The stock market pulled back last week amid news of mixed economic data, as well as the release of notes from the Federal Reserve’s latest meeting. Thursday’s report from ADP that corporate hiring surged in June was the most impactful report, as it sparked an uptick in already rising interest rates. The Federal Reserve wants employment levels to recede so that consumer spending will be lower and, hence, inflation. FOMC notes, which reiterated a need to continue to hike rates in the face of moderating, yet still high, inflation, also pushed interest rates higher.
Rising yields have caused the stock market to decline in the past, with high growth stocks being the most negatively impacted. This is because the value of future earnings looks less attractive due to their longer-term cash flow horizons. Below is a chart of the Tech-heavy Nasdaq from mid-August 2022 until today and, as shown, the Nasdaq generally pulls back as interest rates rise. More recently, however, the Nasdaq has held in despite a rise in the yield of the 10-year Treasury. The question, at this time, is whether rates will continue to rise and, if so, whether we will see the markets pull back further.
Next week will undoubtedly provide more clues regarding sentiment around higher interest rates as traders get back to their desks and digest events from this week. Also of note will be the release of Core CPI and PCI data for June. These indicators are readily-watched measures of inflation, as they reveal if prices for consumers or wholesale goods are on the rise.
At this time, both the S&P 500 and the Nasdaq remain in confirmed uptrends, as they’re above key moving averages, with their momentum indicators in positive territory. In addition, cyclical areas of the market, such as the Industrial and Consumer Discretionary sectors, remain in strong uptrends as fears of a recession continue to recede.
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Mary Ellen McGonagle, MEM Investment Research