Oil prices have surged, Treasury yields have climbed, stocks have come under pressure, and mortgage rates are back above 7%. At the same time, the Federal Reserve is forcing investors to reconsider where interest rates could go next.
It would be convenient if one of those things explained the market, but none do.
In a recent podcast discussion, market strategist Scott Bauer estimated that interest rates were responsible for roughly 70% of the recent pressure on stocks, with energy accounting for the remaining 30%. His point was not that oil is unimportant. It was that interest rates have a much broader reach.
Higher oil prices raise costs for consumers and businesses. Higher interest rates reach into mortgages, credit cards, corporate borrowing and investment decisions. They also affect how investors value future corporate earnings. That gives changes in the rate outlook the potential to move through several parts of the market at once.
This is also why the Federal Reserve’s actual rate decision tells investors only part of the story. Markets often anticipate a decision before it is announced. What policymakers say about inflation, future rate moves, and the economy can change expectations well beyond the next meeting. Even the way individual members vote can provide information about how those expectations may be shifting.
The economic data that follows will add evidence.
Housing is an obvious place to watch. Mortgage rates above 7% make financing more expensive, and sustained higher borrowing costs can affect homebuyers, builders, and eventually construction activity. Housing starts and building permits can help show whether that pressure is becoming more visible. Jobless claims and manufacturing data can provide additional information about employment and business activity.
There is a catch. Most economic reports describe something that has already happened. Investors are buying and selling based on what they believe will happen next.
That can produce reactions that look strange at first.
Strong economic data can support expectations for corporate growth, but it can also give the Fed more room to keep rates higher. Weak data can raise concerns about the economy while increasing expectations for lower rates. Falling oil prices can ease inflation pressure, but the reason oil is falling matters. A decline caused by improved supply conditions is different from one caused by fears of weakening demand.
Markets are not simply reacting to whether a number is good or bad. They are comparing new information with what was already expected and adjusting prices accordingly.
That is where I think investors can get themselves into trouble. Following the economy is useful. Believing we can consistently predict the market’s response to every economic development is something else entirely.
I would rather measure what the market is actually doing.
That is one reason I use a volatility- based indicator in my own investment process. It is designed to identify specific conditions when fear has become elevated and then begins to recede. I don’t need it to tell me whether oil or interest rates will dominate the next week of trading. I need it to tell me whether the conditions I use to make a decision are present.
Sometimes they aren’t.
That’s useful, too.
There will always be another Fed meeting, inflation report, geopolitical event, or unexpected headline. Six months from now, investors may be worried about something completely different.
I don’t need to predict what the next worry will be. I need a process that helps me recognize when the market gives me a reason to act.
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