With Rates Rising Rapidly, Is It Too Early to Talk About Recession?

Last week, it was rapidly rising Treasury yields drawing money out of stocks and raising concerns over future earnings due to increasing financing costs. This week, the focus could shift to the consumer. This is because of rising mortgage rates for homeowners and buoying credit card bills for the typical consumer.
James Hyerczyk
Risk Ahead
Risk Ahead

With last week’s steep sell-off in the U.S. equity markets comes the news that fewer than half of all S&P 500 stocks are above their individual 50-day moving average. While not a major long-term indicator, it does mean most stocks are not in a short-term uptrend. It also raises concerns over the market’s performance into the end of the year.

The S&P is also trading less than half a percent above its January high at 2872.00. This should be considered support. There’s also an old adage that says, “Old tops tent to become new bottoms”. If this is the case then bullish buyers are going to try to make this a self-fulfilling prophesy if the market corrects back to this level.

A move back into 2872.00, in my opinion, will be where the rubber meets the road. A failure to hold this level coupled with the broad-based weakness could start bringing in the heavy selling pressure. The technical guys will no doubt go crazy if this price fails as support because this will be indicative of a failed breakout pattern.

Last week, it was rapidly rising Treasury yields drawing money out of stocks and raising concerns over future earnings due to increasing financing costs. This week, the focus could shift to the consumer. This is because of rising mortgage rates for homeowners and buoying credit card bills for the typical consumer.

In other words, it seems like almost in an instant investors went from celebrating the strengthening economy and robust jobs growth to worrying about whether someone will be able to pay their mortgage or their credit card debt this month. Student loans, personal loans and auto loans will also be affected by the jump in interest rates.

This is not speculation, its reality. After trading to-and-fro for several years, Treasury traders finally got the message last week and kicked it into higher gear, driving 10-year Treasury notes and 30-year Treasury bonds to multi-year highs. At times it looked like a panic had set in. I wouldn’t say that, but it certainly appeared that after the bullish ADP report and the hawkish comments from Fed Chair Jerome Powell that investors realized they were behind the Fed and had to catch up.

With rates moving up at a steep pace, a whole new set of concerns start to open up for investors. If you look at monetary history, short-term rates that move up faster than longer-term rates tend to indicate a recession may be right around the corner. If this is true then this will be a game-changer for stock market investors.

One of the Fed’s jobs is to prevent a stock market meltdown. By continuing to say that it will raise rates gradually, they are presenting investors an orderly tightening process. However, if T-note and T-bond investors want to drive rates upward at a faster pace than the Fed is comfortable with, then conditions may be ripe for a steep sell-off or a recession, or any of the other problems that can be caused by excessive speculation or a market bubble.

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