It has been a busy week on Wall Street. We started with an AI rally that pushed the Nasdaq to a record. By Wednesday stocks were sliding. The ten-year Treasury yield hit its highest level since 2007 on fears the Fed could raise rates again. And oil is back above $100 a barrel. Here to break it down is Michael Reinking, Senior Market Strategist at the New York Stock Exchange. Michael, thanks for joining us again.
Hi, John. Thanks for having me. A lot to get to.
Meta's AI assistant sent tech stocks soaring earlier this week but hit banks and travel companies differently. What did this show us?
We had the SaaS apocalypse earlier this year — this is just a different spin on the AI disruption trade. Markets are looking at AI agents removing friction within transactions. The idea of changing wealth management businesses with robo advisors, changing shopping behaviour, changing the booking of travel. The idea of removing friction in transactions is in theory positive for the crypto complex and stablecoins. Those agents are pretty heavy users of chips and CPUs, so you saw strength come back into AI hardware names.
The ten-year yield hit its highest since 2007. What actually happened?
We had strong PMIs coming out globally overnight. Global yields started moving significantly higher. US yields had been sitting right at key technical levels and round numbers. Then we got a very strong S&P global PMI here in the US and saw a wave of selling in Treasury markets. I would look for the yield trade to calm down over the next week or two as pension fund money starts coming into bond markets at quarter-end.
With the labour market this strong, does the Fed have more reason to raise rates?
The Federal Reserve has a dual mandate. Clearly they are losing on the inflation mandate currently. As the labour market continues to show resilience and the economy stays strong, that gives them more ammunition to continue raising rates. We have been hovering around 200,000 jobless claims for months — there is no real reason to expect a big shift. That is going to keep them very much focused on the inflation side of the equation.
Housing sales numbers are also due. What is the state of the housing market?
Mortgage rates have just crossed back above 7%. Buyers have largely remained on the sideline. The housing market is stuck in the mud. That is one of the dilemmas the Federal Reserve has — monetary policy impacts the consumer and the housing market very much. It is not as if those markets are overheating. A lot of the inflation in theory is coming from AI demand.
How should investors position for the rest of the year?
The final two weeks of September are historically the worst two weeks for the markets. But on the back end of midterm elections, we have historically never had a down year one year following. And the three quarters following midterms — Q4, Q1, and Q2 of next year — are the best three quarters in the four-year presidential cycle. In theory some of that stuff lines up pretty well.
Has September lived up to its reputation this year?
All things considered, the markets actually held up pretty well. The S&P 500 has really just been in a range since June — largely trading between 7,600 and 7,800. You have started to see small and mid-cap stocks come under pressure as yields moved higher. Tech is retaking the leadership role. Hopefully things do not come off the rails in the last week.
Michael, thank you so much for joining us.
Thanks for having me.
