It has been quite a robust bounce since the April 7th low in stocks and the recovery to almost new highs has been at a standstill the past few weeks. You can see the magnitude of this rebound on the far right side of the chart below. Will the S&P run out of gas here? I would say that we will see new highs but there could be a few bumps in the road before that happens. Vertical moves like this always come with pullbacks and we may be close to another one before shooting up to new all-time highs.
Notable is the gap in the chart which could be filled and take us down another 4%. On the plus side, the MACD momentum indicator is crossing higher which shows longer-term investors are buying this market. And a move below 5300 would warn this was a bounce in a longer downtrend. All on the table but I do favor new highs once the turmoil has passed.
Growth
We did get a read on GDP this week and it showed the U.S. economy contracted at an annual rate of 0.2%, marking a slowdown from the 2.4% growth in Q4 2024. Despite the Q1 contraction, projections suggest a rebound with GDP growth potentially exceeding 3%, driven by strong consumer spending and a narrowing trade deficit. However, there is a wider than normal expectation of GDP outcomes from economists given the uncertainties around trade and the current spending bill in Congress.
Interest Rates
All of these items coalesce around interest rates and the potential for a credit cycle if rates push sharply higher. There are areas which are showing some strain. For example, consumers look stretched with their borrowing, residential real estate prices are falling in many cities and commercial real estate delinquencies are now around 10% (and rising). The potential for higher rates should keep Congress on a leash when it comes to spending but not according to the most recent bill passed by the House. The Senate should push back on this bill in the coming weeks and for now we are on the sideline waiting for a better deficit outlook.
Chart of the 10Yr Treasury Bond
Next is a chart of the 10Yr Treasury yield that made a 40Yr low in March of 2020 and has been rising steadily as interest rates normalize. As you can see below, the 10Yr has been in a range for the past couple of years and it looks like we should see a breakout move up to 5%+ in the coming months (I am using Elliott wave analysis which explains the labeling below). In other words, there is probably one more push higher before something happens to drop long yields to green #2 (far right).
I think it is easier to see what could push the 10Yr higher given the most recent budget outlook in Congress. But what causes yields to drop again could be good (inflation and spending fall) or bad (higher rates cause more defaults).
The see-saw behavior of markets should continue for the rest of this year until we have clarity from central banks and our political leaders. I’ll be here to discuss those items in this blog when they happen.
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Paul J McCarthy III CFA
President, Kisco Capital
