After breaking a five-week winning streak, the S&P 500 futures gained slightly in early Monday trading as investors continued to monitor economic data and hints from monetary policy officials.
The 0.31% decline in the S&P 500 last week came on the back of the latest US inflation reading, which jumped 6.2% last month in its largest annual increase in more than 30 years. The hot CPI figure pushed the dollar to the highest level in 16 months and sent US bond yields surging across the curve. However, the news was not enough to cause significant volatility across markets and major US indices remain near their record highs.
While hot inflation and rising bond yields are usually troubling for stocks, investors do not seem worried yet. When adjusting bond yields for inflation, you find out that real yields are deeply in negative territory and that continues to make stocks more appealing, despite overstretched valuations.
The US 10-year TIPS yield declined to a new record low of -1.24% last week before settling at -1.18%. The benchmark traded in negative territory throughout the pandemic and is expected to remain there for many months to come. As long as investing in risk-free assets is unprofitable, economic growth remains solid, and US corporates manage to pass on rising costs to consumers, equities will remain overweighted in portfolios and that’s likely to keep the bulls in control.
This week’s market test comes from US consumers. After the recent University of Michigan Consumer Sentiment Index tumbled to a 10-year low, will this trend translate into lower spending? According to the widely watched Michigan report, the considerable decline in consumers’ confidence is due to an escalating inflation rate and reduction in living standards. However, this could be offset by solid savings during the pandemic and increased household wealth fueled by the rally in equities and real estate over the previous year.
Tuesday will reveal US retail sales for October and show us American’s willingness to spend ahead of the holiday season. If this remains robust, that will provide another reason why investors need to hold on to their equity holdings.
