Medicare Agent News: Stocks Are Rising Again

Tuesday, September 28, 2021

Stocks Are Rising Again

By Nicholas Jasinski | Thursday, September 23

No Reversion...Yet. The S&P 500 built on yesterday's rally today, after bouncing back from four straight losses. The index is up more than 3% from its lowest point this week and less than 2% below its early September record close.

For all the recent volatility, stocks have been more sideways than down lately. The S&P 500 hasn't endured a 5% decline from its all-time high for the past 223 trading days. It's only the seventh time since 1928 that the index has gone on a streak that long, according to Dow Jones Market Data.

During that streak, the S&P 500 is up 32%. The long-term picture for investors remains quite positive, even if ther a

Still, it's natural to expect a reversion to the mean at some point. The S&P 500 will sooner or later see a 5% pullback from its record. And there are plenty of candidates for the eventual catalyst—shifting legislative and central bank policies, decelerating economic and profit growth, or wildcard new Covid-19 variants, to name a few.

But those all appear to be problems for another day, at least for now. The S&P 500 jumped 1.2% and the Dow Jones Industrial Average surged 1.5% today—both indexes' largest one-day gains since July. The tech-heavy Nasdaq Composite gained 1%, while the small-cap Russell 2000 was up 1.5%

This week's Federal Open Market Committee meeting went about as close to expected as possible. And investors and analysts seem to be less concerned about the impact of China Evergrande Group's looming default than they were to start the week.

There has been significantly more action in the bond market this week. On Wednesday, Federal Reserve officials signaled that as a group they now expect higher interest rates to arrive sooner than they did three months ago.

Long-term bond prices have traded down as a result. The yield on the 10-year U.S. Treasury note (which moves inversely to price) is up 0.1 percentage point—a big move for the bond market—in the past three days, to 1.41%. That's the highest 10-year yield since July, but still well off the 1.75% peak from March 2021.

It's also much lower than the yield as reflected by the Fed's latest "dot plot," which has the longer-run estimate of its target interest rate at 2.5%.

Here's Thomas Mathews, markets economist at Capital Economics:

[This] suggests to us that even though the Fed has revised up its own inflation forecasts a bit, investors remain skeptical that inflationary pressures will be sustained. As such, they are confident that the central bank will be able to keep inflation under control without having to hike by all that much, and that even if the Fed were to hike a bit sooner, it would simply have to do less further down the line. This presumably helps to explain why the yield curve flattened yesterday, and why long-dated yields in general remain so low.

By contrast, we think inflationary pressures over the next few years will prove more sustained than investors anticipate. We expect this eventually to result in investors requiring more compensation for inflation, discounting additional rate hikes, or some combination of the two. As a result, we expect long-term Treasury yields to rise over time.

Bonds could eventually join stocks in an inevitable reversion to the mean.