The S&P 500 is cruising toward a 5% gain in March, which would be its best month since October.
Why it matters: The turn higher for the market — after it was down by more than 10% — underscores what attentive investors have come to understand over the last couple of years. The stock market isn't the economy.
Flashback: Remember when the economy was in an all-out collapse in the aftermath of the pandemic? Food bank lines miles long? Unemployment that was quite literally off the charts?
- After the initial shock, stocks rocketed higher.
- Between March 23, 2020, when stocks hit bottom, and Dec. 31, 2020, the S&P 500 jumped an astounding 68%.
Why? Government actions. The Federal Reserve cut interest rates to near zero and Congress spent gobs of money to keep the economy from imploding. (Stock markets like free money.)
- Today, conditions are much different. Inflation is high. The Fed is raising rates, and little additional government stimulus is expected.
Yes, but: We're still seeing the same kind of stocks that led the market higher in 2020 — so-called long-duration stocks that benefit from lower interest rates — leading the market higher right now.
- Goldman Sachs' basket of such stocks, an assemblage of health tech, software and IT companies, for the most part, is up nearly 7% this month, beating the performance of the S&P.
The intrigue: This may seem a little surprising as long-term interest rates — essentially the yield on the 10-year Treasury note — are still going up. In theory, that should hurt these stocks because they're supposed to be sensitive to rising rates.
My thought bubble: One way to square the circle? The yield curve.
- The market's romp began in mid-March. That's right around the time the Fed started hiking rates and signaling that it would keep doing so in order to pull inflation back — even if that hurt the economy.
- That was also when the yield curve really started to crumble. (Translation: The gap narrowed between shorter-term and longer-term rates.)
The bottom line: Essentially, stock market investors may be betting that the Fed's going to hike interest rates hard, which could cause a recession — and eventually return the economy to the sort of slow growth, low-inflation environment that served tech stock investors well for over a decade.
