Although the Treasury’s influence on the US stock market is increasing, investors continue to monitor the Fed’s actions closely. A lot depends on what the central bank does with interest rates. Let’s talk about this topic and draw up an S&P 500 trading plan.
Weekly S&P 500 fundamental forecast
From caution to euphoria. The US stock market sentiment has changed dramatically after the Federal Reserve signaled at its last meeting that it would likely not raise the federal funds rate further, and the Treasury announced a plan to issue fewer Treasuries than expected. Since then, the S&P 500 has closed in the green for 9 out of the last 11 trading sessions, and bearish positions opened by hedge funds and asset managers have fallen to their lowest level since June 2022.
Dynamics of S&P 500 speculative positions
Source: Wall Street Journal.
Even as investors continue to monitor the Fed’s actions closely, the Treasury has an increasing influence on the stock market. This is due to a significant increase in the size of public debt, from $17 trillion in 2020 to the current $26 trillion. As a result, according to Citi research, the S&P 500 has become more responsive to the results of 10- and 30-year Treasury bonds auctions. Starting in 2022, it has changed by an average of 1% these days, which exceeds the result of the previous decade.
Naturally, the correlation between stocks and bond yields is getting tighter, and the broad stock index is so responsive to the US Department of Treasury’s announcement that the securities issuance volume is smaller than expected.
Dynamics of correlation between S&P 500 Treasury yields
According to Morgan Stanley, 10-year Treasury yields will fall to 3.95% in 2024, creating a tailwind for stocks. Stock market sentiment has seriously improved recently. According to a survey by the American Association of Individual Investors, the share of bulls who believe the S&P 500 will rally over the next six months jumped from 24% to 43% in the week ending November 10th. The share of bears, on the contrary, decreased by almost half – to 27%.
Investors are buying out stocks in the belief that the Fed has finished tightening monetary policy and the US economy will avoid a hard landing. The Goldilocks economy also supports the broad stock index when GDP grows above trend and inflation significantly slows down. However, the stability of high inflation rates may temporarily discourage the S&P 500 bulls.
According to Wall Street Journal experts, consumer prices slowed from 3.7% to 3.3% in October, but core inflation remained unchanged at 4.1%. Bloomberg notes that the process has stalled after its serious decline in the first half of the year. The current monthly change of the indicator proves that, in the near future, its annual values will be closer to 3%-4% than 2%.
Weekly S&P 500 trading plan
What does this mean for the S&P 500? In my opinion, the broad stock index will continue trading up. Therefore, such a negative situation as anchored inflation in the United States may become an ideal opportunity to buy it on a correction with the previously suggested target at 4500. The ideal option is to add up to the long positions opened at 4177.
Price chart of SPX in real time mode
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