May 11, 2024 Market Update

The stock market continued its rebound from April’s sell-off, lifting the S&P 500 Index by 1.9% -- the third straight weekly advance.  The benchmark closed on Friday less than 1% below the peak set on March 28th and so it’s possible the S&P could reach a new record high in the days ahead.

The bond market perked up too, albeit just barely, based on Vanguard Total Bond Market ETF (BND), a proxy for U.S. investment-grade corporate and government fixed-income securities.  The fund is still posting a modest 1.8% loss year to date, but the recent rebound revives hope that bonds are stabilizing after a rough ride in 2024 through the end of April.

The stock and bond markets have both been challenged recently by indications by the Federal Reserve that it intends to maintain higher interest rates for an extended period as part of its effort to rein in inflation.  The degree to which such suggestions affect the markets is surprising at times.

The relationship between bond prices and interest rates is straightforward: When interest rates rise, the appeal of new bonds increases due to their higher returns, which in turn diminishes the value of existing bonds, driving their prices down.

There are several reasons high interest rates can have a negative impact on the stock market.

• High rates make bonds more appealing compared to stocks.

• Increased borrowing costs for companies lead to reduced profits, which can depress stock prices.

• The valuation of a company’s stock is linked to its future earnings.  With high interest rates, the present value of these future earnings declines.

Despite these challenges, there is a silver lining to interest rates remaining high.  The Fed's hesitance to cut rates is rooted in the robust performance of the U.S. economy.  A strong economy can alleviate fears of a recession and decrease the likelihood of a prolonged bear market. 

Accordingly, when the central bank does decide to start cutting rates, it may not be a bullish sign if the policy shift is driven primarily by a weakening economy rather than softer inflation. 

That’s all for now.  Have a great weekend and invest wisely my friends.