Stock and bond ETFs reverse recent trends

Economic data on the rising unemployment rate and corporate missed earnings appear to have contributed to the recent reverse of the upward trend in stock ETFs. This post explores this and other recent trends by highlighting selected ETFs that passively track major stock and bond indices.

NASDAQ market correction

As this WSJ article recently highlighted, the NASDAQ (ticker: QQQ) is officially in “correction” territory now. We define a correction as when prices drop by more than 10% from a recent high. Missed expectations from major investments in Artificial Intelligence by tech leaders Microsoft and Alphabet may have contributed. Nevertheless, the S&P 500 index ETF (ticker: IVV) is still up over 12% year to date, as the chart below illustrates. While returns for these two stock ETFs are lower than their mid-year peak, they are still good relative to other markets, like bonds.

Recent trends in stock and bonds ETFs.
Stock ETFs recently started a downward trend, but bond ETFs started an upward trend.

Recent trends in Bond ETFs

Investors appear to be quickly moving away from stock ETFs and into bond ETFs. This so-called “flight to safety” is clear in the image above in the recent upward trends in bond ETFs. The intermediate-term bond ETF, iShares Core U.S. Aggregate Bond ETF(ticker: AGG), shows some of this new trend. This trend is amplified when a longer-term bond ETF, like iShares 20+ Year Treasury Bond ETF (ticker: TLT), is viewed.

What is next?

The Fed left short-term interest rates unchanged after meeting this past week. But, a rate cut is looking more likely, as inflation is down to 2.5% now, edging closer to the Fed’s target of 2%. The Fed’s next meeting is in September, so investors will be eagerly awaiting the outcome of this important meeting. In the meantime, investors may continue to invest in bond ETFs to potentially hedge any additional losses in stock ETFs.

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Inflation trends

The Federal Reserve’s recent announcement to hold short-term interest rates at 5.25-5.5% was well received by the markets this past week and was clearly influenced by inflation trends. After the S&P 500 recently fell into a “correction”, defined as a 10% drop from a recent peak, the index returned over 5% last week. In this post, we highlight recent inflation trends towards lower rates and note that there is still some work to do to reach the Fed’s target inflation of 2%.

Inflation over the last 12 months

According to Statistica.com, the 12-month inflation rate was 3.7%. As the chart below shows, this is a significant reduction in peak inflation of over 9% in June 2022. This reduction was largely due to seven quarters of increasing short-term interest rates, which should reduce economic activity by increasing borrowing costs. But, the Fed also has a mandate to keep unemployment low.

Monthly 12-month inflation rate in the United States from September 2020 to September 2023.
Monthly 12-month inflation rate in the United States from September 2020 to September 2023.
Source: Statistica

Unemployment and a soft landing?

Unemployment has stayed low, as the next chart shows.

Monthly unemployment rate

It is our opinion that the Federal Reserve appears to be close to reaching its goals of low unemployment and inflation. And, this all appears to be happening without triggering a recession. Our final chart shows GDP, which when its rate is negative for two quarters, is the official trigger for a recession in the U.S. As this WSJ article notes, the U.S. economy is “Improbably Strong”.

Real GDP

We conclude from these macroeconomic indicators that the U.S. economy, inflation, and unemployment appear good for now. With the year nearly over, we will see very soon how consumer sentiment and consumer spending around the holidays may influence these indicators.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs