3 Rally-Ending Red Flags the Stock Market Is Waving Right Now

  • While U.S. stocks began the year on a bullish note, the stock market warnings are beginning to pile up.
  • Stubbornly high inflation will keep the Federal Reserve in a state of “higher for longer” in regard to interest rates.
  • Falling bonds and a rising 10-year Treasury yield threaten to ding the recent stock market rally.
  • A strengthening U.S. dollar tends to hurt U.S. equities while also negatively impacting earnings for multinational companies.
Stock Market Warnings - 3 Rally-Ending Red Flags the Stock Market Is Waving Right Now

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In mid-October, the stock market hit a 52-week low but rocketed higher on the day. Ultimately, that session ignited a multi-month, multi-leg rally. After an impressive run in equities, though, we’re starting to see some stock market warnings pile up.

There are certainly positives in the market and the economy. For one, inflation and higher interest rates have not crushed the U.S. or global economies into a deep, dark recession. That’s certainly a positive.

It’s also positive that the labor market has remained incredibly tight over the last few quarters. While some of this is a negative for the stock market and the Federal Reserve, it’s a positive for consumers.

After a hot start to the year — where the S&P 500 rallied in four out of five weeks before a three-week dip — let’s look at a few stock market warnings that are popping up.

Stock Market Warnings: Inflation and the Fed

3D illustration, Inflation - money graph rises, interest rates, Roy Dalio news
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When inflation began roaring higher in 2021, the Federal Reserve was behind the ball. They called it “transitory” and largely let it run loose. Finally, in March 2022, they raised interest rates by 25 basis points. Since then, they’ve been on a strong run of raising rates.

In 2023, the expectation was that the Fed would raise rates twice — by 25 basis points each time — then pause, before a potential interest rate cut by year-end.

However, February has screwed up the entire plan.

On Feb. 3, the January jobs report came in extremely hot. Far hotter than analysts had expected. Then the all-important CPI report topped expectations. So did the PPI report. Finally, the PCE report (another inflation measure) came in hot on Feb. 24.

That’s four-for-four and not in a good way. The assumption is quickly becoming that interest rates will rise further by year-end, and the fight against inflation seems to continue. That’s bad news for equities — particularly tech and growth — which do not perform well in a rising-rate environment.

Plus, it increases the odds of a recession and/or an economic slowdown.

 Bonds and the 10-Year Yield

Several U.S. Treasury Bonds stacked on each other.
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Often called “smart money,” bonds have been struggling lately. While the S&P 500 has been pushing higher, bonds have been moving lower.

The iShares 20 Plus Year Treasury Bond ETF (NASDAQ:TLT) has been down for four straight weeks. It’s perched less than 2% above its December low. Keep in mind, the TLT bottomed around the same time the S&P did, so if it’s leading stocks lower again, that spells trouble.

Additionally, as bonds go down, yields go up.

The 10-year Treasury yield currently sits at 3.95%. In recent trading, it climbed as high as 3.978%, its highest reading since November. In fact, from this month’s low to the recent high, the 10-year yield has risen almost 20%.

For what it’s worth, the 10-year yield was at roughly 4.33% when the S&P 500 was at its 2022 low.

Stock Market Warnings: The U.S. Dollar

Money, US dollar bills background. Money scattered on the desk. Stocks under $10
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Lastly, we have the U.S. dollar. Investors can either follow the U.S. Dollar Index (the DXY) or the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP). Rising yields and rising rates are bad for stocks. So too, is a rising U.S. dollar.

A soaring dollar may be nice for U.S. citizens when they go abroad, but it’s not great for multinational companies who do business in local non-U.S. dollar currencies (like the yen, euro, etc.).

The dollar has gained in four straight weeks, while the UUP is up in five straight weeks.

It could simply be a rebound after a large decline, as the DXY topped in late September and fell over 12% while declining in four straight months. That said, if it’s a more persistent, stubborn rally, then equities could face yet another headwind.

Helping drive the dollar higher? When the Fed raises rates faster and more aggressively than its other central bank counterparts.

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

Article printed from InvestorPlace Media, https://investorplace.com/2023/02/tlt-uup-3-rally-ending-red-flags-the-stock-market-is-waving-right-now/.

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