Today the US Treasury 10yr Note traded above 3% for the first
time in nearly five years. This is a significant move for two reasons. First
it’s a sign that the statistical measures of inflation are being taken
seriously by the markets and that for the first time in recent memory the combination
of stronger economic growth and higher interest rates make welcome the growth
as well of some interesting opportunities to invest in bonds. It should also be
mentioned that the Fed’s ambition to unwind some of their post crisis stimulus
was expected to bring on a negative reception from the interest rate markets.
But as usual when markets decline they uncover hidden treats and for now what
is happening is not a surprise, at least when considering the following.
The Economy
The economy is growing. It’s not that strong except when
compared to the years following the financial crisis when GDP growth stagnated
around 1.5%. Now it’s around 3% and when adding in inflation is decidedly a
growing economy. However, in light of the confirmation suggested by todays move
in interest rates the past few weeks have also seen some slowing down in
inflation as suggested by the
-.01% consumer inflation (CPI) data. On other recently
strong fronts the slowdown, in spite of an intact positive trend, can be seen
in Housing Starts (growing but from unstable sectors) , Manufacturing (growing
but in recently depressed mining and industrial production only) Retail Sales
(growing but erratic due to weather and seasonal factors) and I think you get
the idea. As long as this trend continues the Fed could likely remain
attentive, but the markets are a different factor.
The Markets
There are a number of behaviors inherent in the stock and
bond markets that can be expected in the search of value and opportunities.
First and foremost is that those markets don’t need help to move outside of the
investing public. The move above 3% today was the bond markets impatience with
waiting for the Fed to stop talking and start raising interest rates and in the
meantime stocks will weaken until the bond market figures it all out. The former
important because when the Fed does tighten, the only thing for interest rates
to do then is, nothing, which is good for stocks. And the latter because broad markets
will have given up some value to present some compelling opportunities.
External Events
This week’s move to smooth out trade tensions is being
generally overlooked in favor of more biting news. Today’s decline in the markets
driven primarily by steep drops in Google (GOOGL) and Facebook (FB) that will
likely be followed up by the recent establishment of a privacy council for the European
Union that is predictably going hard after the two companies. Issues with the
upcoming meeting between the US and North Korean leaders shouldn’t have too
much impact, except putting some weight on defense stocks should a deal be
struck. And the only outlier is still China who has stepped up their ambition
to serve their country with their own network of companies. Sound familiar? In
my opinion I still think a deal will be struck as part of a broad trade deal
(maybe even a revamped, more inclusive TPP) to help both China and their largest
European partners in addition to the US. Any other issue of a political nature
will have as much influence on the markets as they’ve had since they began.
Gold
Or should I say Bitcoin. The curious rebound in the
prices of an array of crypto currencies just at the time the US and Euro Asian
broad markets are correcting is no accident. We’ve written before the potential
for a leading cryptocurrencies to replace singular defensive investments such
as Gold and Fine Art and it would appear to be playing out in the past week. Appearances
can be misleading, so I’ll keep everyone updated.
Down the Road
The challenges of the broad markets are in my opinion the
same as they’ve been since last year. The increased level of growth has, I believe,
caught the Federal Reserve by surprise and pushed their agenda to include an additional
rate hike in this year. Economics, as we analyzed, don’t necessarily suggest
the same level of strength coming down the road. That doesn’t mean the economy
will sink, or the yield curve will follow by inverting (sometimes considered a
precursor to recession) it more likely suggests a period of static change,
especially with so much happening on the trade front, and our entering into the
spring and summer season. There is notion that it is wise to sell in May and go
away for the summer. We’ve already sold a little to slow down and take in the
scenery, but believe the opportunity to speed up will be on the horizon.
