Weekly Update

Stocks just posted their best week since March! And the headline reads: “Stocks climb in light, pre-holiday trading, with the S&P 500 posting the biggest weekly gain since March, amid growing confidence that the economy is strengthening enough to handle higher borrowing costs as early as this summer.”

Hmm… I humbly, if not hesitatingly (no one knows for sure!) disagree (at this point) with the “growing confidence” part. I do, however, agree with the “economy is strengthening enough” part.

So what should we expect under a higher interest rate regime? Well, for starters, the dollar (given present conditions) would rise. Which it did a week ago Wednesday when the Fed’s—immediately interpreted as hawkish (portended a coming rate rise)—April meeting minutes were released:    

click each chart, then wait a second and click again, to enlarge…

Dollar's move on April minutes

And treasury yields would soar. Which they did “ “:

Treasury Yield on April minutes

And the stock market—assuming I’m right and traders aren’t positioned for a higher fed funds rate—would sink. Which it did “ “:

spx's move on April minutes

But look what happened during the week following those “logical” reactions.

The dollar was all over the place, but did edge higher:

Dollar a week after minutes release

Treasury yields were tumultuous, but ended slightly higher:

Treasury yield a week after minutes release

And the stock market soared!

spx a week after minutes release

What you see above is the result of short-term equity traders doubting a June fed funds rate hike. And currency and bond traders playing it safer and/or looking beyond the next three weeks, or both. There’s a commonly held Wall Street belief (held mostly among bond traders) that bond traders are smarter than stock traders. I’ve always thought nah, they’re just more careful…

Next week’s economic calendar is pretty full, with the biggie being the jobs number on Friday. As the above would indicate, in my view, a soft number would likely be welcomed by the stock market—as it would alleviate pressure on the Fed to move in June. A strong number would likely see stocks lower. In the long-term scheme of things—in terms of that long-term, globally balanced equity portion of your portfolio—it don’t matter :)!

Here’s yesterday’s commentary/technical lesson, in case you missed it.

Have a wonderful weekend!

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