Market Remains Choppy With Near-Term Headwinds

Stock market indexes opened higher this morning, rebounding from yesterday’s rout. At the moment, the Dow is up 178 points, and the S&P 500 is up .4%. Ten of eleven major market sectors are in the green, led by utilities and consumer-related sectors. It looks like traders are stepping in to buy the dip. Commodities are mixed in early trading. WTI crude oil edged up to $75.70/barrel—the high end of its range over the past 3 years. And yet most energy stocks are far below where they were in 2018. The bond market is also trying to recover from the past week’s correction. Bond yields, which have spiked recently, settled down today and took some pressure off of stocks. The 10-year Treasury Note yield ticked down to 1.51%. It appears that yields are up in response to the debt ceiling fight, which I consider to be a near-term minor event. Importantly, yields aren’t rising because of Fed policy or inflation expectations. The Treasury Inflation-Protected (TIPS) bond market predicts 2-year inflation around 2.5%. That seems really benign given the massive global supply chain disruptions we’re hearing about.

Here we go again. Current funding for the federal government is set to expire on Friday at the end of its fiscal year. It looks like congress will pass a stopgap spending measure to kick the can down the road. Democrats initially tried to use this temporary measure to completely suspend the federal debt limit, but that attempt failed. So today’s vote may be less ambitious in that it won’t be tied to more controversial items like getting rid of the debt limit or passing the $3.5 trillion stimulus bill. Of course, political theater is high fashion these days, and the more extreme ends of both parties are playing a game of chicken – threatening to shut down government operations or allow default on Treasury bond interest payments if they don’t get their way. The debt ceiling has been raised dozens of times in recent decades, resulting in several high-profile political fights (and government shutdowns) since 2011. None have tanked the economy or resulted in debt default.

Covid Delta’s wave is receding in the US. Average new daily cases have fallen to around 115,000 from about 170,000 a couple of weeks ago. And the hospitalization rate has fallen to 6.4 per 100,000 population vs. about 12 per 100,000 at the end of August. The Covidestim project run by academic researchers is now signaling improvement across the nation. Specifically, the average number of follow-on infections resulting from one newly infected person has declined below 1, suggesting the spread is slowing. Of course, the caveat with these figures is that some localized populations with low vaccination rates aren’t yet seeing improvement. But for the nation as a whole, nearly 60% of the population is fully vaccinated, and another 12% have received one of two doses.