Category Archives: bond market

Current Market Observations

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U.S. Equity markets were battered again last week across all sectors, even in the face of strong economic data released that showed 3rd quarter GDP rose +4.90%. Weak and mixed earnings reports and continued global turmoil weighed more heavily on the markets than a strong GDP report. For the week, the Dow Jones Industrial Average fell -2.1%, the S&P 500 Index dropped -2.5% and the NASDAQ fell -2.62%. Meanwhile, the 10-year U.S. Treasury bond yield fell nine basis points to close the week at 4.84% as several large investment houses either lifted their short trade on treasuries or recommended an outright buy for the sector. Both moves rallied bond prices.

US Economy 

As mentioned above, the 3rd quarter U.S. GDP was released last week and showed that the U.S. economy grew by 4.90%, which was more than double the 2nd quarter rate and led by consumer spending on Travel & Leisure and Retail Goods & Services. The economy has been bolstered by a strong labor market and consumer savings accumulated during the pandemic. See Chart 1 below from Valley National Financial Advisors and Y Charts below showing the U.S. GDP and S&P 500 Index since 1950. We purposely picked an exceptionally long-dated chart to show why it is important to think about investing over extended periods rather than over very volatile short periods of time. You will see from the chart that, over time, the S&P 500 Index grows with the U.S. economy, and we continue to believe that the U.S. economy has a long way to go from here, especially over an extended period. Remember, time is an investor’s partner, not their enemy, and it is easy to get caught up in the volatile short-term noise and miss the big picture.

This week, we will look at the latest FOMC report after their two-day meeting ends on November first. Futures markets and traders are currently pricing in another “pause” in interest rate movements, which would be welcomed, but alone not enough to move markets higher. However, if that announcement is paired with a more dovish statement or language akin to “we believe the current interest rate levels are sufficient to combat inflation,” we could see the fear leave the markets to be replaced by positive investor sentiment.

Policy and Politics 

Last week, we emphasized our concerns impacting markets: global regional turmoil, fear of the Fed continuing to raise interest rates and uncertainty related to our political spectrum. With the election of Congressman Mike Johnson (R-LA) as U.S. Speaker of the House, the political sideshow and uncertainly related to it has been lifted, and Washington (rightly or wrongly) can now get back to work with focus on a spending bill that avoids another embarrassing government shutdown. 

What to Watch 

  • Target Fed Funds Rate from the FOMC meeting, released 11/1/23; current upper limit 5.50% 
  • U.S. Initial Claims for Unemployment Insurance for week of 10/28/23, released 11/2/23, prior 210,000 new claims. 
  • U.S. Unemployment Rate for October 2023, released 11/3/23, prior rate 3.8% 

Certainly, the economy continues to grow at a healthy pace despite interest rates rising from 0.00% to 5.50%. However, we are seeing sanguine earnings releases from companies and, along with that, language from CEOs and CFOs pointing to less-than-stellar earnings going forward. We stated before that interest rate hikes take time to work through the economy (typically 9-18 months). The first-rate hike in this cycle was in March 2022, about 18 months ago. We believe the FOMC is close to being finished with rate hikes as inflation continues to creep towards their 2% target (the September 2023 rate was 3.7%). As usual, watch for dovish (lower rates) or pivot (hike to cuts) language from Fed Chairman Jay Powell during the press conference after the FOMC meeting and announcement this Wednesday. We understand there is a lot of conflicting data: a growing economy, healthy consumer spending, strong labor market, less than stellar earnings, high-interest rates hurting the real estate market, and, of course, all equity markets continuing to sell off each week. Sometimes, it is not easy to be an investor. Please reach out to your financial advisor at Valley National Financial Advisors for questions or help.

Current Market Observations

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The broader markets rallied last week, seeing through the noise of continued inflation concerns, a protracted war in the Middle East, and mixed third-quarter corporate earnings releases. Last week, the Dow Jones Industrial Average and the S&P 500 Index moved +0.79% and +0.45%, respectively, while the NASDAQ moved lower by –0.18%. In a classic “Flight-to-Quality” trade, U.S. Treasury bond yields fell as investors moved to safe Treasuries during a time of global conflict. The 10-year U.S. Treasury bond fell 15 basis points, ending the week at 4.63%. Even at this lower yield, investors are finally seeing “real” yields on Treasuries as the U.S. Inflation Rate has finally fallen lower than the 10-year U.S. Treasury bond yield. See Chart 1 from Valley National Financial Advisors and Y Charts. 

US Economy 

As mentioned above, while stubbornly staying above the Fed’s target rate of 2%, the U.S. Inflation Rate is now 3.70% (released last week). The U.S. Core CPI (Consumer Price Index) fell to 4.13% in September 2023 from 4.39% in August 2023. Chart 1 below shows the 10-year U.S. Treasury and two inflation measures. While inflation remains higher, the yield on the 10-year Treasury is slightly higher, thereby finally offering investors real, after-inflation returns. 

Higher interest rates continue to negatively impact growth stocks as those companies typically borrow money to expand operations or hire additional employees. As third-quarter earnings releases hit the tape, we will get a better picture of which firms and industries are best dealing with higher interest rates for longer. Large banks Citigroup, JP Morgan, and Wells Fargo all reported earnings better than expected as higher interest rates helped these banks as they continue to remain a bit stingy in passing on the higher rates to their depositors. 

A widening or global escalation of the Israel-Palestinian conflict could impact oil prices, but thus far, world oil prices have not been materially impacted. It is important to watch this event to see how various actors on the world stage choose sides. For example, the U.S. has moved the USS Gerald Ford carrier fleet to the region to support Israel. Of course, defense stocks (ex. Northrop Grumman, General Dynamics & Lockheed Martin) have modestly rallied because of the growing conflict.  

Policy and Politics 

Three government forces are working in the economy right now, and all are impacting the markets, pushing uncertainty and worry into prices:

  1. We have the Fed and its constant fight against inflation. Last week, Federal Reserve Bank Vice Chairman Philip Jefferson noted that higher long bond yields are doing a lot of the work for the Fed in slowing the economy, implying that there is no need for further rate hikes.
  2. U.S. Secretary of State Anthony Blinken is actively involved in the Israeli-Palestinian conflict, which clearly indicates the U.S. is willing to do whatever is necessary to support our allies in the region.
  3. We continue to see a circus in Washington, DC, as lawmakers fall over each other trying to elect a new U.S. Speaker of the House.

Taken together, these government forces are adding uncertainty and worry to the markets, which is quite the opposite of what we expect and desire from our leaders. 

What to Watch 

• U.S. Retail Gas Price for week of October 13, 2023, released 10/16/23, prior price $3.81/gallon.
• U.S. Housing Starts for September 2023, released 10/18/23, prior 1.283 million starts.
• U.S. Initial Claims for Unemployment for week of October 14, 2023, release 10/19/12, prior 209k
• 30 Year Mortgage Rate as of October 19, 2023, released 10/19/23, prior 7.57%
• Key Earnings releases to watch this week: Tesla, Netflix, Goldman Sachs, Lockheed Martin.

We pointed out the wall of worry above with confusion on interest rates, continuing global conflict, and a broken U.S. Congress. Meanwhile, the markets are moving slightly higher each week, and bonds finally offer “real” yields for investors. Instead of worrying about what is happening now, the markets are scaling the wall of worry and moving higher as they filter out the noise and see sectors like big tech, healthcare, and mega banks doing well, even given all the noise. It is easy to get mired down with worry and negativity – that is all we see on TV and hear from so-called experts, but the markets see the future and ignore the noise. Investors interested in creating long-term generational wealth should listen to the markets and ignore the TV. Reach out to your financial adviser at Valley National Financial Advisors for advice or questions.

The Markets This Week

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Stocks rode the D.C. seesaw last week as the broad
market fell, rose, and ultimately finished flat on the week amid daily, if not
hourly, conflicting comments from senior political leaders. Large-company share
prices, however, dropped more than 1% for the week.

With
the third-quarter-earnings reports season not beginning until this week,
investors remain fixated on the partisan battle over the federal budget and the
government’s need to raise its debt-ceiling authority. As of Friday, the
partial government shutdown was in its fourth day.


The
market’s rebound on Friday demonstrated how closely investors were watching
Washington, as stock prices rallied on media reports suggesting that Speaker of
the House John Boehner was perhaps more flexible than previously thought in
working to increase the U.S. debt limit before the estimated Oct. 17 deadline.
Technically, in the event that deadline isn’t met, the federal government
probably wouldn’t run out of money until the end of the month.


The
Dow Jones Industrial Average lost 186 points, or 1.2%, to 15,072.58, a second
consecutive weekly drop. But the S&P 500 index finished essentially
unchanged at 1690.50. The Nasdaq Composite index bucked the trend, rising 0.7%,
or 26 points, to 3807.75.


“It
was a manic-depressive market,” says Paul Nolte, a portfolio manager with
Dearborn Partners. There’s hope of a handshake on the debt ceiling, but the
competing sound bites from Democrats and Republicans aren’t helping, he says.


With
shares off just about 2% from highs, the market hasn’t reacted much to the
stalemate, he adds, and certainly less painfully than the 10%-plus slide back in
August 2011. That’s when Standard & Poor’s downgraded U.S. debt amid the
wrangling over lifting the ceiling. As things stand, the debt ceiling is more
pressing than the budget (Source: 
Barrons Online).


Heads Up!

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THE FED SURPRISES!

The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs to see more evidence of improvement in the economy.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”

Chairman Ben S. Bernanke and his policy making colleagues refrained from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when Bernanke first outlined a possible timetable for a reduction in the asset purchases that have swelled the Fed’s balance sheet to $3.66 trillion.

The Fed chairman has orchestrated the most aggressive easing in the Fed’s 100-year history, pumping up the balance sheet from $869 billion in August 2007 and holding the main interest rate close to zero since December 2008.

“Asset purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on the committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”

The Markets This Week

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The stock market jumped sharply last week, making up
for a lack of trading volume with enthusiastic price bidding. The likelihood of
an attack on Syria faded, and investors turned festive, sending share prices up
2% to 3%. Stocks completed a rare seven-consecutive-day win streak last
Wednesday.

A
few weeks ago, a U.S. missile attack on Syria seemed imminent, but that’s on
hold after Moscow-brokered talks began last Thursday on a plan for Syria to
surrender its chemical weapons. With U.S. sabers sheathed for now, investors
are calmer, but the ups and downs in these talks will probably lend some
unwelcome volatility in the next few weeks.


To
some extent, last week’s big rally was also a function of the growing
acceptance of a bullish view that the Federal Reserve will not remove as much
bond-buying stimulus as it signaled back in June. The Fed’s $85 billion in
monthly bond buying has been a major factor in the stock market’s rally over the
past two years by keeping interest rates artificially low.


The Dow Jones Industrial Average climbed 454 points,
or 3%, to 15,376.06. It’s down 2% from record highs set last month. The
Standard & Poor’s 500 index gained 33 points. That’s about 1% below the
all-time high of 1709.67 hit on Aug. 2. The tech heavy Nasdaq Composite index
gained 1.7%, or 62, to 3722.18.


“I’m getting a sense that the market believes
the Fed tapering will be lighter than previously thought,” says Joseph
Amato, president of fund manager Neuberger Berman. The Fed’s policy-setting
committee meets Sept. 17-18, and that “will clearly be the driver of
near-term market sentiment,” he says.


In general, the tapering consensus appears to be
coalescing around an expectation that the Fed will indicate a $10 billion to
$20 billion reduction in bond buying. That would be much less than the $40
billion curtailment that the Fed signaled last June. If the Fed meets market
expectations, that will probably send stocks higher, Amato adds.


Brian Reynolds, chief market strategist at floor
broker Rosenblatt Securities, agrees. Such an outcome would likely push the
S&P 500 index through the 1700 level, where it has met some resistance in
the run-up of the past two weeks.


Stocks
haven’t been able to top the August high because traders are pulling in their
horns ahead of the Federal Open Market Committee meeting. If the Fed meets
consensus, the old highs will be taken out in a few weeks, Reynolds predicts.


He calls scenarios where the Fed delays any tapering
or where it follows through on the larger $40 billion reduction “low
probability outcomes.” In the former case, the market would probably bolt
higher, but in the latter case, there would likely be a “big
selloff.” (Source:  Barrons Online).


The “Heat Map”

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Most of the time, the U.S. stock market
looks to 3 factors to support its upward trend – let’s grade each of the
factors:

CONSUMER
SPENDING:  I grade this factor a C (neutral).

THE
FED AND ITS POLICIES:  I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.  


 BUSINESS
PROFITABILITY:  I graded this factor an A (very favorable).   

 NOTE: 
the above grades are unchanged from last week.

The Markets This Week

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Stocks finished the week generally mixed in light
trading, with mega-caps lagging the market. Traders mostly shrugged off a
technical glitch at the Nasdaq, which halted that exchange for three hours
Thursday.

The market traded down Wednesday ahead of the
release of the minutes from the U.S. Federal Reserve’s July policy-setting
meeting, and middling rallies on Thursday and Friday weren’t enough to overcome
the earlier losses among the big caps.

With
few macroeconomic data releases and little new in the way of policy hints out
of the Fed, investors switched their focus mainly to corporate news from
companies like Microsoft (ticker:
MSFT) and retailer Abercrombie (ANF).

The Dow Jones Industrial Average managed to climb
back above 15,000 Friday, to close at 15,010.51, down 71 points, or 0.5%, on
the week. The S&P 500 index inched up eight points to 1663.50. The Nasdaq
Composite index gained 1.5%, or 55 points, to 3657.79. The small-cap Russell
2000 index jumped 14 points, or 1.4%, to 1038.24.

The
market’s negative reaction to the Fed minutes was surprising, says Liz Ann
Sonders, chief investment strategist at Charles Schwab, because it wasn’t
particularly “new news.” However, the drops are more understandable
in light of high bullish sentiment among investors coming into the week.

As a contrary short-term indicator, she says
sentiment remains “too frothy,” even if it has cooled. The Schwab
strategist is cautious about the near term and expects more of a pullback and
volatility. “I’d like to see a further reversal of sentiment” before
getting more positive, she adds.

Investors might be obliging. Last week, individuals
pulled $12.3 billion out of equity exchange-traded funds, the first outflow in
eight weeks and the largest in five years, according to a report Friday from
Bank of America Merrill Lynch chief investment strategist Michael Hartnett.

Next week might be quiet, but in September there are
going to be headwinds in the form of a Fed policy meeting on the 17th and 18th,
in a month when many expect the central bank to begin tapering its quantitative
easing, notes Jack Ablin, chief investment officer of BMO Private Bank.

Then there are critical German elections on the
22nd, and the ninth month has historically been a tough period for stocks, he
notes (Source:  Barrons Online).

The Markets This Week

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The Goldilocks economy is back. Soft job news Friday wasn’t enough to dent another big week for equities, with the major indexes setting new highs Friday—again. The continuing excitement has come on generally “just good enough” data from the U.S. economy, from second-quarter corporate earnings, and even from the jobs arena.


In many cases, bullish data—such as Thursday’s lower jobless-benefit filings—came with ancillary figures or revisions that undercut the trend, like Friday’s weaker-than-expected hiring data. Yet the combination didn’t set off investor fears the reports would sway the Federal Reserve Board to speed up an eventual withdrawal of monetary stimulus.


In general the economic figures “were nothing great, but nothing too bad,” says Dan Morgan, a portfolio manager at Synovus Trust.


The Dow Jones Industrial Average rose almost 100 points to 15,658.36, up 0.6%, a new high and up 19.5% this year. The S&P 500 index gained 18 to finish at 1709.67, also a record high, the 25th this year. The tech heavy Nasdaq Composite index jumped 2%, or 76 points, to 3689.59.


In the way of technical indicators, the market shows strong underpinnings: The number of stocks making new 52-week highs remains firm, those over their 50-day moving average hover around 80%, and breadth is strong.


It does seem as if the Goldilocks economy is back, says Stephen Massocca, a managing director at Wedbush Equity Management. Older readers remember that the 1995-1996 stock rally came amid U.S. domestic-product growth that was neither too fast to set off inflation fears nor too slow to ignite earnings-growth worry. “It’s a bumbling, stumbling recovery,” Massocca says of today’s U.S. economy.


Investors are again wrestling with whether they want a stronger economy or not. Slower growth means the Fed’s punch bowl remains available but that corporate earnings increases, now a tepid 4%, could ease even more. Faster economic expansion would help profits—and therefore stocks—but investors fear the early withdrawal of central-bank stimulus, a big propellant of this year’s hefty gains (Source:  Barrons Online).

Heads Up!

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As we forecasted in the last two issues of The Weekly Commentary, the FED’s Chairman, Ben Bernanke, calmed the bond market using wording in his speeches recently that pressured and influenced the bond market to drop interest rates.  We suspect this tactic will continue with the end result that interest rates on mortgages, bonds with a maturity of 5 or more years, and intermediate/long term bond funds will decline for the next 2 to 4 weeks. This tactic, which I call “jawboning,” can work for only a limited time period until economic reality sets in again at which time interest rates could move higher.  Our interest rate forecast is for interest rates on the above mentioned securities will generally decline for 2  – 4 weeks or longer, but rise over the next 5 to 10 years.

Heads Up!

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You may have seen recent newspaper headlines, “Interest Rates Are Rising!”  You may have wondered how that could be the case since the FED has held interest rates steady for a total of 4 ½ years.  The explanation is the FED controls short term interest rates that affect the interest rates on short term Treasury Bills, bank Savings Account rates, bank CD rates and money market account rates – these rates have not moved.  



The newspaper headline, “Interest Rates Are Rising!”  is describing longer term maturities like the U.S. Treasury Bond with a 10 year maturity, home mortgage interest rates,  and commercial mortgages.  The FED usually has only a small influence on the direction of these long term rates; but, the FED has been actively buying these long term maturity securities in the marketplace using an unconventional and questionable system that experts call “Quantitative Easing”.   The FED continues to buy these longer term maturities at the same pace.  Recently bond market speculators have been trying to jump in front of the FED tapering of Quantitative Easing to sell their present bond holdings.  When more sellers exist in a marketplace than buyers, prices go down – in this case bond prices. 



To understand bond prices and interest rates, click here:


http://news.morningstar.com/classroom2/course.asp?docId=5375&page=2