In a tizzy with Lizzy
Interest rates reached levels last seen in 2010 following U.K. prime minister Liz Truss’ surprise deficit-widening budget (and associated borrowing requirements) forced bond sales by U.K. Pensions in order to meet margin calls. Anyone want to bet the over on Mrs. Truss exceeding the current 119-day record for the shortest premiership?
U.S. Treasury rates, already moving higher in September, were pushed to even higher levels as panic set in at U.K. pensions in search of liquid assets to unload quickly. The Bank of England subsequently stepped in to calm U.K. fears, but not before U.S. rates were impacted in the fallout. Ultimately, the 10 yr. U.S. treasury rate increased a whopping 64 basis points in September to top out at 3.83%.
The spike in rates helped to drive the S&P 500—already in retreat from the hawkish Fed—down 10% for September, a new low for the year.
Is that it?
The good news is that we’re getting closer to the end of the downturn. Higher interest rates and an aggressive Fed are certainly close to priced in. Furthermore, we are closer to peak inflation. Commodity prices have rolled over (e.g. lumber back to pre-Covid levels) and ISM Surveys indicate contraction beginning in manufacturing orders. The pig is in the python, and investors see it, so they have adjusted to a degree. But it will take time to digest, and we are likely to see earnings downgrades as companies begin to report over the next few quarters, so it’s still too early to give the all-clear signal.
What would provide that signal? A Fed pivot. This seems unlikely in November, but Powell could begin to signal a slower pace of hikes during the Q&A session which would be welcome news to investors. So, while we are not yet done, we are getting closer to the end of the cycle.
As we approach the end of the cycle, fixed income is beginning to look more attractive. We’ve been wary of fixed income since the start of 2022. But, as we approach a potential rate top, there is more to like. In fact, US treasuries are starting to look like one of the most attractive risk-adjusted options on the table as they provide:
- A hedge to the risk of recession;
- A safe haven / potential appreciation should the Fed hike until something breaks;
- Current yield.
While we’re not out of the woods yet, we are starting to see the path out. If the Fed can avoid breaking something and the market can absorb lower earnings, we’re getting closer to a bottom where we can see a path to more upside.
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This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.