Is the Market Living in the Twilight Zone?

The Twilight Zone debuted on October 2, 1959; Rod Serling’s brainchild is remembered for its standalone episodic nature, unusual plot twists and moral undercurrents. The series ran for only five seasons but made an indelible imprint on audiences.  

From an interest rates perspective, it feels like we’re approaching a new dimension. Using Serling’s words, “beyond that which is known to man. It is the middle ground between light and shadow, and it lies between the pit of man’s fears and the summit of his knowledge. This is the dimension of imagination.”

In my imagination, I understand the fixed income market more than reality. Even with my limited scope of knowledge, I know that the cost of money has massive knock-on effects, and the cost of money has skyrocketed. But so far, nothing has “broken.” 

Higher for Longer

Two years ago, the U.S. 2-year yield was 30 basis points. It’s now 510 basis points. If we evaluate the 10-year rate, it’s moved from ~1.5% (150 basis points) to beyond 4.5% last week. Relative to the beginning of this year, the change in rates is far less pronounced. 

Thus far, the system has been able to digest the most significant (percentage-wise) rate hiking cycle in history. The one challenge came during, Q1 when several regional banks failed as deposits flowed into more attractive assets.

The market now expects that short-term rates will remain elevated for longer than previously expected. The Federal Reserve Governors updated their “dot plot” at the September meeting and the majority anticipate the Fed Funds rate to remain above 5% in 2024. 

The Highs & Lows

• 30-year (fixed rate) mortgage is at the highest level since August of 2000 (7.68%)
• 1-year T Bill yield is at the highest level since December of 2000 (5.54%)
• 5-year Constant Maturity “Real Yield” (adjusted for inflation expectations) is at highest level since November of 2008
• Housing affordability is at the lowest level in history in parts of the country

Savers are being rewarded. The housing market is being handcuffed. Despite the mostly downbeat headlines, equity indexes, particularly the Nasdaq-100® Index (NDX) remain resilient. 

September Slump to October Bump?

The past two years, U.S. equities declined in September but perked up considerably in October. 2020 was a unique story as stocks slumped across both months as markets were regripped by COVID fears. Investors are asking themselves if this year will be more like 2020, or ’21 and ’22.

Will the NDX, which is roughly 9% off calendar year highs, fall into a technical “bear market?” Will the cost of money slow the growth outlook for next year and beyond? Will the Chicago Cubs make the playoffs?

I wish I knew the answer to each of these questions, but I don’t. In a Twilight Zone scenario, the Cubs not only make the playoffs, but make a deep run like many other wild card teams. 

As for the capital markets questions, all we know is that the NDX has remained resilient so far, and there are growing index options alternatives to potentially help insulate YTD gains or express an outlook for the NDX over the next few days, weeks, months or years. 

Index

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This originally appeared in our Smart Investing newsletter. Sign up here to access your weekly digest of the latest investing news, personal finance tips and educational must-knows – all in one place.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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