A Market in Transition?

Chart of the Week for October 15-21, 1999

Bond and stock markets have grown extremely volatile in the past several weeks and have left many investors edgy, especially now that the S&P 500 Index has retreated more than 7% in less than two months.

As the market struggles with more evidence of tightness in the labor market and strong consumer demand, market participants have started to factor in the possibility of a third Fed tightening in November. As a result, the 30-year Treasury bond yield is now at a two-year high. Rising bond yields are typically negative for the stock market.

Fear of rising prices is beginning to take a toll on the market. Prices for oil, gold, and certain other commodities are moving up. Additionally, emotion has become a factor. More analysts are questioning valuation levels, the appropriateness of the equity risk premium (which has fallen an estimated 80% during the decade) and the prospects for future broad advances.

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