Just as markets unexpectedly rally big, corrections may happen just as fast, if not faster. Markets ended lower on May 29 after American Airlines (AAL) cut its profit forecast. In addition, the Fed’s Beige Book showed the economy expanded from early April through mid-May.
The Dow Jones lost 1% or 411 points. The S&P 500 (SPY) and Nasdaq (QQQ) also declined.
Stock markets are growing increasingly worried about the impact of current interest rates remaining. Historically, rates have are not considered too high by any means. They are now normalized at rates since before the zero-interest rate policy. Without a rate cut, the 10-year U.S. Treasury note climbed to a four-week high. At 4.6%, the note (IEF) might head toward 5.0% next. Persistent inflation could push the yield toward 5.5% - 6.0%.
The Federal Reserve cautioned that its interest rate policy is data-dependent. Assuming the core PCE (inflation excluding energy and food) does not change by much, expect yields to rise further. The government will release April’s Personal Consumption Expenditure data on Friday.
Buy Energy Stocks
On Thursday, ConocoPhillips (COP) offered to buy Marathon Oil (MRO) for $15 billion, paying a minimal premium. Consolidation in the energy sector would lift stocks like Devon Energy (DVN). EOG Resources (EOG) and Occidental Petroleum (OXY) are also attractive holdings.
