Weekly Economic Trends and Indicators

All three major stock market averages hit new record highs in the month of May as corporate earnings continue to surpass market expectations. Bond yields surged again in April. How do the events of Wall Street affect what happens on Main Street, or vice versa?

Although certain tech stocks, particularly those associated with artificial intelligence (AI) have received a great deal of attention during the recent weeks and months of this bull market, the gains in the market have been broad-based. Multiple sectors, including financial institutions, energy and commercial services have seen double-digit gains in the past 12 months.

There are mundane explanations for some of this. Financial institutions are benefiting from the current interest rate regime. Energy stocks have benefitted from oil recently breaking the $80/barrel mark. However, the broad gains in industrials, consumer staples, and the like, are the result of strong business and consumer spending. Consumers, in particular, are driving economic growth currently with significant contributions to GDP growth. What happens on Main Street has important implications for Wall Street. It works in the other direction as well. Record levels in the stock market make people feel wealthier and contribute to increased consumer spending.

What are analysts looking for in determining the direction of the broader markets in stocks and bonds? Consumer confidence, which rose more than expected this month, is definitely one indicator. However, the connection is not always straightforward. When consumer confidence beats expectations, there is a positive effect on the market, but that is balanced by the negative effect that more spending is inflationary, leading to interest rates being held higher for longer.

The connection between economic news and the bond market is typically more straightforward. It’s all about inflation. If the news makes people worry about inflation, bond prices tend to go down and yields (which always move in the opposite direction) move up.

In my most recent financial market update in February, the yield on the benchmark 10-year Treasury note was 4.28%. Currently, the yield is about 4.46%. Thus, the price of the 10-year note decreased (because the yield went up) even as the stock market climbed to new highs. Stocks and bonds went in opposite directions because of the combination of strong corporate earnings and bad (or worse than expected) inflation news.

The 10-year note contains important information about inflation expectations as well as expectations of economic activity. When COVID-19 hit in 2020, the 10-year dropped by a full percentage point almost immediately, but rose from less than 1% to over 3% by mid-2022. It then drifted slowly up to nearly 5%, peaking at about the time the Fed stopped raising the fed funds rate. Then in mid-December of last year, the yield dipped below 4% briefly as it looked like inflation was coming back under control. Ever since then it has slowly crept back up as high as 4.7% in late April as inflation concerns surged. This week’s (Friday) announcement of the April Personal Consumption Expenditures price index has the potential to move the yield up or down depending on whether news is bad or good for inflation.

Next week: International Update