Bond yields keep rising and stocks keep falling. That’s been the story of the last two months. The S&P 500 is still firmly up this year with a 10% gain but its uptrend is being threatened.
The 4200 level on the S&P is a key area that I am watching very closely. It represents several potential areas of support:
200-day moving average (blue curving line)
Trendline from October 2022 lows (green diagonal line)
38.2% Fibonacci retracement of bull market at 4600 (from top blue horizontal line to current horizontal line)
Prior resistance points (red arrows)
Bears will have to do their best to hold stocks below this level. If they do, a tactical shift in some of our portfolio models will likely be in the cards. Those would move partially away from stocks and into treasury bills, which are paying over 5% APY.
However, I’m hoping we won’t have to. The S&P 500 has had a positive return 9 out of 9 times in Q4 when it was up over 10% through July and then down in August and September.
Stocks are supposed to fluctuate so to me, the bigger story has been bond yields breaking through the high we saw last October and haven’t seen since 2007. It has been a collapse of epic proportions in bond prices and a drawdown for 38 months — the longest in history.
Short-term rates have remained roughly the same but longer duration bonds have been playing catch up with the Federal Reserve talking higher for longer into existence. It will take time for bond interest payments to recoup these losses.
Historically, what have higher rates meant for stocks? Here are the average returns since 1926.
The inflation rate chart looks similar.
The simplest explanation for all of that green is that stocks have a bias toward the upside, especially as you expand your holding period.
Eventually, rates will probably cool down the economy enough for them to be lowered again. Then, bond prices will reverse in our favor. But even if it takes time for that to happen, these historical stock returns are good numbers to keep in mind.