A Pause in a Seventh-Year Cycle

A Pause in a Seventh-Year Cycle

Stocks pulled back last week as rising long-term Treasury yields weighed on risk appetite. The S&P 500 fell 1.6%, the Nasdaq Composite dropped 2.9%, and emerging markets declined 4.1%. Even so, all three remain solidly positive for the year, with the S&P 500 up 8.9%, the Nasdaq up 9.8%, and emerging markets up 15.4% year-to-date.

Treasury Yields Climb

The move was driven in large part by higher long-term interest rates. The 10-year Treasury yield rose to 4.55% and the 30-year climbed to 5.06%, both up meaningfully from where they stood at the end of the second quarter. Rate-sensitive and growth-oriented areas of the market felt this most, with the technology sector down 3.8% for the week, while more defensive areas such as energy, real estate, and consumer staples held up better.

Oil Remains Key

Energy prices remain a swing factor. West Texas Intermediate crude has climbed 18.7% and Brent crude 20.8% so far this quarter, both still up more than 40% year-to-date. Oil has nonetheless retreated well off the highs reached earlier this year amid Middle East tensions, and its path from here remains one of the more important variables for the inflation outlook.

Growth Continues

None of this changes the broader picture we shared in our mid-year letter earlier this month: the current economic expansion, which began in the second quarter of 2020, is now in its seventh year. Corporate earnings have grown more than 20% over the past twelve months, the labor market has remained resilient, and a wide range of asset classes, not just U.S. large caps, have participated in this year’s gains.

Valuations Warrant Caution

Valuations are a reasonable point of caution. The S&P 500 trades at roughly 20 times forward earnings, above its long-term average near 16 times, which leaves less room for error if earnings growth were to slow. Elevated valuations do not on their own signal that a pullback or correction is imminent, but they are a useful reminder that returns from here are more likely to track earnings growth than valuation expansion.

Looking Ahead

Looking ahead, investors will be watching whether long-term yields continue to rise, how energy prices evolve, and upcoming commentary from the Federal Reserve. Weeks like this one are a normal part of investing in any market cycle, and history suggests that cycle maturity, on its own, says very little about how much further an expansion can run.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.