“Fast Car,” the 1988 classic by Tracy Chapman, was recently rerecorded by country star Luke Combs. The version by Combs hit #2 on the Billboard Hot 100. “Fast Car” was a big part of my high school years in small-town Texas, and I am happy for this generation to share in this inspirational anthem. On the flip side, I am a little saddened so many people relate to the feeling of wanting to escape their current situations and drive far away. Maybe this is human nature to have the momentary feeling of wanting to flee.

“You got a fast car Is it fast enough so you can fly away?”

Investors may be having similar feelings of fleeing the stock market after the dog days of summer. In this SOTW we address the current conditions to determine if it is time to escape. 

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The chart below displays the 10-year US Treasury bond, noted in red, versus the NASDAQ Composite, noted in blue (QQQ). When the 10-year goes up, the tech-heavy Composite (QQQ) goes down. Maybe our answer to the question of escaping depends on the direction of interest rates.

(Source: Bloomberg)

The relationship between the 10-year US Treasury bond and the technology index looks positively inverse in the past year. In other words, if we knew the direction of interest rates, then would we know the direction of stocks?  

Predicting the direction of the Treasury in the short run (1-3 months) can be a fool’s errand, but if more time is allowed, then we can start to logically reason into the direction of rates.  

The 10-year bond yield is a function of short-term interest rates and inflation. Inflation has clearly retreated, and we believe the Fed funds rate has peaked. In fact, we have reason to believe deflation is becoming a real possibility in 2024, so we believe interest rates will fall.  However, there could be pain between now and the first rate cut, but if patient, investors could be rewarded.

On September 13th, the most recent inflation reading was announced.  The Consumer Price Index climbed slightly (+0.3% from July).  This was expected and does not concern our team.  The trend is still clearly down as the inflation that was fueled by the pandemic-era stimulus has clearly subsided.  In other words, the worst is over and rate hikes are close to being a thing of the past. 

The Fed, business owners looking to borrow at the higher rates and of course our research team will be watching closely for signs that higher rates will negatively impact the economy.   If rates continue to rise, we would most likely become bearish and look to escape some rate sensitive investments.  But for now, we are sticking the course and waiting patiently for the rate hike storm to pass.

“I know things will get better”

Wanting to flee your hometown (or stocks) at times is a common emotion, but that’s okay. Sing loud for now and stick around because things will get better.