We all know that the asset classes holds certain correlation with each other. In the case of the stock market and interest rates, this historical correlation is negative. Which means that when interest rates rise, the stock market falls; and vice-versa.
We are currently experiencing a very peculiar moment in the American market. For start we had a very strong payroll in Janueary, with the lowest unemployment rate since 1969. Added to this, consumer inflation data (measured by the CPI) surprised positively and corroborate the fact that the fight for inflation should continue and we will not have interest rate cuts by the Fed in 2023.
Even so, American stock markets continue to rise. Selective blindness? Irrational exuberance? We have no way of knowing it. But, the fact is, that there is something strange is in the air. Yields on 10-year Treasuries keep rising, the DXY has turned to an uptrend again, gold prices have dropped... The only thing missing is the US stock market.
The blue chart in the bottom represents the correlation coefficient between Nasdaq and interest rates (Fed Feds Rate). As mentioned earlier, the historical correlation is negative. For brief periods of time it works positive (interest rates rise and the stock market rises as well). At the moment we have a dysfunctional market. The correlation is at a coefficient of 0.58 and for a long time already. Looking at past behaviors, when the correlation levels hit these levels, we had corrections of 15% to 25% within a period of 15 to 30 days.
I believe the adjustment will come! Either interest rates fall (which I think is unlikely) or the stock market melts (which I think is more likely). I believe that, at least, a 10% correction on the Nasdaq is yet to come.
Short Nasdaq!
We are currently experiencing a very peculiar moment in the American market. For start we had a very strong payroll in Janueary, with the lowest unemployment rate since 1969. Added to this, consumer inflation data (measured by the CPI) surprised positively and corroborate the fact that the fight for inflation should continue and we will not have interest rate cuts by the Fed in 2023.
Even so, American stock markets continue to rise. Selective blindness? Irrational exuberance? We have no way of knowing it. But, the fact is, that there is something strange is in the air. Yields on 10-year Treasuries keep rising, the DXY has turned to an uptrend again, gold prices have dropped... The only thing missing is the US stock market.
The blue chart in the bottom represents the correlation coefficient between Nasdaq and interest rates (Fed Feds Rate). As mentioned earlier, the historical correlation is negative. For brief periods of time it works positive (interest rates rise and the stock market rises as well). At the moment we have a dysfunctional market. The correlation is at a coefficient of 0.58 and for a long time already. Looking at past behaviors, when the correlation levels hit these levels, we had corrections of 15% to 25% within a period of 15 to 30 days.
I believe the adjustment will come! Either interest rates fall (which I think is unlikely) or the stock market melts (which I think is more likely). I believe that, at least, a 10% correction on the Nasdaq is yet to come.
Short Nasdaq!