Rate Debate

Rate debate.  Stocks had a wild ride yesterday, closing mixed as traders responded to the prior day’s hawkish Fed announcement.  Weekly first time unemployment claims rose for the first time in 6 weeks, indicating that we may not be out of the woods just yet.

N O T E W O R T H Y

Much ado.  You might have grown up playing Bocce, Boules, Pétanque, Lawn Bowling, or maybe even… Horse Shoes.  They are all fun and all of them elicit memories of … well… Summer… just a few days away, officially.  In New York, yesterday, June 17th, was a beautiful day.  In New York, it was warm, but not too hot, not a trace of humidity.  The sun was hot and the sky was a pale hue of blue.  As I made my way across the plaza to my office I noted other eager people as they emerged from subway stations and pulled their masks aside, looked up at the sun, closed their eyes, took a deep breath… and they were thankful.  I was one of those people — so I know what I am talking about.  I made my way into my building and passed the friendly guard, flashed my ID badge which was adorned with the slightly heavier – slightly beard-ier – Mark Malek, I said “good morning” as I do every day, and made my way to the elevator which appeared to be anticipating my arrival… not unlike a predator that awaits its unsuspecting prey on edge of the savanna.  I was not unsuspecting.  I knew what was waiting for me… I knew.  On Wednesday, the Fed threw a curveball.  The Fed told us that interest rates may go up, not next year, but in two years, and that it might consider “talking about” spending less on bond purchases in the future — because things are going in the right direction – maybe… OK.  The Fed said that, for the moment, it would continue to keep things as they were… to promote further growth.  Yep… ok. Markets are a beautiful thing!!! They factor in the passions of buyers that are convinced that prices are going higher and sellers that are certain that prices are going lower.  The net result is … a market.  When both sides are increasingly passionate in their convictions, prices tend to bounce around … otherwise known as volatility, and we have had plenty of that in the wake of the Fed’s Wednesday announcement.  Interestingly, futures markets were already factoring in interest rate hikes next year and in 2023.  Bond markets too, have factored in higher interest rates as longer maturity treasury yields climbed from last summer through March, earlier this year.  Then came inflation… actual inflation.  The Fed was not worried, referring to it as transitory, and the markets bought it.  Bond yield increases moderated and stocks edged slightly higher.  On Wednesday, that all changed.  After investors had a chance to unpack the Fed Chairman’s comments, the consensus was that the policy makers are starting to feel that inflation may not disappear so fast.  The Fed’s primary tool to combat inflation is, of course, rate hikes.  So there you have it, the Fed may start raising rates, according to the dot plot, some time in 2023.  The expected reaction would be for value stocks to rise and growth stocks to fall. However the opposite occurred yesterday with a rally in growth stocks and a selloff in cyclical value stocks.  Banks, which would surely benefit in a higher rate environment, fell yesterday.  With the Fed expecting greater inflation and looking to raise rates, one would expect treasury yields to climb, but in fact, they went down in yesterday’s session. Could it be that investors don’t believe that the Fed will actually raise rates?  Yesterday’s trading pattern suggests so.  One corner of the market which did display an expected reaction was precious metals.  Gold fell by -2.1% dragging the mining sector with it. Gold, thought to be an inflation hedge, does not pay a dividend, and investors faced with higher yields from bonds may shun the metal in favor of yield… maybe. Industrial metals like copper and steel had a rough day yesterday as well, though selloffs there were mostly caused by Chinese Government policy moves along with the fact that metals are a bit overbought.  Crude oil, which recently had a bullish run, pulled back… it was also slightly overbought.  Crude oil and gold were certainly impacted by the spike in the US dollar.  The Dollar typically gains strength when rates and bond yields are high as foreign investors must convert into the sovereign currency, the dollar, in order to buy the bonds and get the higher yields.  Gold and crude oil are traded in US dollars, so when the dollar strengthens those commodities become cheaper… prices go down.  Ok, ok so there was a lot going on in the markets yesterday, some of the moves made sense, while others caused brows to furrow.  It is clear that there was a lot of pent-up tension and traders used the Fed announcement as an excuse to switch things up a bit.  Meanwhile the economy continues to improve, we just had a really solid earnings season, and the Fed made it clear that any major policy shifts are not likely to come soon and that any changes will be subtle and slow (AKA still accommodative).  So, is it time to scrap the reflation trade and go back to the economic doomsday trade?  It is far too early to tell, but we can expect more volatility ahead as the debate plays out in the days and weeks to come.  For now, Summer officially begins this Sunday, Father’s Day.  My mind is on barbecues, classic novels, and maybe improving my Horse Shoes skills.  Keep that long term focus, stick to your core investment strategy.

THE MARKETS

Stocks had a mixed close with growth stocks climbing and value stocks falling, a theme that we haven’t really witnessed since last year.  The S&P500 slipped by -0.04%, the Dow Jones Industrial Average fell by -0.62%, the Nasdaq Composite Index rose by +0.87%, and the Russell 2000 dropped by -1.18%.  Bonds traded higher and 10-year treasury yields slipped by -7 basis points to 1.5%. Cryptos slipped by by -2.81% as the great debate over mining sustainability raged on.

NXT UP

– Baker Hughes Rig Count (June 18) is expected to show a weekly increase to 465.67 rigs from 461 rigs.  Still nowhere near its pre-pandemic level, this has been on a steady rise since hitting a low last Summer.

– Today is triple witching which means futures and options contracts on indexes and equities expire today… which really means higher volume and the possibility for volatility today.

– Next week we will get more regional Fed reports, flash PMIs, more housing numbers, GDP, the PCE Deflator (the Fed’s preferred inflation metric), and University of Michigan Sentiment.  Check back on Monday for calendars and details.

IMPORTANT DISCLOSURES.

Muriel Siebert & Co., LLC is an affiliated broker/dealer of the public holding company, Siebert Financial Corporation, which also owns Siebert AdvisorNXT, LLC. Siebert AdvisorNXT, LLC is a registered investments advisor (RIA) with the SEC and with state securities regulators. We may only transact business or render personal investment advice in states where we are registered, filed notice or otherwise excluded or exempted from registration requirements. Investment Advisor products are NOT insured by the FDIC, SIPC any federal government agency or Siebert’s parent company or affiliates.

You are being provided this Market Note for general informational purposes only. It is not intended to predict or guarantee the future performance of any security, market sector or the markets generally. This Market Note does not describe our investment services, recommendations or market timing nor does it constitute an offer to sell or any solicitation to buy. All investors are advised to conduct their own independent research before making a purchase decision. This Market Note is to provide general investment education and you are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate for you based on certain investment objectives and financial situation. Do not use the information contained in this email as a basis for investment decisions. You should always consult your investment advisor and tax professional regarding your investment situation before investing. The charts and graphs are obtained from sources believed to be reliable however Siebert AdvisorNXT does not warrant or guarantee the accuracy of the information. Any retransmission, dissemination or other use of this email is prohibited. If you are not the intended recipient, delete the email from your system and contact the sender. This is a market commentary, not research under FINRA Rule 2210 (b)(1)(D)(iii) and FINRA Rule 2210 (c)(7)(C).

© 2021 Siebert AdvisorNXT All rights reserved.