Has the Market Finally Bought What the Fed Was Selling?

S&P 500 Price Outlook:

S&P 500 Forecast: Has the Market Finally Bought What the Fed Was Selling?

The S&P 500, Nasdaq 100 and Dow Jones pushed deeper into record territory this week as strong bank earnings fed into an already encouraging fundamental backdrop. Alongside a strong start to earnings season, price action reveals investors may have finally bought into the Fed’s agenda as Treasury yields took a drastic turn lower and the US10Y yield suffered its largest daily decline since late February despite strong economic data.

Months of monetary and fiscal policy support amid a reopening economy has led many investors to expect a white-hot US economy in the months ahead and many official growth forecasts have suggested similar. With the market expecting considerable economic growth in the United States, many market participants voiced concern over a similar rise in inflation that likely sparked concerns the Federal Reserve would taper its policy path sooner than the central bank had planned. In response to rising rate hike expectations, US Treasury yields ticked higher.

Market Backs Away from 2022 Rate Hike Expectation, Yields Follow Suit

All the while, Federal Reserve officials were playing full-court press suggesting, at essentially every opportunity, inflation would be transitory in nature and the Fed would not act before 2023. As it has done countless times in the past, the market denied the Fed’s policy path and pushed yields higher nonetheless – until recently. Whether it was Fed Chairman Jerome Powell’s appearance on 60 Minutes or the seemingly relentless barrage of dovishness from other Fed officials, the market seems to have finally bought what the Fed was selling all along – a lower-for-longer policy plan that would see yields muted.

High-Flying Tech Stocks Recover as Yields Slip

S&P 500 price chart and nasdaq 100 price chart

Consequently, yields have begun to slip as investors buy up Treasurys once more and assets that were once beleaguered by rising yields – gold, silver and mega-cap technology stocks among others – have begun to recover. While the S&P 500 and Dow Jones were relatively unbothered by the rise in yields, concern had begun to mount around broader equity valuations should the US10Y yield reach 2.5% where the S&P 500 earnings yield currently resides.

Suffice it to say, recent price action suggests a palpable change in market expectations which could spark breakouts in assets like gold, silver and the Nasdaq 100. That being said, real economic data continues to come in above expectations and many investors remain dubious inflation will remain transitory. Further still, the recent decline in yields may be mere consolidation ahead of another leg higher.

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Either way, emerging price trends may continue should Treasury yields slip further and that could mean more gains are ahead for the S&P 500, Dow Jones and Nasdaq 100. Shorter-term traders might consider gold and silver as they look to snap their months-long downward channels. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

–Written by Peter Hanks, Strategist for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX