The Stock Market Rally Was Fun. That's as Good as It Gets for Now. -- Barrons.com

By Jacob Sonenshine

The stock market tried to rally for a hot second, but the gain is suddenly petering out.

The S&P 500 rose 4.4% from a more than two-month low of 4967 hit at the end of April to 5187 Tuesday. One important reason was that the 10- year Treasury yield has dropped to about 4.49% from a 2024 high of just over 4.7%.

That comes as government data showed that while employment continued to increase in April, fewer jobs than expected were added. That indication that the economy is cooling off is a sign that the rate of inflation could slow down, which keeps the door open for the Federal Reserve to cut interest rates, even if the central bank isn't ready to do so quite yet. Stable or lower interest rates should allow the economy and corporate profits to continue to grow.

But Wednesday morning, the S&P 500 dropped to 5171, on a day that hasn't been so full of news. It just can't seem to crack above its record closing high of 5254.

Since hitting that high in late March, it has been in a trading range, dropping to the April low point, rising through Tuesday, and now dipping again. Sellers keep coming in before the index can hit a new high, mainly because not enough about the macroeconomic picture has changed for the better.

The 10-year yield has stopped declining for the moment. It has been at roughly its current level this week, and it remains above 4.2% to 4.3%. It sank roughly 0.80 percentage point over a period of months to that area by March and then stopped sliding as people sold the debt, sending the price down and the yield up. Bond yields and prices always move in opposite directions.

A move below that zone would signal that buyers of the debt are coming in, sending the yield down again.

That isn't happening because policymakers have made it clear that the Fed still wants to keep interest rates relatively high. Until the Fed signals that it is on the cusp of cutting rates, the 10-year yield is likely to remain above that key 4.3% point -- keeping a lid on the stock market.

An auction of 10-year Treasury debt scheduled for early afternoon could make matters worse. Investors are concerned that demand for the notes could be weak, which would lift yields.

"Yields at current levels are still a headwind to valuation [for stocks], " writes Mike Wilson, chief U.S. equity strategist at Morgan Stanley.

When the 10-year yield was recently at about 4.5% in mid November, the S&P 500 was at about 4500, which is 13% below its current level.

Until yields break meaningfully lower, don't expect the stock market to perform too well for a while. It could fall, though it isn't likely to tank.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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May 08, 2024 11:23 ET (15:23 GMT)

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