Short Term Market Mayhem Is Declining – Now Let’s Talk About the Long Term Good News
August 15, 2024
By Robert Wiedemer
Short Term Market Mayhem Almost Gone
Despite the mayhem in July, the S&P 500 closed up 1.1%. Despite all the further mayhem in August, the S&P closed today up 0.3% for the month. That means positive movement for the market for almost two months. So much for a major reckoning in the market!
Short term panics don’t last. That’s why I don’t trade them. It’s simply a good way to lose money. But it’s a great way to create something to talk about and to look smart. That’s why so many stock pundits and analysts do it. Lots of show but it creates little dough.
However, it also does something that is much more dangerous. It distracts investors from important long-term news and trends that may be developing. That’s exactly what happened in July when we had two pieces of very good long term news.
Long-Term News Is Very Good – First from the Fed
First, the Fed is finally starting to reduce the amount of bonds that it sells. It has been talking about it for most of this year, but it hadn’t really done anything until July. In 2023, the Fed sold an average of $65 billion a month of Treasury and mortgage bonds. However, in July the Fed only sold $43 billion between July 3 and July 31. Just a few months earlier in March they sold almost $100 billion between March 6 and April 4.
The Fed has indicated they will decrease total bond sales by about 35% on average. We won’t know how close they come to that figure for a few months but at least they have started.
As I have mentioned before, this is important to keeping the 10 year interest rate from rising too much farther. The 10 year rate has fallen from about 4.5% at the end of June to around 3.9% now. It also indicates the Fed is sensitive to higher interest rates and will print money, if needed, to keep the 10 year rate from getting too high.
This is very important good long term news because the bond market (and the 10 year interest rate) will be facing continued upward pressure from massive, and increasing, Congressional borrowing. Because of this pressure, the Fed will need to stop selling bonds and eventually start printing money again to keep 10 year rates from rising too much. When demand rises for a good, the supply of a good must increase or prices will rise – the same is true for money (which is a good) and the price is the interest rate. The Fed will need to increase supply to keep the price of money down.
Second Long-Term Good News Is from the Treasury
In addition to the Fed reducing sales of bonds, which will help keep the 10 year rate from rising too high, the Treasury announced in July that it will work to minimize its sales of long term bonds to fund the government debt. Instead, it will continue to rely heavily on short term Treasury bills and cash management bills to fund government borrowing.
This is very good news because the fewer long term bonds the Treasury tries to sell, the less upward pressure on the long term 10 year interest rate. Of course, funding government debt with money markets is probably not a good long term strategy but, for now, it helps keep long term rates down, which will help keep the stock market up.
Bottom Line: Focus on the Long Term Macro Trends
It is important to focus on the long term macro indicators but, even if you do,
you've got to focus on the right macro indicators at the right time with the right interpretation. It may sound easy but it's not. As Mike Wilson, Chief Investment Officer and the Chair of the Global Investment Committee for Morgan Stanley, said after making some major mistakes in predicting the stock market in the last two years, “the macro environment is becoming harder to predict.”
Maybe that's one reason so many investment advisors and stock pundits focus on the short term issues that are here today and gone tomorrow. It's just a lot easier.