Following the most recent Fed rate hike decision last week, Fed Chairman Jay Powell went on record suggesting it is a puzzle why long bond yields are staying so stubbornly low. Yet for those well researched in the dynamics of the bond market and the crowd-based wisdom it can convey, the message is clear: the current rate-hiking pace of the Fed is believed to be unsustainable by the bond market and it will slow down economic growth if not made more glacial than presently being communicated. At present, short rates are rising more swiftly than the long-end of the curve is adjusting in recognition of faster economic growth; should the yield curve invert (meaning long rates are less than short dated ones), it signals a serious policy mistake has been committed and an economic recession should be anticipated.
The first full week of June was again characterized by foggy and uncertain geopolitical headlines, but the number of positive fundamental developments continued to outweigh those that in isolation would be viewed with a negative lens. As a result, domestic equities managed to build on the positive result for May with an advance of +1.7% for the S&P500. The profile of the advance also implies that the current tone of the market is risk-seeking with more economically sensitive corners and asset classes within the market acting well. When including last week, the S&P500 is up +4.8% to-date in 2018 compared with small-size companies that sport a +9.5% return over the same period as measured by the Russell 2000. By contrast however, international baskets as measured by the MSCI EAFE index are only narrowly positive with just a +0.1% change YTD.
“The biggest business in America is not autos, steel, television”, or apples. “It is the manufacture, refinement, and distribution of ‘anxiety’.” Such was penned by media legend Eric Sevareid (who was an American author and CBS radio and television news journalist from 1939 to 1977) when the “news” consisted of a morning newspaper and a half-hour of nightly national news. One would probably consider this a recently offered thought rather than from 1964. What might anyone say today about our constant barrage of “news”? News today seems more commentary and opinion in a wrapper called “news.” A “geopolitical fog” of “news” is creating a directionless market; issues consist of – tariffs/trade; rise in oil prices boosting inflation expectations; the Fed raising interest rates too fast and/or too much; mid-term election year; Italy/Spain politics; not to mention North Korea or Iran; and etc.