Last week was a wild one for sure in the bond and stock markets. The bond yield plunged and stock prices soared led by SMidCaps and interest-rate sensitive sectors and industries. Fears that the bond yield might continue to surge above 5.00% evaporated in response to weaker-than-expected employment indicators and a broadening consensus that the Fed is done raising the federal funds rate. The bond yield plunged 41bps from last month's peak of 4.98% on October 19 to 4.57% on Friday (chart). The 2-year yield dropped 31bps from 5.14% to 4.83% over this same period. The yield curve spread is now just -26bps.
The stock market seems to be following the classic pattern of a bullish year that started with a very positive January Barometer. The S&P 500 was up 6.2% this year during that month. It is also the third year of the presidential cycle, which tends to be the best of the four years of a presidential term. Even the seasonal script is back in play after last week's epic rally. September and October have a tendency to be tough months for the stock market, setting the stage for Santa Claus rallies during the final two months of the year.