After suffering a grueling finish to the second quarter, stocks are starting to stage a quiet comeback again, with the S&P 500 (^GSPC) back within 3% of its all-time high after rising 7 of the past 9 sessions. But for all its fortitude in the face of great challenges, fund manager Ed Dempsey of the ATAC Inflation Rotation Fund is troubled by the benchmark's resilience, while disasters unfold all around it.
"Gold (GLD) crashed. Japanese government bonds crashed. Emerging Markets (EEM) crashed. U.S. bonds (^TNX) crashed," Dempsey says, adding that other rate-sensitive sectors like homebuilders (XHB) and utilities (XLU) "are also reacting to spiking interest rates." As these sectors take it on the chin, the broader S&P 500 stands strong, a veritable last man standing if you will.
Despite the S&P 500's resilience, Dempsey notes larger issues do remain. The world's top two central banks are being less accommodative, with the Fed hinting that bond purchases may taper, as well as what Dempsey describes as outright "tightening" by the People's Bank of China.
"The last piece that is left here is the S&P 500," and having "not made a new high in well over a month," Dempsey believes the downside risk for the S&P 500 is very high.
And with no signs inflation on the horizon, he says the bond market has taken it upon itself to effectively "price-in five quarter-point rate increases" by pushing the yield on the 10-year Treasury up to 2.7%.
There is one opportunity that Dempsey likes in this uncertain market: government debt. "Bonds could be a nice buy right here," he says, especially "if spiking rates start to slow housing, and if the stock market corrects."
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