TSP Smart: Quick look 20 September

The FOMC board that sets interest rates met today. No surprises.

Held rates steady – market expected

Said one more hike this year – market expected

Will hold rates high next year – market does not believe them

But we are finally seeing a shift in market expectations for higher rates next year. BTW, the SP500 is priced for a return to under 3% rates… ain’t going to happen.

I’ve been waiting for a market signal, but instead I see a broad sideways pattern with narrowing internal breadth. And while we remain in that pattern, we may be seeing the beginning of a leg down.

It can technically be argued both the SP500 and the Nasdaq-100 broke trend and just failed the retest.

The SP500 is the TSP C fund of course. The Nasdaq-100 is dominated by the Magnificent Seven that have done most of the heavy lifting in the SP500. If they go, the market goes.

The last large Nasdaq-100 downturn coincided with interest rates rising. In the last week or so, the 10-year Treasury yield broke out to a new high.

Looking at today’s FOMC announcement pattern below, we see the normal rally that starts the afternoon prior into the announcement. This rally was 1.25% where the average rally is 0.75% but the market quickly gave it all back.

We can see where the market held its breathe during the announcement and then the knee jerk reaction hard down – not good.

I call it the knee jerk reaction because we really need to see the follow through after all the extra press meetings. But as for now, the market closed lower and appears to be rolling over this week after topping on the 14th.

The next chart does NOT show the current interest rates, it shows the market’s expectations for rates at the end of NEXT year. The point is the market is beginning to discount higher rates next year up from only 4% in July.

I’ve been trying to hammer home that the market’s bet on lower interest rates has been wishful thinking by those who live in the financial economy that got used to suppressed interest rates. Rates are not high today, they are simply normalizing.

Normal interest rates are higher than inflation, yet we are sitting near inflation. And I see higher inflation baked into the stats for the next 9 months. My point is I do not see reason for interest rates to come back down.

I do see the need for the stock market to adjust down to higher interest rates. A large adjustment.

When will it begin to adjust in earnest?

Interest rates hitting highs, UAW strike, govt shutdown… what could go wrong.

When you invest in broad index funds like the TSP funds, the big picture is what really matters the most, not what individual stocks are doing.

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Michael Bond

Categories: Perspectives

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