Market Notebook

Discussion – 

Global equities generally ended last week sharply lower. Bonds traded a bit mixed depending on duration with short duration taking a hit and longer duration moving higher.  A mix of conflicting influences appeared to move individual instrument prices. At different points in the week, market participants showed concern over inflation, future interest rates, movement in the U.S. dollar, and risk assets.

Comments from the Federal Reserve regarding a possible hike in interest rates sooner than previously forecast was responsible for much of last week’s dislocations. This was not surprising. See last week’s Market Notebook discussion. Many market participants likely saw this coming as inflationary concerns have been front and center for a while. Since U.S. economic fundamentals remain solidly in the green, the depth of any correction in equities will likely depend more upon sentiment and shaken confidence than any underlying fundamentals.

From a technical perspective, damage has been done to the S&P as it held a close under the 50-day moving average. In the recent past, closes below the 50-day moving average have been solid buying opportunities. Will the same hold in the coming week? Of course, time will tell, but before it becomes a buy, the S&P must show that it can hold a close back above the 50-day moving average, otherwise, a further correction would be the path of least resistance.

Regarding the real economy in the U.S., The Conference Board’s Leading Economic Index or LEI posted a large gain in May suggesting the U.S. economy will continue growing over the near term.

The coming week for me is likely to be dominated by tactical moves in portfolios based upon technical indications as the dust from last week settles. For example, SBUX was purchased in several portfolios during the height of the pandemic. SBUX has performed nicely since then, but recently, it has broken its uptrend and moved to consolidation. At the end of last week, the price was sitting at key technical support. If SBUX breaks that support in the coming week, it may be time to consider selling that instrument. This is but one example.