Interest-Rate Worries Take Center Stage and May Trigger a Stock Market Top

The stock market has done an exceptional job of ignoring higher interest rates for a long time. Rates hit a low in September 2024 when the Fed made a dovish pivot and they have been steadily increasing since then. On Thursday, the iShares 20+ Year Treasury Bond Fund TLT hit its lowest level since November 2023. If it drops much more, it will be testing levels last seen in 2004, prior to the onset of the Great Recession.

Why has the market has been ignoring this trend in interest rates? Primarily because of a belief that inflation was under control and that the Fed would start cutting rates as the economy slowed. The Trump trade and tariff turmoil caused worries about the potential for stagflation, but the delay in tariffs on China shoved that worry aside and allowed stocks to rebound sharply.

The worries about the impact of interest rates hit hard on Wednesday following a very poor Treasury bond auction. This auction was not a particularly important one, but it occurred at the same time that it became clear that the "Big Beautiful Bill" was not going to be an exercise in fiscal discipline. Maybe Moody’s downgrade of U.S. debt last Friday did have some justification.

The issue now is whether bonds can stabilize and interest rates can stay contained. Further increases in longer-term rates will be a significant headwind for equities, especially with the potential for more trade and tariff turmoil as the 90-day pause comes to an end.

Technically, the market is extended, and some pullbacks and consolidation are not only likely but also healthy. The question is whether the selling gains momentum and kills the bounce that started in early April.

My game plan is to tighten up stops and focus on cutting some exposure, but there are many stocks that still have strong technical setups and should be given room to bounce around.

At the time of publication, Rev Shark had no positions in any securities mentioned.