Today’s Market Update: 10.5.18 Rates Rise, NASDAQ Negative

We expect volatility in October.  So, far, one of the most volatile months of the calendar year has not disappointed.  It has been volatile.  The ultimate measure of market volatility is the VIX, better known as the volatility index and often referred to as the “Fear Index.”  The VIX was up over 4% today alone, and jumped 23.5% just this week!  Why?  Interest rates.  Measured by the benchmark 10-year Treasury note, rates shot up 5.5% this week (see chart below).  That’s a big move.

U.S. 10-year Treasury Security interest rate up 5.5% in last week.

Rates rose for all the right reasons. Primarily, the U.S. economy is strong.   The sharp spike in rates basically was sparked by the American jobs market that continues to flex its strong metrics. Today’s U.S. payrolls report showed a 134,000 increase in nonfarm jobs, lower than expected.  But the July and August revisions showed a total boost of 87,000 net new jobs. Further, the jobless rate edged lower to a new 49-year low of 3.7%. More jobs and less unemployment, along with higher wages and greater consumer confidence and spending, plus the strength in the housing market make for a domino effect towards higher inflation.  Bonds don’t like that.  So, as the bond market has fallen, rates have  risen. Rising rates, at least initially, hurts the stock market.  Especially growth stocks, and in this day and age, we are really talking about the FANG stocks (Facebook, Apple/Amazon, Netflix, & Google).  While the Dow Jones and the S&P 500 indices were off down only fractionally this week; the home of growth stocks, the NASDAQ, had one of its worst weeks of the year so far (see chart below).

NASDAQ over last week.  Down -3.21%

Some analysts attribute the NASDAQ nosedive to simple profit taking.  I am in that camp. See the charts below reflecting the NASDAQ’s year-to-date and trailing-twelve-month returns.  Stellar! This is the proverbial question of “is the glass half full, or half empty?”  Are rates going up to stifle 70’s style inflation, or is the economy so strong to support higher costs of capital?  I think the latter.  The recent run up in rates should not be a surprise…to anyone on the planet.   The U.S. has had a totally transparent Federal Reserve for a decade, telegraphing its every move…and future ones.  All anyone has had to do is watch the “dot plots.”  The “dots” plotted on the Fed’s graph issued in June shows their intentions with regard to interest rates going beyond 2020.

To say the least, rates went up and the NASDAQ went down this week.  The jobs report was the catalyst to the rise in rates and also reaffirms a strong and growing U.S. economy.  As your portfolio manager and investment advisor, my job remains to monitor that delicate balance of risk and reward.