Displaying items by tag: rates

(New York)
One of the most respected financial publications in the country has some bad news for investors: the selloff is not over yet. Barron’s argues that the selloff is not close to over, despite the mild recovery, because investors are not yet use to the new “yield backdrop”. For the first time in over a decade, the market seems to be pricing in higher rates and a tighter monetary environment. “The going bet, now, is that the Federal Reserve will continue to lift rates, and thus tighten credit, and maybe to a degree that produces an economic recession”.

FINSUM: We think more volatility is on the way and that it will take a little time for the storm clouds to clear, but we do not expect a bear market, or much more than a 10% overall correction.

(New York)

One of the guiding ideologies of the bond market over the last few years has been to buy the dips. Every time that bond yields have risen some, it has been smart to go long bonds as they inevitably came back down. However, this time looks very different. The difference is that central banks are no longer fixed to their ultra-low rates policy, which means there is no big magnet that pulls rates and yields ever downward.

FINSUM: So in our view what is really happening right now is a market wide price discovery period for bonds. Because the underlying situation is changing, no one is comfortable judging bond yields and prices. This worry has spread to equities, but in our view the root anxiety is in fixed income.

(New York)

Well it finally happened yesterday. The big selloff in bonds finally managed to legitimately spook the equity market. Stocks in the US were down big as the yield on ten-years jumped mightily. The ten-year yield is now 2.73%, the highest in three years, which was a significant mental threshold. Investors are worried that with the world economy doing so well, inflation may again rear its head, causing central banks to raise rates quickly. The S&P 500 fell 0.7% on Monday.

FINSUM: Okay here is the big question we have—why would the world economy doing well and higher rates be negative for stocks? If anything, equities are a good inflation hedge.

(New York)

Small cap stocks are off to a good start this year, up over 3% this month. Furthermore, a strong start tends to signal good gains for the whole year. There is a lot of reason to be positive—the economy is good, regulations are being rolled back, and the bull market for small caps is much younger (less than two years since a big correction). However, risks abound, according to Barron’s, especially in the long-term. Valuations are still high by historical standards, and are actually higher than they first appear. Smaller companies are also more in-debt and more exposed to interest rate rises than many realize.

FINSUM: We think small caps will keep rising so long as the broader market does. Also, the fact that they had a 25% correction which ended in February 2016 gives them a bit more breathing room than their large cap peers.

(New York)

Okay so here is the trick: the Dollar should be getting stronger, but it isn’t. In fact, it is getting weaker quickly, and is at its lowest point in three years. The economy is getting stronger and rates look likely to rise, but the Dollar is weakening. What does this mean for stocks and the economy? The answer is that, in general, a weaker Dollar is good for earnings, as American companies, especially the largest ones, tend to get a lot of revenue from overseas. However, some think the Dollar is falling because of higher inflation expectations, which could mean that it is a sign of weaker financial markets to come.

FINSUM: One would think that slow to moderate inflation with a high likelihood of rising rates and a strengthening economy would be ideal for Dollar appreciation. But the opposite is happening.