OVERVIEW
The U.S. stock market slid last week as volatility picked up on Wall Street. The VIX index, a measure of stock market volatility, surged more than 28% to a level of 17.10.
The Dow posted a weekly decline of around 1%, and the S&P 500 and Nasdaq posted weekly losses of over 2%.
Foreign markets didn’t fare much better, with both developed and emerging market country stocks dropping 2.4%.
Bond prices were down across the board as rates rose at the long end of the yield curve. The benchmark 10-year Treasury rate rose to 4.05%, up from 3.9% the week prior. The result was a 3% drop in long-term Treasury prices.
Although oil prices rallied, ending the week over $80 a barrel, commodity prices as a whole were down about 1.2%. Corn prices fell more than 7% for the week, and gold dipped 1.2%. The U.S. dollar ended the week stronger by about 0.4%.
KEY CONSIDERATIONS
Time for a Breather – The U.S. stock market pulled back last week, with the S&P 500 falling about 2.3% for the week. Many blamed the newfound weakness on the U.S. debt downgrade, and that very well might have had something to do with it.
However, as the chart below shows, it’s also fair to say that the S&P 500 ran into a logical level of resistance last week, equating to about 4600 on the S&P 500, or the March 2022 highs.
The S&P 500 has been sprinting higher all summer, so this was a well-deserved break for the index. As they say, if you run a four-minute mile, you’re going to need a breather!
The next level of support is about 5% lower from here, or the August highs. So that will be something to watch out for in the week ahead.
But what gives us some confidence that the market rally might still have some legs is that global breadth, or participation, continues to improve. For example, nearly half of the world’s stock markets made new 12-month highs in July, and for the first time since April 2021, no ACWI markets made new lows last month.
The indicator below illustrates this nicely. It uses momentum and trend indicators from the MSCI ACWI markets to measure global stock market momentum.
As you can see, it recently climbed into its upper bullish zone, indicating that nearly 80% of the world’s stock markets exhibit characteristics associated with strong technical price trends.
This is the type of stuff we like to see in a bull market.
But there are still risks out there. And one risk that is worth keeping an eye on is the risk of stubborn inflation.
Sure, by most accounts, the rate of inflation has been falling, and this has been good news for the stock market.
But the indicator below shows that the rate of change in commodity inflation might be starting to pick up again. If this is a leading indicator of things to come for broader measures of inflation, it could put some pressure on the stock market.
But, with that said, our Inflation Composite model, shown next, shows that the threat of inflation is not too worrisome at the moment.
So, the bottom line is that we continue to see signs of a broadening stock market—particularly when we look at other countries’ stock market performance—which should bode well for the prospects of U.S. risk assets, like stocks.
However, some short-term price weakness or speed bumps will be expected, given how far stocks have already run up domestically. And inflation, while still falling, could always make a resurgence down the line, potentially throwing a wrench into things.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
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