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.
Category Archives: Blog Post
After Brief Affection with Foreign, US Investors Again Turn Sights To Home – Week Ended 6/8/11
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.
“Sell-in-May” Advocates Likely Disappointed Thus Far – Week Ended 5/18/18
The most watched of US indexes yielded slight ground during the week ended May 18, with the S&P500, Dow, and Nasdaq each sliding between -0.5% and -0.7%. Bonds continued to experience downward price pressure with key interest rate benchmarks resuming their inching-up. Weaker equity performance however comes on the heels of an eight day winning streak for the Dow, and an S&P500 that remains nearly +2.5% higher than it was at the end of April. Most interesting perhaps is that what are often thought of as the more economically sensitive and risk-seeking sectors including Small-size companies, industrials and the transports, actually continuing to climb, creating an interesting and arguably positive divergence when looking beneath the surface.
Robust Earnings More Than Just a Tax Cut Story – Week Ended 5/11/18
US equities rebounded in the second week of May, with the broad S&P500 climbing by +2.4% and more cyclically sensitive areas of the market faring even better (Dow Transports +3.3%; Small-Caps +2.9% at the expense of defensive industries like Utilities -2.1%). The strong weekly performance was likely the combined result of unfaltering strength in 1Q earnings season (nearing a conclusion), softer than expected readings on inflation, and tough trade & tariff talk that seems to be thawing (obviously the situation is fluid and could reverse again quickly). On the geopolitical front, the US also recorded a win from N. Korea with the announced release and return of 3 prisoners back to home in the US.
Corporate Earnings Face Off Against Shifting Rate Environment – Week Ended 4/27/18
The final full week of April might best be described as a tug of war between big macro concerns and favorable micro inputs. All of which combined such that the domestic stock market was unable to find direction throughout the week and concluded virtually unchanged over the 5 trading days ending April 27 (as measured by the S&P500 and broad Wilshire 5000). By contrast, reference-rate bonds on the other hand experienced a noteworthy development wherein the 10-year US Treasury climbed above 3% for the first time in more than 4 years (it closed the week just under at 2.96%) and the Fed is signaling no intention of slowing their hikes. As recent as year-end the same bond maturity sported a stubbornly low yield of just 2.4%; so the roughly +60 basis point rise represents a +25% adjustment in just 4 brief months. With the US Federal reserve and other major monetary authorities around the globe continuing to communicate a preference toward further normalization, including through rate hikes, rates seem poised to rise further.
Political Volatility Still Driving Financial Markets; Can 1Q Earnings Ride to the Rescue – Week Ended 4/13/18
Choppy market action that persisted throughout February and March is continuing this month against an increasingly unpredictable political backdrop. 2Q began with a horrible first day and stressed week, but the slide was reversed last week despite no shortage of fresh unsettling headlines. For the week ending Friday the 13th, the S&P added +2%; some of the momentum areas hardest hit in recent weeks (Amazon, Tesla, Facebook) also managed to enjoy some of the best relative performance as the negative news flow for them eased a touch. Interesting though amid the choppier weeks is that smaller-size companies have actually fared better than their larger-cap brethren. Of additional merit, credit spreads (often a leading indicator of problems below the surface) tightened last week, suggesting that while US equities remain in closer proximity to the lows of the correction range than the upper, the underlying economic and corporate fundamentals are still perceived as OK. In that regard, the correction is appearing to maturing, and maybe nearing a tradeable conclusion.
Trade War Worries Bring February Lows Back in Focus – Week Ended 3/23/18
It was one of the worst weeks for equities in recent memory as the S&P500 skidded -6% and the tech-heavy Nasdaq gave back -6.5%. The pressure over the last two weeks is bringing the lows set back in early February (following a 9 day pullback that commenced after all-time highs were set on January 26) back in close proximity. Those who were feeling emboldened and relieved by a very abbreviated corrective phase and V-shaped recovery over the balance of February may be starting to feel less confident. Simply, the variety of troubling headlines in recent weeks are the most obvious catalyst for retesting lows set several weeks back and sentiment appears to be eroding based on continued developments around international trade (trade war fears) and ongoing White House drama (budget, scandal, personnel changes, etc). Troubling as those themes are, deteriorating sentiment is ordinarily a requisite condition for corrections to actually have any cleansing effect and deter risky investor behavior.
Trade Tensions Linger, But Did Goldilocks Get New Running Shoes? – Week Ended 3/9/18
Heading into March, it was beginning to feel as if the markets might revisit the correction lows plumbed in Early February amid still choppy trade. The S&P500 gave back more than -3.5% of its rebound over between February 27 and March 1 with sentiment eroding fast on the back of protectionist and trade-war rhetoric emanating from the Trump administration. That may still occur, but interestingly while the fury over trade-related tension remained elevated throughout last week and is still top of mind for many, financial markets began behaving better. In fact, the S&P500 managed to stage several mid-day reversals and close appreciably higher in 4 of the 5 days last week; the full-week experience was actually one of the best so far in 2018. The S&P500 climbed a strong +3.5% with half of that gain occurring on Friday, the 9th birthday of the current bull market (3/9) in concert with what can only be described as a blowout strong employment report for February.
Rebound Continues Helping Narrow Early-February Drawdown – Week Ended 2/23/18
Following what was easily the sharpest and most stressful drawdown the markets experienced in the last two years, foreign and domestic equity markets are managing to fight their way back in recent weeks, dramatically narrowing the loss that was built in early-February. Volatility, remains more elevated than witnessed during virtually all of 2017 due to bond yields that have risen materially on the worry about rising inflation. But since February 9, the S&P500 is up almost +5%. With the rebound so sharp though and the pullback relatively short-lived, the biggest questions in our mind are: was that really the extent of the correction (seemed too short, even if it was panicky and nerve wracking); and secondly, will the market actually manage to finish roughly flat for the month? Writing today with the markets again notably higher, it seems the race is on, but barring a sharp selling between here and Wednesday it would seem the market has achieved a highly unexpected and HUGE moral victory and seeming credibility to participants such as us who believe the pullback was largely an overdue technical correction rather than a meaningful change to the positive underlying economic fundamentals.
Stocks Cross Technical Threshold of Correction – Week Ended 2/9/18
As bad as the prior week felt, the 5 trading days ending Friday February 9 were even worse with the S&P500 experiencing two selloffs approaching of around -4% each on Monday and Thursday; the 2nd brought the peak-to-trough giveback from January 26 to more than -10% and crossed the threshold for what is technically defined as a correction. It is crazy to think it was just Jan 26 when the major US indexes and client portfolios hit fresh all-time highs and retail investors seemed to be charging head-first into equities for apparent fear of missing out. How different the mood suddenly feels. Still, we are not in any way surprised to be seeing the market finally experiencing pressure. It was overdue and arguably healthy; weve been de-risking client portfolios in anticipation of such via some tactical adjustments and rebalancing efforts; those adjustments are helping as client portfolios are off nowhere near as much as the major indexes.