8 Monster Stock Market Predictions – Week Of March 8

The New York Stock Exchange building.

This will be another big week for stocks, with the CPI and PPI data, plus an ECB meeting. This is all critical stuff for the bond market specifically, and while most will focus on the 10-year, the TIP market maybe even more important.

The TIP and TLT ETFs provide an easy and fast way to see what is happening for both. The TLT has fallen faster than the TIP ETF, suggesting that yields on the longer-dated bonds have risen much faster than TIPS. The last time this happened was in 2013, and the TIP market corrected quickly. I talk about this much more in my Week Ahead Video for members of Reading The Markets – T.W.A – Trouble Lies Beneath The Surface

But the difference between this time and 2013 is that presently, the S&P 500 is much more highly correlated than in the past. It is likely because the equity market follows the signal from inflation expectations to help it determine if growth is returning to the economy. Inflation expectations are determined by the difference in Treasury rates and TIP rates. Therefore, if TIPs have underperformed Treasuries, and Treasury rates pause or fall, and TIP rates continue to climb, it will cause the inflation expectations to fall, sending a negative signal to the equity market.

It will be viewed as an indication that the growth outlook is slowing.

S&P 500 

The S&P 500 (SPY) futures could rise this week to around 3,860, or perhaps as high as 3,900. But I really don’t think any rally will last. The higher rate environment has, to some degree, changed the game. Rates are surely historically low, but we need to remember that part of this push higher were the lower rates, and now that rates have moved higher, equity valuation is even more expensive. (Should be free to read – The Stock Market Party May Finally Be Over)

Nvidia 

The highly valued technology sector has been hit the hardest and could easily continue to be hard. For example, Nvidia (NVDA) fell this week all the way to $467. But more importantly, the earnings yield versus the 10-year is still well below its historical average and would need to rise an additional 35 bps to get back to that average. But remember, the more the 10-year rises, the more expensive Nvidia gets on a relative basis, meaning the stock needs to fall even further.

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Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information ...

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