Are higher rates a “real” problem? Higher yields appear less threatening when viewed against the resilient economic and earnings backdrop along with the green ClearBridge U.S. Recession Dashboard. Below is a summary of the most recent Recession Indicators report:
Key Takeaways:
- According to Jeff Schulze, CFA, Head of Economics & Market Strategy with ClearBridge Investments:
- Strong stock market starts have historically tended to carry on through year-end, and today’s higher yields appear less threatening amid a resilient economic and earnings backdrop and ClearBridge U.S. Recession Dashboard flashing a green, expansionary signal.
- The recent rise in the 10-year Treasury yield has been driven by higher real rates, not a surge in inflation expectations or term premium, suggesting this is not a fiscal or credibility shock.
- With nominal growth still solid and inflation expectations well anchored, a pause or decline in yields could ease financial conditions and help support the next leg higher in risk assets (stocks).
ClearBridge U.S. Recession Dashboard
Source: ClearBridge Investments
Markets appear to be getting into the Halloween spirit a little early this year, as a growing list of concerns has left investors somewhat spooked to start September. Ongoing geopolitical tensions with Iran and their potential impact on energy prices remain a concern. More recently, headlines surrounding artificial intelligence have added another layer of uncertainty, as leaders within the AI industry have raised concerns about the pace and security implications of continued AI development. In addition, the approaching midterm elections are likely to generate additional headlines and market uncertainty as we move closer to November.
While these developments can influence investor sentiment, our focus remains on the market itself—specifically, what price trends, participation, and relative strength are telling us. From that perspective, several near-term indicators are beginning to flash a yellow caution light.
Market Participation Has Weakened
One of the more important things we monitor is market breadth, or how broadly stocks are participating in a market advance. A healthy market generally benefits from a large number of stocks moving higher rather than gains being concentrated among a relatively small group of companies.
Two indicators we follow—the S&P 500 Ten-Week Indicator and the NYSE High-Low Index—have both been declining recently. Put simply, fewer stocks are participating positively in the market.
The S&P 500 Ten-Week Indicator measures the percentage of companies within the S&P 500 Index trading above their 10-week, or approximately 50-day, moving average. That reading has declined to roughly 34%, meaning only about one-third of S&P 500 companies are currently trading above this commonly followed short-term trend measure.
Lower readings can eventually signal that the market has become oversold and potentially positioned for a rebound. At its current level, however, the indicator suggests meaningful near-term weakness without yet reaching the more extreme levels historically associated with a washed-out market.
The NYSE High-Low Index tells a similar story. This indicator compares the number of stocks reaching new 52-week highs with those reaching either new highs or new lows. It has recently fallen to approximately 26%, its lowest level since last spring's tariff-related market decline.
Together, these indicators suggest that market participation has narrowed considerably.
Source: Nasdaq Dorsey Wrigh
The Longer-Term Picture Remains Stronger
While short-term participation has weakened, the longer-term relative strength of U.S. stocks continues to paint a considerably stronger picture.
One measure we follow is the U.S. Equity Core Percentile Rank, which compares the relative strength of the S&P 500 Index Funds group with more than 130 other asset groups. That indicator currently stands near 98%, placing U.S. large-cap stocks near the top of the overall rankings.
This creates an interesting market environment: short-term breadth has weakened considerably, while the longer-term relative strength of U.S. stocks remains historically strong.
Source: Nasdaq Dorsey Wright
Historically, this combination has been relatively uncommon. Since 2003, there have been only a handful of distinct periods when the U.S. Equity Core Percentile Rank was above 95% while the NYSE High-Low Index fell below 30%.
The historical results following these periods have been mixed. Longer-term relative strength has generally remained supportive, but short-term returns—particularly over the following 30 to 90 days—have sometimes been weaker than average. Periods in 2018, 2021, and 2023 contributed significantly to those weaker short-term results.
Of course, history does not tell us exactly what will happen next. It does, however, provide useful context for evaluating the current market environment.
Source: Nasdaq Dorsey Wright
What Does This Mean for Investors?
The primary message today is caution, not alarm.
Near-term market participation has deteriorated, volatility has increased, geopolitical uncertainty remains elevated, and the upcoming midterm elections could contribute to additional market swings. International Equities (stocks) have also recently demonstrated improving relative strength compared with Domestic Equities (U.S. stocks).
Taken together, these developments suggest a yellow caution light for U.S. stocks.
Importantly, a yellow light is not the same as a red light. It does not necessarily signal that investors should abandon their long-term investment strategy or make dramatic portfolio changes based on headlines.
Instead, this is an environment where patience and discipline may be particularly valuable. Depending on individual circumstances, it may make sense to be more selective when putting new money to work, maintain available cash when existing positions weaken, or gradually establish new positions rather than investing all at once.
For now, we will continue monitoring market breadth, relative strength, volatility, and other technical indicators for signs that participation is either beginning to improve or deteriorating further.
Periods of uncertainty are an inevitable part of investing. Our objective remains the same: stay disciplined, remain objective, and allow the weight of the evidence—not short-term headlines or emotions—to guide investment decisions.
The current reading for the PR4050 is: U.S. Equity Core = 98.59% & Money Market = 14.79%. For the PR4050 indicator to trigger and alert us when we should consider moving to cash, U.S. Equity Core must be 40% or below and Money Market must be 50% or above.
Source: Nasdaq Dorsey Wright
Below is the most recent D.A.L.I. (Dynamic Asset Level Investing) Indicator showing International Equities and Domestic Equities in the top two spots, while both maintain a commanding lead over Cash and Fixed Income.
Source: Nasdaq Dorsey Wright
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These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. All indices are unmanaged and may not be invested into directly.
Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.
Nasdaq Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolios across all major asset classes in an effort to emphasize strength wherever it exists. Domestic Equities, International Equities, Commodities, Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.
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