What is the bond market telling us?

If you think the equity markets have been volatile over the course of the last few weeks, take a look at what is happening to bonds, not only here in the United States, but elsewhere in the world. As readers are aware, in times of uncertainty, investors seek safety. Historically, they have used bonds as a safe haven until the financial storms have passed. This demand causes bond prices to climb and their yields to drop. For example, a few short weeks ago, the U.S. Treasury Ten-Year note was trading around 2.4%. Today, it is yielding 1.62%. That’s a huge move in an extremely short time in the fixed income market. Many pundits think that yields can go even lower with some predicting that a 1% yield could be possible in the months ahead. At that rate of return, bond yields are lower than the present inflation rate, which is a bit above 2%. If you think that is crazy, just check out what bonds are yielding in other countries, like Japan and Germany, where their sovereign debt is trading at negative interest rates. Japan’s ten-year note is presently yielding -.197%, while Germany’s ten-year bund is changing hands at -.604%. “In the thousands of years, that the world has had a market where borrowers and lenders exchanged debt, according to market sage, Art Cashin of UBS, yields have never gone negative, so this is truly a “first” in the financial markets.” To make matters worse, most countries are pushing their interest rates even lower. This week, for example, central banks in India, New Zealand and Thailand all announced interest...

Tariff threat unsettles markets

Donald Trump’s announcement on Thursday that an additional 10% tariff will be levied on the remaining $300 billion in Chinese exports to the U.S. on September 1 did not sit well with investors. The news could very well trigger the stock market decline that I have been expecting. Regular readers know that I have been waiting for a 5-7% pullback in the markets fairly soon. Since the first two weeks of August are usually a bad time in the markets, the pullback this week might be right on cue. In my last column, I also explained in some detail how it appeared that Donald Trump had no intention of negotiating in good faith with the Chinese this past week during meetings in China. The Chinese, evidently, felt the same way. Nothing was offered to move the negotiations forward by either side. That suited the president just fine because he was using the potential of a deepening trade war, in my opinion, to pressure the Federal Reserve Bank into a series of interest rate cuts. However, Jerome Powell, the chairman of the Federal Reserve Bank, failed to deliver what he wanted on Wednesday. Powell is stuck between a rock and a hard place. He did acquiesce (to some degree) to Trump’s demands, while attempting to preserve his and the Fed’s historical and legal independence. He cut rates by one quarter of one percent, but then left the impression, while talking to reporters in a press conference, that the cut was simply a “mid-cycle adjustment” rather than the beginning of a series of further interest rate cuts. That disappointed the financial...

Brexit: The never-ending story

Back in 2018, the government of the United Kingdom and the European Union reached an agreement on exactly how the British exit (Brexit) would occur. Since then, despite countless meetings, discussions and votes, the UK Parliament has failed to approve that process. The new date for an exit is October 31st. Will this really be the end of the story?   The October extension was really a compromise negotiated by former Prime Minister Theresa May of Britain’s Conservative Party. Some European countries were offering a much longer delay for as much as one year. However, Emmanuel Macron, the French President, insisted on a much shorter time period. Macron and some other European leaders are worried that the toxic atmosphere within Britain, which has been building ever since the exit vote back in 2016, could spill over and infect sentiment within the populations of other European countries. The longer these exit negotiations go on, the more likely other European countries might be persuaded to follow the UK’s lead and announce their own exit plans. To further complicate matters, Boris Johnson, an outspoken critic of the negotiations (and a leading pro-exit populist), took over as prime minster from May for Britain’s Conservative Party this month. One of his first promises was to accomplish the exit with “no ifs, ands, or buts.” Johnson has vowed to leave the EU by October 31, regardless of whether or not a deal with the EU can be inked. In addition, he and his cabinet have demanded a change in the terms of the negotiated deal, which have surfaced before, and were rejected repeatedly by the...

All eyes on the Fed

It was a week of chop. That was to be expected, given it was the first week of second quarter earnings results. While some individual big-name stocks made substantial moves, the overall indexes traded up and down but ended the week about where they started. It was largely what I predicted would happen. The same will apply to this coming week with all eyes intently focused on the July 31 meeting of the Federal Open Market Committee taking place next Wednesday. Investors expect the Fed to cut the Fed Funds interest rate by at least one quarter percent. Let’s hope they do. In the meantime, aside from earnings announcements, investors were confronted with some bad news out of Washington. After months of waiting, the U.S. Justice Department finally announced that the U.S. government has launched an investigation into the largest U.S. technology companies. Specifically, authorities will be trying to determine if the likes of Facebook, Apple, Google and Amazon are guilty of anticompetitive practices. If they are found guilty, that could lead to antitrust charges. Actually, I was impressed with how well the markets held up given that the above named “FANG” stocks have been the market leaders for years. The four companies represent a substantial weighting in many of the U.S. indexes, such as the S& P 500 and NASDAQ indexes. While no one knows how long until, or even if, any of the companies will ever be charged, the investigation will cast a pall over the group for some time to come. So, while investors grabbled with the bad news from this Justice department, over at the...

Get ready for a step back in stocks

Two steps forward, one step back, it’s the nature of things. Unfortunately, stock markets are susceptible to this pattern as well. As such, investors should be gearing up for a bit of downside in the near future.   That should come as no surprise. I like to remind readers that equity investors can expect at least one to three selloffs per year. Some of those declines can be quite scary and seemingly come out of nowhere. That’s the price of doing business in the stock market. Traders know this. They are paid to anticipate these moves. They make their money during times like that. They will buy stocks at giveaway prices from panicky investors like you and I, who typically sell at the lows and buy at the tops. My hope is that if I can prepare you to expect these minor blips in the market beforehand, you won’t become a victim of your own fear. Take the present level of the S&P 500 Index, which hit 3,000. That is something I predicted would happen a few weeks ago and right now, if you had stayed invested, you would be quite pleased with your performance. The 3,000 level on the S&P 500 is a nice round number and humans, for whatever the reason, are drawn to nice round numbers. That level also registered as a new historic high (actually, the index hit 3,018 for a moment, before backing off). But for some, if you put those two events together, some might assume that we may have hit an interim top in the markets. That’s way too easy. If I...

Lower interest rates equal higher stock prices

The math is simple. As long as the Federal Reserve Bank is neutral to positive on lowering interest rates, investors who want any kind of return are forced into the stock market. Until that changes, equities are in the buy zone. “But, but, but,” moaned several readers, who called or emailed me from blue states, “What about Trump, and the Chinese and the Iranians and earnings season and everything else?” That doesn’t matter, in my opinion, over the next few months, or until stocks become so over-extended that the markets fall upon their own weight. Think of a tree that grows so tall and its limbs and leaves so full that its roots can’t support it. Until then, enjoy the ride. Unless you have been living under a rock (and some have), you should know by now that America’s outlook on things financial has become extremely polarized. Those in the Trump camp believe we are on the verge of the second coming of the Lord (if only we would all give the president a chance.) Those on the other side are convinced that Trump represents (as the Iranian leaders argue) the “Great Satan.” The Trump camp of investors needs little encouragement when I paint a positive picture of what’s to come in the stock market, so let’s focus on calming the fears of the remaining equity investors. My advice is not to be swayed by your wall of worry. I do not mean to discount or make light of all the negatives that we hear and encounter time and time again. They are definitely out there. But none of...