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Nov 08

The Market Today: 11/6/15

Ratesrates

Today was certainly an interesting day in the markets. We started the day with the release of the employment numbers from the Department of Labor. The expectations were for an increase of 183,000 jobs. Every Economist out there was right around that number. The increase of 271,000 came as quite a shock to everyone! The market did sell off sharply to begin the day as the reaction to that number. Why the negative reaction? Higher interest rates are more competitive with stocks, thus, slowing the advance of the stock market. First and foremost, there should never be a swift reaction to these numbers, as they are subject to revisions over the next two months. The last two releases have been very weak, and then suddenly, we see a strong report! Coincidence? I think not. If you look at the comments from Fed Chairwoman Janet Yellin last Wednesday, she stated that we should not rule out a hike in rates in December? Funny how such a strong employment number comes out just two days after her statement! Plus, the Fed should not make a judgement based on one economic release! Obviously, we like seeing a strong employment picture within our economy. We should not be thinking just because we have one good release, all of a sudden, the Fed will be releasing interest rates! Even if they do, is it really a big deal? No, it isn’t. This is because when they start raising, they will not be raising rates at a fast pace, it will be very slow, and methodical.

Rates: Stocks

As mentioned above, the stock market had a swift negative reaction to the release of the employment numbers. This was do to the belief that with higher interest rates, is the belief that it is more difficult for stocks to move higher in a rising interest rate environment. Is  rising rates really impede stock growth? In the current case, I don’t think it will. I say this, because the Fed will rates on a very slow schedule. Considering interest rates are basically at 0, it has a long way to go before being at historically normal levels. Interest rates on the 10 year level would have to be above the 5%-6% level for me to be overly concerned about interest rates affecting stock growth! Even though stocks sold off swiftly at the open, they closed nearly unchanged! That say’s a lot about the strength of the stock market! Plus, when the interest rates are moving higher, which sector is the greatest benefactor of this? The Financials, and they are one of the biggest weighted sectors in the market. When Financials move higher, this will pull the rest of the market up with it!

Rates: Bonds

Interest rates on the 10 year level had a strong up move in terms of yield, and strong negative move in terms of price! The 10 year closed at 2.33%. I could see it move up to maybe 2.5% in the short term. I do not see it moving much higher than that in the short term. As you can see by the chart, I highlighted two yellow circles. Those yellow circles represent an overbought level. As you can see from the first circle, rates moved lower after that. We are now at the second. From that, it would not surprise me to see rates move a little lower, then moving higher into the December Fed meeting. We will see some volatility between now and the end of the year in bonds!

Author Sean Rhodes is an expert in financial markets and helping you manage your money. For a no-risk consultation, check out Sean at the following link for more information, and expert advice on portfolio construction, and helping client’s navigate markets when interest rates rise!

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