In this week’s video, we highlight the top 5 things you should know about 529 college savings plans. Take a look:
To learn more, check out the video on our FAQ page of our site, where we expand on the things you should know about 529 plans.
In The Market...
The S&P 500 was essentially flat last week. Let's look under the hood:
Stocks looked poised for a nice rebound, rising nicely heading into Wednesday before giving back all of those gains by week’s end. Defensive sectors gained (Consumer Staples, Utilities) while growth-oriented sectors fell (Tech, Consumer Discretionary, Materials).
Normally we might see the bond market rally along with the more defensive sectors, but that was not the case. Why? Simply put, investor demand for long-term bonds has weakened. Weaker demand means falling bond values, which means higher interest rates.
Take a look at this chart I shared back in May, only now in current time. My fear today remains what it was then — short-term interest rates would rise too quickly and eventually eclipse longer-term rates, causing the “yield curve” to invert. This is still very much in play, when looking here at the 10-year Treasury rate (blue line) vs. the 2-year Treasury rate (orange line):
An inverted yield curve is abnormal and unintended. If you lend your money for 10 years you should expect to earn a higher annual interest rate than if you lend it for 2 years.
By my estimation, this is the result of two things working in conjunction. First, the Federal Reserve has accelerated its pace of raising short-term interest rates. Second, although investor demand for long-term bonds has weakened, it has not weakened enough. So while long-term interest rates have also increased over the past 2 years, short-term rates are simply rising quicker, and thus, closing the gap.
Okay, back to stocks…
For now it appears investors are selling any market rallies rather than buying any market dips. This is pretty typical in the days/weeks after a quick market drop like the one we just witnessed. We are remaining patient and being selective about reinvesting back into stocks.
Interestingly, recent market behavior resembles that of Oct. 2014, which also happened to be the last midterm election. In fact, many of today’s statistical measures align with that period of time. I will spare all of those details, but the important takeaway is that if the market continues to channel Oct. 2014 then we would expect the S&P 500 to rally roughly +10% over the next 6 weeks. Will it? Nobody knows for sure. But I thought it was worth highlighting.
Still though, upward price momentum has waned. The S&P 500 continues to hug its 200-day moving average, which is a line-in-the-sand that invites considerable buying/selling activity. We want to see more stock prices above their 200-day moving averages, not less.
Here is a look at the percent of stocks that are above their 200-day moving averages, collectively by sector. Josh tracks and logs this at each week-end. Notice how the percentages have slipped lower since the beginning of the year:
If this percentage continues to decline, stock prices will likely fall further from here. Simply put, stocks need to hold their 200-day averages. It is a tricky market right now, no doubt.
In Our Portfolios...
Have a great week!
Brian E Betz, CFP®