Stock market bears long have anticipated that higher interest rates eventually would kill the long-running market uptrend. As far back as 2009-2010 there were predictions that when the Federal Reserve unwound its accommodative monetary policy the market would not be able to handle the pressure.
The bears have been dead wrong about interest rates and their impact on the market, but we now are seeing the first real market reaction to higher yields. The yield on 10-year Treasury bond inched up to 3.25%, which is the highest level in seven years. This is a positive for the dollar, but Europe is struggling with Italian budget issues and Asia is in a funk over trade issue.
In recent years the market easily has shrugged off higher rates. There have been a few brief spikes in rates and some limited reaction to a more hawkish Fed, but it never lasted very long. The last time the market really struggled with rates was in early 2016. Janet Yellen was making hawkish noises as Fed chairwoman, but the market was worried that economic struggles overseas would keep economic growth contained and it reacted negatively to the hawkish talk.
Coordinated action by central bankers around the world eventually occurred and the market has been trending straight up since then. The Fed has raised rates a number of times but the market has shrugged as it counts on strong economic growth to offset the higher cost of funds.
It isn't just the increase in interest rates that is causing the current market pressure. There are also structural and technical issues that have helped to produce this pressure. After a great third quarter many money managers were inclined to take some profits and a number of large funds made some rotational moves that hurt smaller and more speculative stocks and benefited big-caps and the Dow Jones Industrial Average (DJIA).
To a great extent this is just the normal ebb and flow of the market, and the higher rates, economic issues in Asia and the Italian budget issue are just convenient headlines that help to justify the action. Market pundits always are looking for ways to explain the market action even when it is just the normal cycle at work.
There is another soft open this morning on higher rates, but technicians are starting to look for some bounce action to kick in as many stocks are now oversold. With earnings season starting soon there will be some positive catalysts to attract buyers.
The market is undergoing some routine corrective action and higher bond yields are an easy and convenient justification for the pressure. The rate rise is more severe but the market generally has been able to deal with it as it remains optimistic about the pace of economic growth.
I'll be looking for some new buys this morning but will be moving on an incremental basis.