Looming Government Shutdown And Higher Interest Rates Hang Over Market
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Key Takeaways

  • Markets Hoping To Break Losing Streak
  • Higher Interest Rates May Be Here Longer Than Initially Thought
  • Lackluster IPO Market

Heading into Friday, stocks are hoping to snap a three day losing streak. The threat of interest rates remaining elevated for a longer than expected period of time combined with increasing risk of a government shutdown is taking its toll. On Thursday, the S&P 500 closed down 1.6% with all eleven sectors finishing in the red. The Nasdaq Composite, which is on pace for its worst week since March, was down 1.8% and is down 3.5% since last Friday. Both the S&P 500 and Nasdaq Composite are looking at the first consecutive monthly declines since September of last year and the worst month since December.

There are a few catalysts for this week’s selloff. On Wednesday, despite leaving interest rates unchanged, Federal Reserve Chairman Jerome Powell indicated the Fed expects to keep interest rates higher for a longer period of time than most economists expected (both the Bank of Japan and Bank of England also left rates unchanged). According to the CME, there is a greater likelihood rates will remain at current levels through July of 2024. We’re also facing an increasing likelihood of a government shutdown as lawmakers grapple with reaching agreement on both a continuing resolution and budget for the next fiscal year. However, I will point out that markets rallied during the last two government shutdowns. Rounding things out are the continued lack of progress in the UAW strike with threats of more walk offs expected to take place today. Finally, crude oil prices are back above $90 per barrel, causing concern inflation could heat up again.

It hasn’t just been stocks taking a hit. Bonds are also suffering, sending interest rates higher. The 30-year bond saw its rate rise to 4.55%, the highest level since 2011 and, according to The Wall Street Journal, the largest one day increase since June of last year. Yields on the 10-year hit their highest level 2007 on Thursday, settling at 4.79%. The 2-year also saw its rate rise to levels not seen since 2006, closing at 5.15%.

Rising interest rates are affecting mortgages with the standard 30-year mortgage rate at 7.19%, the sixth consecutive week above 7%. Higher rates are being felt in the housing market where the number of existing home sales for August came in at 4.04 million, below forecasts of 4.10 million.

With the yield curve staying inverted, there continues to be a risk of recession. Campbell Harvey, a professor at Duke University, is commonly credited with popularizing the relationship between yield curve inversions and recessions. Using 3-month and 10-year yields, the inverted yield curve has correctly predicted every recession to as far back as 1968. It has also never flashed a false positive. According to Harvey, the average lag time between the inversion taking place and a recession is 13 months. Yields on the 3-month and 10-year yields went inverted in late October of last year, so we’re just about at 11 months since that took place, suggesting a recession would likely hit just as the holiday season arrives.

There are some individual stocks worth mentioning. The UK’s Competitions and Market Authority appears poised to give consent to Microsoft’sMSFT
$75 billion acquisition of ActivisionATVI
Blizzard. Shares of Activision are up nearly 2% premarket. AmazonAMZN
announced they will be introducing commercials to their Prime TV content early next year. They will also offer a commercial free option for an additional $2.99/month.

McDonalds is raising the fee for new franchisees from 4% to 5%. The increase will only affect new franchisees, not existing ones. Shares of McDonalds are up a little less than 1% premarket. Cisco closed down 4% on Thursday after announcing they would be purchasing cyber security firm SplunkSPLK
for $28 billion. Shares of Splunk closed higher by 13%. Meantime, shares of AppleAAPL
are indicated higher by1% as the new iPhone and Apple Watch go on sale today.

Finally, we’ve seen some recent IPO activity this month, first with ARM Holdings and then with Instacart. While ARM was initially met with enthusiasm that sent the stock as high as 69, shares have since pulled back and closed Thursday at $52.16, their lowest close since the IPO. At the same time, shares of Instacart closed at $30.65 on Thursday, below their IPO price of $31. The relative lackluster performance of these offerings could have implications for future IPOs. If these new issues both lay an egg, so to speak, it may discourage other companies from going public.

For today, stocks are indicated to open higher. However, in down markets, it’s not uncommon to see a strong open followed by weakness. Therefore, I’d like to see markets actually hold their gains as the day progresses. As always, I would stick with your investing plans and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.

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