by Ivan Martchev
September 19, 2023
When I penned “Wild Cards for September” at the start of this month, bonds surely were on my mind, as I did not expect six months ago that the 10-year Treasury would trade above the October 2022 yield highs without backing off, but we closed on Friday a few basis points (bps) below 4.34% and we have traded as highs as 4.36% recently. Could they go to 4.50%? We’ll find out soon enough.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As the 10-year yield moved up from 3.25% in the spring to 4.35% recently, the stock market generally ignored rising bond yields. First, there was the AI craze, which is great, but I do not believe it will be a major contributor to earnings in 2023 or 2024, which is what this year’s stock market action should be discounting. If the S&P 500 has risen this far without a considerable rise in earnings, as interest rates are also rising, the discounted value of future cash flows means the index should be a little lower.
We don’t have to enter into a recession to see a normal correction, which right now looks like somewhere in the vicinity of the 200-day moving average, which is rising and is just below 4,200. Typically, an index finds strong support near a rising 200-day moving average after spending a long period above it.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Also, we have a creeping dollar, because of creeping bond yields, as interest rate differentials move in the dollar’s favor, meaning a double whammy situation is developing. Multinationals don’t like a strong dollar, as it means lower earnings when repatriated to the U.S. While the S&P 500 index gets about 29% of its revenues from abroad, the tech sector, which has been a leader in 2023, gets 59%! So now we have rising yields that discount future cash flows at a lower level and a rising dollar that suppresses earnings.
If that is not a recipe for a continued correction, I don’t know what is.
Corrections are normal and not a reason to panic. In addition to the rising 200-day moving average on the S&P 500, there is an overlapping and very important trendline that connects key lows on a closing basis (see chart, above). That would be a good target for a shakeout in the next 2-4 weeks.
We’ll reevaluate when we get there, but so far in 2023 both the economy and the stock market have been surprising to the upside, so right now the glass still looks half full, not half empty.
The Euro May Have Further to Fall
The inverse of a rising dollar is a falling euro, as it is the largest component of the U.S. Dollar Index, by far, at 57.6%. That is because of all the individual European currencies that once floated against the dollar, such as the Deutsche mark and French franc. Still, Europe has a greater challenge than the dollar.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Geopolitically, the Ukrainian counter-offensive has failed, with no gains against the Russian line of defense in the last three months and, by some estimates, the Ukrainians have already lost 20% of the new weapons delivered for the counteroffensive. The Russians were hopelessly unprepared for the fierce Ukrainian resistance at the start of the war – and for the first Ukrainian counter offensive last fall. Now they are prepared, and it shows on the battlefield. The current stalemate is bearish for the euro, since until this conflict is resolved, it will always have the possibility of spilling outside of Ukraine’s borders.
The Russian Federation has made it clear that it will not accept anything short of a neutrality pledge from Ukraine – a constitutional amendment that Ukraine will not join NATO – as well keeping what they have on their side of the frontline, effectively joining Crimea by land with the rest of Russia.
None of this is acceptable to Ukraine at the moment, so this stalemate may have further to go, which is euro bearish. Europe will not straighten out its relations with Russia and quickly ramp up natural gas imports, even though it badly needs them, which raises questions about the coming European winter.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation is Rapidly Receding – Except for Energy Prices
Income Mail by Bryan Perry
America Desperately Needs Lower Rates to Pay its Rising Bills
Growth Mail by Gary Alexander
Rising Debt, Fewer Workers and Slower Growth Since 2001 – Why?
Global Mail by Ivan Martchev
Bonds and the Dollar Suggest a Further Correction in Equities
Sector Spotlight by Jason Bodner
The Market Often Surges or Sinks on Misinterpreted Words
View Full Archive
Read Past Issues Here
Ivan Martchev
INVESTMENT STRATEGIST
Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
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