S&P 500 at Record Highs: What Stocks, Bonds, Gold & the Dollar Are Signaling

Kristian Kerr (00:12):

Welcome to Market Signals. I'm Kristian Kerr, Head of Macro Strategy at LPL, and I'll be your host this week. Well, it's been an eventful summer for investors. Over the past several weeks, markets have had to navigate remarkable mix of developments, including policy interventions in both bond and currency markets, ongoing geopolitical tensions in the Middle East, significant deleveraging episodes in the U.S. and abroad, and perhaps most surprisingly, an S&P 500 that continues to probe all-time highs and a VIX that is happy to sit in the mid-teens. With so many powerful and off the competing forces driving asset prices, it can be difficult to separate the signal from the noise. To help make sense of it all, we're joined today by LPL's own Chief Technical Strategist, Adam Turnquist. Adam, thanks for joining us. How are you?

Adam Turnquist (00:53):

Hey, Kristian, doing well. Thanks for having me on.

Kristian Kerr (00:56):

I think it's going to be a good discussion. So, as mentioned at the start, there's certainly no shortage of topics to discuss. So I thought for today's episode, we could do a macro around the horn style show and just touch upon the key things you're seeing in stocks, bonds, commodities, and the FX markets. I'd love to understand how these markets interacting with one another and what their collective message might be telling us about the path forward, especially as we approach the historically notorious post-Labor Day period. So let's start with equities. Despite a lot of volatility under the surface, a spike in long-end rates and some major drawdowns in momentum stocks, the S&P continues to hold near record highs. So what are the technicals telling you about the underlying health of this advance and what should investors be paying the close attention to right now?

Adam Turnquist (01:43):

So when you look at the technical picture, I think it's a simple message and it's don't fight the tape. Look, we spent June, July in a consolidation phase at the index level. Obviously, a ton of dispersion going on inside of that consolidation range with, for example, semiconductors down 20% in July. And just kind of a mess underneath the surface. But what we didn't see is money moving out of the market. We had these big rotations, whether that was factor rotations or more sector rotations. Equity markets held up pretty well considering all that's going on. We finally broke the upper end of that range coming into August through 7,610 on the S&P 500. And that really does set the market up for what we would describe as a new like higher after that consolidation range. We've seen market breadth expand to levels we haven't seen in a couple years when you look at how many stocks are above their 200-day moving average.

Adam Turnquist (02:43):

So I think when you go through kind of a check the box exercise and you look at the technicals here, it does seem to be a durable type of breakout. We've had a little bit of weakness of some short-term overbought conditions with the market this week, obviously on some of those more macro headlines, but support's holding up, buyers coming in where they should, near the 20-day moving average on the S&P 500. So for now, I think you give the bull market the benefit of the doubt.

Kristian Kerr (03:12):

Yeah. I mean, it's, I think it's been one of the big stories really all year, right? Is this tremendous amount of volatility at a factor level. You know, momentum's been one of the top factors of the last several years. And, you know, if you had told me the move that we ended up getting in things like semis, you know, the cost behind a big move, that's been a big driver of kind of the tech trade globally, that we would get these types of moves and the index would hold up as well as it has and, you know, pushing new fresh all-time highs. You know, I'm not sure I would've believed you, but I guess that gets us to the real question here. You know, to your point, money has not left the asset class, but can we continue to have this type of volatility and under the surface and not see, you know, a bigger drawdown?

Adam Turnquist (04:05):

So I'm always leery of buyer of the first bounce, and you saw that in the KOPSI, the semiconductors trade. We've had a pretty notable relief rally in both of those areas of the market. And we haven't had a ton of technical progress through some levels that we've been watching specifically on the semiconductors, the SOX Index, the 50-day moving average struggling there. And that's a lot of times where these relief rallies go to die. So as I mentioned earlier, the bull market's still alive and well, but it's not without reservation in terms of that volatility. I think anecdotally, when you start to see the market wobble, where you have very high dispersion, you have these big moves in momentum up and down, it does suggest, at least from a historical standpoint, that you could be due for a bit of a pullback and maybe the initial low and the reaction were just, it was just simply that, a relief rally off oversold levels.

Adam Turnquist (05:02):

But going back to just the longer term trend in price action, I think you stick with it, but you keep risk on a pretty short leash.

Kristian Kerr (05:09):

Okay. I mean, we do also have kind of the seasonal element here, right? For whatever reason, you know, more times than not, you come back from Labor Day and markets tend to oftentimes have a little bit of a wobble. Maybe it's just because, you know, investors out there come back from their summer holiday and just move stuff around their portfolios. I know you've done a lot of work around the seasonality implications around a midterm year. What are you looking for in terms of, in terms of the, you know, the kind of somewhat negative seasonality we have? Kind of how are you thinking about that here as we're, you know, towards the tail end of August coming around the end of summer?

Adam Turnquist (05:49):

Base case for us as we look at it technically is expect higher volatility, and that's a pretty easy statement to make when you look at where the VIX is trading right now, mid-teens, well below its longer term average, below the 200-day moving average. So I would not be surprised to see volatility pick up. As we know, the market does not like uncertainty. The midterms bring a pretty high degree of uncertainty in terms of we don't know the congressional composition of Washington. And when you look back throughout history, going back to 1950 and how the market performs from August to midterm election day, the returns skew positive. Average median returns just over 2% for the S&P 500. But during that period, there's a lot of choppiness. The average max drawdown, so peak to trough, again, from August to the midterms is around 10%.

Adam Turnquist (06:42):

So not exactly a one for one risk reward. It's a little bit asymmetric to the downside. So you factor that in where the VIX is now and where the VIX tends to peak during the year, which is late September, early October, I think it goes, it really supportive of that base case of expect higher volatility from here.

Kristian Kerr (07:05):

Okay. And if I'm hearing you right, if we do get any sort of shaking of the tree, it's really that period after that into the end of the year tends to be really, really strong for the market, right? So typically, we want to be looking to maybe buy stocks if we were to get some sort of volatility around the election.

Adam Turnquist (07:22):

Yeah. If you're using history as a guide here, the returns after midterm are nothing short of impressive. When you look at that same investment time horizon, again, the last 75 years of data, the S&P 500's batting 100% from midterm election day out 12 months after midterm election day. Average gains during that period, about 15%. Most of those are accumulated in the first six months. So there tends to be a big rally coming off the midterms that last around six months. And I think given today's environment, if that if it's status quo in November, still in a bull market, earnings are impressive. I think it's a buy the dip opportunity going into the fall.

Kristian Kerr (08:09):

Okay. I guess last question on stocks, just going into the seasonal period, which, you know, there could be at least an uptick in volatility, what are some, what are the levels in, let's say, the S&P that would that would open the door to maybe a deeper correction if we were to, if we were to get under?

Adam Turnquist (08:28):

So watching closely the breakout point on the S&P 500, so 7,610, the 20-day moving average, not far above those levels. Now, if we break that, that would just put us back into that consolidation range that we were in starting really in June. I think for me, looking at the market, if we take out those June lows, call it 70, right around 7,400, the official level, 7,3,87, that would introduce downside risk maybe to the 200-day moving average or the 7,000-point milestone. So that would be more of your correction type of a pullback, and that's where I think I'd get a little more nervous on a short-term basis.

Kristian Kerr (09:09):

Okay. Thanks for that. Let's move over to bonds. I mean, yields have been pretty choppy over the last several weeks. You know, the Treasury buyback announcement last week saw a big move lower in long-end yields. Then it came almost all the way back, and then now, you know, we're recording this on August 25, and it's, and now it's kind of testing back the lows post that announcement. What do you make of the price action here in yields and, you know, particularly in response to that buyback announcement from the Treasury last week?

Adam Turnquist (09:42):

Right now, we look at yields and we've been classifying it really all year as two steps forward, one step back with yields trending higher despite some of these fits and starts that we've seen play out. And when you look at 10-year yields, for example, trading around 4.64 today, if we start taking out, we'll call it 4.70, the 4.75 range, that really introduces upside risk, I think, to 5%. That would mark a breakout from this consolidation 10-year yields have been in for the last few years, and that would mark a continuation of the longer term uptrend that's really started to form since 2022. The Fed started raising interest rates, obviously, and that reversed a secular downtrend in 10-year yields. And I think at minimum, that reflected that we're probably not going back to zero interest rate policy. That was a, I think, a paradigm shift in terms of, from a technical view of the rate environment.

Adam Turnquist (10:41):

And it introduces, of course, the potential for a new uptrend. And if we get that break, again, through 4.70, 4.75, I think that would mark the next move higher for interest rates where we're talking about 10-year yields approaching 5%. In terms of the long bond, which, of course, has been in the headlines moving back around 5.20 today, recording this Tuesday afternoon around 3:00 Eastern, just for a reference point. That's a near-term level that we're watching, but again, the trend has been higher for a while in the long bond. And I think Stanley Druckenmiller's op-ed in the Wall Street Journal was more critical of course, of Treasury Secretary Scott Bessent trying to influence yields, and <laugh> I liked his quote, "Let the bond market speak," and I think it's going to speak quite loudly if we start breaking through in a material way above that 5.20 level on the long bond.

Kristian Kerr (11:39):

Yeah, that seems to be the biggest risk, right? If we. And we got close, we got pretty close last week after the initial reaction, but yeah, I think if we were to kind of take those highs out in yields, yeah, that's where things could get really interesting really, really fast. You know, I do wonder here, you know, we've got, like, we're not through this in terms of, you know, we got the announcement, we've got a little more details, you know, talk potentially that they might use the TGA as a funding score for some of these buybacks. We also have Jackson Hole here. Any thoughts going into that here at the end of the week in terms of, you know, maybe it's from a level standpoint, but, you know, we seem to be at a pretty just critical spot here.

Kristian Kerr (12:24):

Where on the downside, I guess, in 10s would you be thinking that, you know, maybe this has turned more meaningfully and we might get kind of a more decisive move lower here in yields?

Adam Turnquist (12:39):

So, I don't have any color on what to expect from Kevin Warsh at Jackson Hole, but I do think, given we're at this inflection point, Treasury Secretary Scott Bessent laid his cards on the table and outlined, I think, his pressure point that's keeping him up at night in terms of where yields are. So, as we go into it, when we look at the reaction to whatever news we get on Friday from his speech, on the downside for yields, I would just use the 50-day moving average right around 4.59. If we start breaking below that level, I think we could be talking about yields getting back down kind of in the 4.35, 4.40 range, maybe closer to the 200-day moving average. And I think that would buy not only the Treasury some time, but also the Fed some time as well.

Adam Turnquist (13:29):

The likelihood of that happening, I don't know. I like to stick with the trend here, which has just been consistent, higher highs and higher lows really since the February, March timeframe in yields. So I would lean toward more upside risk than downside risk going into it.

Kristian Kerr (13:45):

Yeah, it's fair. I mean, force the trees, right? We had a secular, 40-year secular move down in rates break, and, you know, big move, big move up in yields from there, consolidating. So bigger picture does seem like yields aren't done, but, you know, it's more kind of a short-term dynamic. But I'm there with you. I mean, I think, I think there's a lot to be said of how price reacts to these announcements. So, you know, you're going to want to see if. And I've talked a lot about this, right? Like when Scott Bessent came in to be Treasury secretary, he talked a lot about, you know, he sees his primary job as being, you know, the top bond salesman of the United States, right? So, and how he gets measured by that is keeping yields down. So him coming in when he did was not that surprising, but ultimately, it's got to work.

Kristian Kerr (14:30):

So I think what that means is probably we're going to see a lot more volatility going into this week at a minimum. Have you looked at any, have you looked at, like, the MOVE Index? So, you know, the VIX equivalent of the bond market, you see kind of higher vol or the same way you do in equities?

Adam Turnquist (14:48):

I've been pretty surprised by the MOVE Index. It's just been well below average, not a lot going on in the MOVE Index. I look at it, but I glance at it at this stage because there's just not much volatility priced in, and I do think that introduces more mean reversion, especially given what's going on with the Treasury, what's going on geopolitically, the oil market. You look at the macro conditions, you look at world or global rates right now, some divergences in monetary policy expectations. And from my perspective, that all points to upside risk in the MOVE Index and higher implied volatility there. And it could be downside volatility or upside volatility. It will be interesting too when you look at positioning and you think of Scott Bessent as his in the macro trader world, I'm sure he's aware of where positioning is.

Adam Turnquist (15:43):

There's a lot of short positions in 10s and 30s right now, so he's getting a little bit more bang for his buck when he's doing these moves to catch the shorts offsides. And that short interest is still high, even though I'm sure some of that's been covered on the latest news. So, I do think volatility there is another base case for fixed income.

Kristian Kerr (16:04):

Yeah. I mean, let's call this what it was, right? It was an intervention. Right. and yeah, you know, typically the best interventions tend to, you know, they tend to work the best when there's a vision dynamic that catches a lot of the market investor trader community kind of a little bit offsides. So I think that's a very important kind of aspect to this. Again, we'll see, you know, he might need to announce some other things if he wants to be more successful, but again, I think that's what we're watching the tape here closely to try to understand better. But that's all a good segue to this idea that, you know, nothing in the markets really happens in a vacuum. So arguably what Bessent has done with buybacks, you know, along with the coordinated intervention in the yen, puts the dollar in a position to weaken.

Kristian Kerr (16:51):

How are you viewing the FX market here in the dollar index? You know, I know we've talked a lot about, you know, we've been sitting on this kind of major trend line 14, you know, going back to 2014, depending how you draw it. Any, any clarity there on the dollar? Because on the face of it, you know, what's been announced should be pretty dollar bearish, but it doesn't seem to be breaking quite yet. How are you viewing it?

Adam Turnquist (17:14):

Not breaking quite yet, but really viewing the dollar as a proxy for the debasement trade. We've had yields move higher, the dollar move lower on the news. On the technical side, we took out the 100-day, the 200-day moving average, but we're still range bound. So we had this brief breakout in the dollar index. It was exciting because it was really like watching paint dry for that range in the last year for the dollar. Finally broke out, and then we whipsawed back into the range after breaking down from a shorter term double top. So I think maybe you get down to the midpoint of the range and that's where things get tested around 98. Ultimately, kind of the 95, 96 level is the key line in the sand to watch. If you break that, that would not only mark the end of the consolidation range and a breakdown from it, but it would also break the longer term secular uptrend in the dollar.

Adam Turnquist (18:06):

And I think that would be in conjunction if yields are rising, a bit of a concern for the debasement trade really taking off in a material way.

Kristian Kerr (18:17):

Yeah. Yeah. I think what's interesting too is that we're here, you know, to your point, we've been kind of watching paint dry in the FX markets, but FX volatility is incredibly low. Volatility tends to have a mean reverting dynamic to it. So you go through periods of exceptionally low volatility, it tends to proceed a period of much higher volatility. So I'm wondering, you know, given everything that we're seeing in terms of the narrative potentially changing these announcements, you know, are we going to see a spike higher in vol, which you would expect to maybe see if we were to see kind of that, that trend decisively break in the dollar. So I think we're, you know, we're clearly at getting near some sort of inflection points. I'm not sure how long we can kind of trade around these, what, mid-single digit levels of FX vol.

Kristian Kerr (19:06):

So I think it's a key part of this, the fact that we are kind of so comatose in the FX market and starting to come into some pretty big levels that I think it's worth watching pretty closely here. Perhaps the clearest beneficiary if we were to get a weaker dollar environment is commodities. You know, we've started to see some breakouts across the commodity complex here lately. Gold was a big mover over the last week in response to that Treasury announcement and has now almost retraced half of the decline from the highs in January. Are you still constructive on precious metals?

Adam Turnquist (19:42):

Still constructive on precious metals, a view we've had for the last couple years. I'd say gold right now is one of the more exciting charts to watch, really, especially after the last, I guess now we're eight, nine months into the year. It's been just a wild ride for a perceived store of value. We had this momentum trade in gold take prices to almost 5,600 an ounce in January. We had a subsequent 20% or over 20% drawdown in gold as the war started to break out. So, the flight to safety wasn't really there in gold. And you started to see central banks use gold as more of a source for dollars as they became scarce, especially Middle Eastern countries that were used to selling oil. And we've now hit a low in gold, I think that marks the correction lows in gold, or I guess you could technically call it the bear market lows in gold.

Adam Turnquist (20:42):

We've reversed a downtrend off the January highs. We got back above the 200-day moving average, which I was viewing as a big test for the strength of this rally. And I think we'll likely move higher from here and get back above the 5,000 point mark over the coming months. You look at the fundamentals of gold, you have central bank buying slowed down a little bit in Q1, but central banks came back in a big way, including China adding to the reserves. I think gold is now the second highest held reserve asset across global central banks. Of course, the dollar being number one, but it recently, gold recently surpassed Treasuries. So, I think you can easily make the case on a fundamental and a technical side here for gold. So I guess you could call it the stars aligned for further upside in the gold market.

Kristian Kerr (21:33):

Yeah. Yeah. Yeah. To your point, I think Q2 was the largest central bank purchase of gold in a Q2 period ever, right? So - Right. It does look like they're back. And I do think like we had. Listen, the move that we saw in December and January in gold and the precious metals was, you know, nothing short of like a mania, right? So clearly, we had kind of high speculative interest, so there was kind of almost like overhang of stale longs, I think, in the market in addition to kind of the aspects you talked about.

Kristian Kerr (22:25):

And it seems like we kind of worked our way through that, right? And I think the way we've bounced back so hard and kind of went back to that 200-day pretty convincingly, it does seem like kind of we've worked through all that stuff. I mean, are there any other areas of the metals markets, you know, silver, platinum, some of these other kind of more higher beta precious metals that you're looking at?

Adam Turnquist (22:49):

Certainly copper continues to trend in record high territory, of course, an AI beneficiary. Of course, a component of the resource nationalism theme that we outlined in our Midyear Outlook where you're starting to see more restrictions on things like copper. Some of that can change, of course, with policy in Washington in terms of refined copper, and you've had an influx of copper coming to the U.S. in really front-running tariff threats that could take place in 2027. The other interesting one is silver. If you think about the central bank buying programs that are out there, they're assumed price insensitive, so they just want to buy gold for their reserves at almost any cost. I think if we start getting back again to kind of the 5,000 or higher level in gold, we could start hearing about more programs outside of gold for reserve assets, things like silver.

Adam Turnquist (23:47):

I think Russia last year introduced a silver reserve program and the catalyst could move from gold to another major commodity like silver, provided there's enough liquidity in the market. So, I think that's a longer term trend that we're watching. You look at silver, palladium, some of the other metals, certainly reversing some major downtrends, and it goes beyond just the metals in Brent prices and energy. You look at some of the components of commodities like in the Ag space, wheat breaking out from a major bottom, and really across the board in grains. And these are early inning breakouts. They would suggest there's plenty of length here for this rally to move. If you look at the Bloomberg Commodity Index ex energy, so you take energy out of the equation and it just hit record highs this week.

Adam Turnquist (24:41):

And to me, that's really setting up for a potential new leg higher when you look at the components that are just starting to reverse major downtrends coming out of major bottoms, plenty of upside to go, I think.

Kristian Kerr (24:52):

Okay, interesting. Yeah, I mean, you touched upon it a little bit, but you can't really talk about commodities right now without crude. So you, anything there you want to flag? Like, I know everyone tends to focus on, like, front month Brent and front month WTI, but, you know, I would argue it's really been the refined product side that's been more interesting with the, you know, like the diesel crack spread getting over 100 last week. Any quick thoughts, views on energy, given that it has been such a big driver of cross asset movements here over the last few months?

Adam Turnquist (25:27):

Right. Certainly, Brent comes up in a lot of conversations here with our advisors and client base. And when you look at it technically, we've bounced off support at 70, got back above the 200-day moving average. I think it introduces upside risk right now to the summer highs around 102. And then the physical market, Kristian, as you pointed out, remains historically tight and maybe an underpriced risk in the market with crack spreads at record highs. We have strategic petroleum reserves at, I guess, the term is critically low levels. So you don't have that supply release optionality that we did back in March when you had several countries release a major amount of SPR into the market to help shore up the supply shock. I think there's, if this is prolonged or any major escalation, you could see Brent prices move materially higher from here and another risk for not only interest rates, the Fed, but I think obviously the broader risk appetite that seems to be pretty strong right now in equity markets.

Kristian Kerr (26:34):

Yeah. Yeah, I agree. It needs to be watched really, really closely. , All right, I think we can wrap things up there. Great insights as always, Adam, really appreciate you, taking the time to walk us through it today. And thanks everyone for listening. Please join us next week for another edition of Market Signals. Until then, bye for now.