The following economic awareness entry is based on short-term events and therefore should not be taken as information towards making investment decisions, which are of a long-term nature. It is only meant to provide clarity regarding current economic events, as there is often a large degree of incorrect information dispersed through the media or other sources.
Last week, the Presidents' Day holiday meant markets were only open for 4 trading days, and during that time, we received comparatively few economic reports. Nonetheless, major domestic indexes showed considerable volatility and posted losses for 3 straight days. By Friday, however, stocks rebounded and ended the week in positive territory.
What drove market performance last week?
Once again, inflation and interest rates were on many investors' minds. In particular, multiple reports from the Federal Reserve contributed to performance.
On Wednesday, the Fed released minutes from its January meeting, which indicated that officials had concerns about inflation. The minutes revealed that between rising inflation and economic growth, the Fed sees justification for continued interest-rate increases. In reaction to the news, 10-year Treasury note yields hit their highest level in 4 years.
How do treasury yields and stock prices affect each other?
To say that the interaction between treasuries and stocks is complex would be an understatement. At its most basic, prices for stocks and bonds usually move in opposite directions. When stock prices go up, bond prices drop - and vice versa. For treasuries and other bonds, yields rise when their prices drop. As a result, when the stock market jumps, treasury yields often do, too.
Last Wednesday, however, rising yields may have contributed to a drop in the markets. Why?
Some investors become concerned when 10-year Treasury yields hit 3%, since that percentage level has aligned with bear markets for the past several decades. On Wednesday, the yields hit 2.94% - just a sliver away from that "warning" level.
Please note that the rate-driven analysis triggering this concern is likely far too simple and may not accurately predict what's ahead. With that said, the concern still has the ability to affect investor reactions.
What happened later in the week?
Friday, the Fed shared more information with a new report on its monetary policy. The details helped allay some investors' fears of interest rates increasing too quickly. In reaction, yields on 10-year Treasury decreased to 2.87% - and the S&P 500 had its largest gain in weeks.
What's on the horizon?
After receiving multiple perspectives from the Fed last week - but relatively few new data updates - we should gain significant economic insight this week. From a Gross Domestic Product reading to perspectives on manufacturing and consumer confidence, investors will have many fresh data points to analyze. We will monitor these updates closely and continue to help you stay informed about where the economy stands and what to expect in your financial life.
Monday: New Home Sales
Tuesday: Durable Goods Orders, Consumer Confidence
Thursday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg Index
Friday: Consumer Sentiment
Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5- year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
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Diversification does not guarantee profit nor is it guaranteed to protect assets.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.
The S&P US Investment Grade Corporate Bond Index contains US- and foreign issued investment grade corporate bonds denominated in US dollars. The SPUSCIG launched on April 9, 2013. All information for an index prior to its launch date is back teased, based on the methodology that was in effect on the launch date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back tested returns.
The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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