Stock Market Shows No Signs of Celebration or Dance, and Investors Should Abstain from Frivolous Behavior. Following the Federal Reserve's Announcement, Here Are Crucial Factors to Monitor Immediately.
The S&P 500 SPDR ETF (SPY) currently stands 10% above its 200-day moving average, which has dipped as low as $600. Meanwhile, the Federal Open Market Committee (FOMC) has not initiated a rate cut cycle in the last nine months, a notable departure from previous years.
Elsewhere in the market, the Russell 2000 iShares ETF (IWM), which tracks the U.S. small-cap segment, is facing a potential challenge. Approximately 40% of its index members have a significant amount of debt that is due soon and requires refinancing to maintain operations. This situation, often referred to as a 'debt cliff,' could potentially impact the overall performance of the ETF.
The Fed's focus has shifted, with a weaker job market now at the top of their worry list. This concern, coupled with trade policy uncertainty, is making it difficult for investors to make confident decisions.
The stock market's valuation remains high, with the S&P 500 Index selling close to its highest in modern history. Despite this, expectations for further rate cuts in 2025 are high, with the President of the United States during that time being Donald Trump, who began his second term on January 20, 2025. However, the Fed has only cut rates by a quarter point in 2025, leaving the market in a state of uncertainty.
President Trump's stance on Federal Reserve leadership has been a point of contention, adding another layer of uncertainty to the market. It's worth noting that index investing has become a self-fulfilling prophecy, with nearly $4 out of every $10 in an S&P 500 Index ETF concentrated in 10 prominent stocks.
In the bond market, the U.S. Treasury 10-Year Note ETF (UTEN) provides a means for investors to purchase the benchmark note through this 3-year old ETF. However, non-U.S. buyers of U.S. Treasury bonds may not be as reliable a support system as in the past.
One factor that has disrupted the market this year is a rising long bond yield. This trend could be an indication of more market disruptions to come. As of now, the price points of UTEN are modestly higher, but this seems to be a news-driven situation, particularly through the fall.
In conclusion, while the stock and bond markets are currently showing signs of growth and volatility, the uncertainty surrounding trade policy, the Fed's actions, and the concentration of index investing pose potential risks. It is important for investors to stay informed and make decisions based on their individual risk tolerances and investment goals.
Disclaimer: All information and data in this article are for informational purposes only. The author does not have positions in any of the securities mentioned in the article.
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