Here are the latest 6 month charts for a quick look at the state of the stock market.
Notice the recent run up in the Dow Transports and the flatline of the utilities during the Bull of the last few weeks. What does that tell you about the markets expectations for interest rates?
Utilities are one of the most rate sensitive sectors of the stock market. They don't do well when interest rates rise because their earnings are strongly affected by the cost of borrowing money; they are heavy debtors. When that cost is low, their earnings are high, when that cost is high their earnings are low.
Transports are strong when the economy is running strong or soon will be. Their earnings rise as they are booked to ship more goods to and from manufacturers and to their final destinations; the Dow transports are indicating an uptick in the economy which leads to a greater demand for credit, and higher rates as a result.
During the past year, businesses were getting squeezed between higher commodities prices which they pay to produce goods and services, and an inability to pass them on in the form of retail price increases.
Now however, the lid may be coming off the prices that they are able to charge, and they are anticipating larger profits in the near future as a result.
Given all this and the fact that the ten-year Treasury yield has gone from 4.0% to over 4.6% in short order, it looks like long rates will be rising with short rates, and the yield curve will continue to steepen.
But will it last if the Fed keeps raising rates?
At least for a little while, yes.