A Pattern of Rate Increases Causing Market Downturns Followed by a Complete Rebound

May 23, 2024

By Robert Wiedemer

What the April downturn took away, the May upturn more than brought back with the market reaching record highs.

The April downturn was caused by the market’s number 1 nemesis:  Higher interest rates.  The 10 year rate jumped almost a half percent in April from 4.1% to 4.6%.  

The May upturn was caused by the market adjusting to the higher rate (now at 4.5%) and to a quarter percent reduction in the 10 year rate from its high in April due to a better than expected inflation reading for April. That we saw such a quick and solid rebound in the market is likely reflective of a positive mood in the market going forward.

A Repeating Pattern

However, this is not the last time we will see this same pattern of interest rate increases playing out over the next year.  When interest rates go up again, the market will go down – until it adjusts to the higher rate, as it did in May.  The market has shown an excellent ability to adjust to higher rates over the past two years.  The 10 year rate has risen from 1.5% two years ago to 4.5% and the market is hitting record highs.

In addition to adjusting to rate increases, the rate often falls back a bit after it jumps up, as it did last week.  That makes the adjustment to a higher rate even easier for the stock market.

Again, we don’t think we have seen the last increase in the 10 year rate.  In fact, we expect more rate increases over the next year or two.  And we expect the market will continue to adjust to higher rates in the future until the rate goes above 6%, which is when the Fed will likely do whatever printing it takes to keep the rate from going much higher than 6%. 

Finally, please keep in mind that when the Fed announces a rate increase or decrease, it is only referring to the overnight rate.   The 10 year rate is not set by the Fed, but by the bond market.  And the only way the Fed can affect the bond market is by buying and selling bonds.  That’s why we keep our eye focused on Fed bond purchases and not so much on potential increases or decreases in the overnight rate that the Fed may or may not implement.

So, with the April inflation news behind us, we expect the remainder of May will be relatively uneventful and we will see some continued modest gains in the market over the summer.  

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