The Dancing Frog (The Stock Market)

Remember the old Looney Toons cartoon where the frog would dance only in sight of one man?  He would whip out his cane and top hat to sing, “Hello My Baby, Hello My Honey, Hello My Ragtime Gal…”  The man would set up a show, ask the frog to perform for a crowd of patrons and all he would get was a glassy-eyed “ribbit”. 

Markets have behaved similarly this quarter.  At the end of June, the S&P 500 sat just slightly above its lowest point of the year.  Almost as soon as statements printed for June 30^th, Markets began an incredible rally of nearly 15%.  As of early August, the theory that the Fed would run to the rescue as they have now for over a decade began to falter.  The theory was officially dead in the water after Federal Reserve Chair, Jerome Powell, spoke at the annual Jackson Hole conference in late August – confirming that inflation is the Fed’s priority right now.  They will be relentless in trying to tame cost increases, even if it means the economy may have to slow down to accomplish this goal.  In response, the Markets began a reversal that, as of September 30th – just in time for quarterly statements to print again! – was back to just below the prior lows set in June.  We are back to a glassy-eyed “ribbit” after quite a show.   

None of this comes as a great surprise.  We remain in a transition to higher interest rates.  Which we expect to continue.  (Broken record anyone?!)   

That said… we have made an incredible amount of progress!  Interest rates, as measured by the 10 year Treasury yield, have more than sextupled.  Yes – you read that correctly (and I had to look it up to make sure I used the right word).  The 10 year Treasury yield has moved from .6% to over 4%.  Increasing by a factor of more than 6!  (The yield actually dropped below .4% in the darkest days of Covid but only momentarily.)  This is absolutely a historic move and constitutes tremendous progress toward a “normalized” interest rate, moving away from government support.   

The Markets are responding to this move in interest rates as one would expect – they are “adjusting valuations” across the board.  Dividends of 3% are no longer “worth” the same when overall interest rates move up.  Future cash flows are worth less in the present when rates are higher.  The Markets have a lot of work to do to sort all of this out and it is most certainly not fun!  However, July and early August are a reminder of how quickly the Markets can reverse course.  News flows and data are paramount right now. The right “rate of change” in the inflation numbers could cause another reversal to the upside.  The mid term elections are coming up, as anyone with a mailbox, phone or television is undoubtedly aware.  This could increase rhetoric but has remained a nonevent thus far with inflation, the Federal Reserve and – as always – earnings, being the primary concerns.   

The other bit of good news in terms of this progress is that those who have saved are no longer being punished with yields of almost zero on instruments like CDs.  Certificates of Deposit were earning almost 4% in the short term once again as of last week according to Bond Central.  Nowhere near the current rate of inflation, but also well off of the basement floor.   

In short, we have made really significant progress in the transition to higher rates and have moved through a lot of the Market pain that comes along with that transition.  We still don’t know when the wild inflation beast will prove to be tamed but, we have done a lot of work, if you will.  The Markets can turn on a dime, and often will when there is just a whiff of good news.  We never know when or by how much.  Increasing inflation remains the focus so there is likely more work to do with earnings and the economy likely being in focus but…  Keep those seat belts buckled!