replacement for the returns in the stock market. Once yields reached the 2% line, however, the steady climb in yields turned into a rapid climb in yields sparking the sell-off in the equity markets. For the last few months, yields have stabilized anticipating a slowdown in inflation and Fed rate hikes. Recently, however, yields have started to rise again on the back of rising inflation expectations.

Herein lies the problem. Despite the strong sell off of equities over the last year, valuations are essentially back to normal levels. The forward PE ratio is actually trading above the 25 year average as are 4 other valuation metrics. Meaning that the market is still valued above average when 10-year yields are much higher than they have been since the global financial crisis. In other words, stocks are still fairly expensive relative to the 10 year yield on treasury bonds and this may be a continued source of volatility in the stock market for the foreseeable future.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved February 24, 2023, from FactSet Database.

2.FactSet Research Systems. (n.d.). S&P 500 & 10 year yield (Interactive Charts). Retrieved February 24, 2023, from FactSet Database.

3.J.P. Morgan Asset Management. “Guide to the markets: S&P 500 valuation measures.” Updated January 31, 2023. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

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