Market Notebook

As measured by ticker SPY, equity prices declined during the last week while bone prices, as measured by ticker BND, moved higher.

From a technical analysis standpoint, equity prices remained in a downward trend, narrowly averting bear market territory. The price action in equities appeared primarily momentum-based rather than an expression of economic fundamentals. Given that bond prices seem to be entering consolidation, equity prices may not be far behind should bond price consolidation continue. The rationale is as follows: Should market participants come to believe that peak inflation has occurred, bond prices are likely to consolidate or move higher. Subsequently, if peak inflation is in the past, the Federal Reserve may have room to slow interest rate increases. At this point, equities would likely begin to consolidate or move higher. Market participants may be willing to overlook growth concerns if they believe peak inflation is in the past, assuming the Federal Reserve and Federal Government will act to engineer a soft economic landing. This is perhaps one of the more optimistic scenarios as to how things could play out. Less optimistic scenarios exist, but they also seem less likely to occur given what is known. As always, the timing is uncertain. Things could improve next week, or improvement could take much longer. Look to bond prices as a hint that the above optimistic scenario might be playing out.

It seems prudent to avoid equity purchases during the coming week unless necessary or unless specific opportunities present themselves since equity prices appear to be in a technical downward trend.

Regarding bond prices, they appear to be entering technical consolidation. Given the long-standing nature of the downward trend in bond prices, this is a welcome development.

Consolidating price action in bonds opens the possibility of bond purchases, albeit while exercising caution. If bond purchases are on your radar, consider using risk controls such as stop losses or position size. Remember, it appears that bond prices are just starting to enter consolidation, so caution is advised.

As an additional note, The Conference Board’s Leading Economic Index declined in April, suggesting economic expansion in the U.S. may moderate over the near term.

All the best during the week ahead.

Disclaimer: Nothing in this discussion should be considered investment advice. The content of this discussion is strictly my personal opinion and subject to change at a moment’s notice. Investment advice can only be provided to you by your investment professional and not by a general market discussion such as this one. If you wish to speak with an investment advisor, contact us. We can probably help.