Sunday, April 23, 2006

The Major Movement Below the S&P 500 Surface

Here is what has happened over the past 25 trading sessions:

S&P 500 (SPY): Up .09%
Long Bond (TLT): Down -4.85%
Real Estate Stocks (IYR): Down -3.72%
Financial Stocks (XLF): Down -.18%
Consumer Staples Stocks (XLP): Down -2.82%
Retail Stocks (RTH): Down -2.80%
Energy Stocks (XLE): Up 9.62%
Gold (GLD): Up 14.20%

You get the idea. The S&P has gone nowhere, but this masks considerable movement beneath the surface. Energy stocks and precious metals are soaring, while bonds fall (interest rates rise). This is taking a toll on consumer and retail stocks, as well as real estate issues. Financial stocks are not feeling a similar pinch at this juncture. Because they are the most highly weighted group within the S&P 500 Index, they are a major prop for the bull market. It is difficult for me to see how sustained energy price increases, coupled with rising interest rates--a continuation of the weak dollar vs. commodities phenomenon--will not, over time, so weigh on consumers that an economic slowdown, if not a recession, becomes a reality.


John Wheatcroft said...

You are absolutely correct. I have absolutely no idea how raising interest rates can possibly solve $3.00 gasoline or the problems that will cause in our economy. I wish someone from the Fed would answer that question for us. But as I've said before in other places the Fed's job is to raise or lower interest rates. Whether it makes sense or not it's their job. It's what they do for a living.

Brett Steenbarger, Ph.D. said...

True enough...the problem may be that, in a world of rising commodity prices (which is to say, a world of falling dollar value vis a vis tangibles) and a world in which other economies are raising their rates, the Fed may have little control over what happens at the long end of the curve, as borrowers demand higher yields.