Bloomberg has published a very insightful article about the current state of the market. In particular, it offers a view of how the big run up in bonds is likely to end. The fears that are driving the bond market—mostly that de-globalization will cause a recession—can only end two ways. Either the recession and de-globalization never materialize, in which case yields shoot back up, causing big losses in bonds. Or, the breakdown of global trade does happen, In this scenario, goods likely become significantly more expensive (especially in west) because there is no more labor and cost arbitrage. In this scenario, inflation then jumps, again sending yields much higher and sparking losses. In other words, the current bond market can only end in tears.
FINSUM: This was a very insightful argument in Bloomberg today. While there are some nuances that might cause some different outcomes, the basic contention is quite astute. Stocks seems a much better bet.
The inverted yield curve has investors feeling down on their luck at the moment. What is the best way to play the turmoil and volatility? The answer may be in two seemingly unlikely places. The first is in energy ETFs, especially oil. Energy stocks have traditionally done very well during inverted yield curves, so an ETF like XLE seems like a good bet right now. Additionally, tech ETFs such as Vanguard’s VGT could be a good play, according to Bloomberg. Tech has often done well during inversions in the past.
FINSUM: Recommending a tech ETF right now is the height of contrarianism. Tech is basically caught in the middle of the trade war, and frankly, seems like a bad buy.
Rates are looking likely to head sharply lower, and the inversion does not seem likely to abate. Since the Fed’s 25 bp cut a few weeks ago, markets and the economy’s outlook have moved sharply lower. This will likely lead to several cuts over the next year. According, what is the best way to play this big change? Two asset classes that fit the bill are gold and dividend stocks/funds. Gold thrives when there are worries about the economy and when rates are falling, so this is a perfect environment for the metal. Throw in the fact that it has been in a bear market for years and you also have valuation on your side. Dividend stocks look likely to do well because they tend to rise as rates fall. Additionally, the sharp drop in long-term yields means a 2% yielding stock looks incredibly more attractive than it did a year ago.
FINSUM: Gold seems to have a lot of momentum and valuation is on its side, but dividend funds seem like a really good bet to us.
More data has been just released on the US real estate market, and more disappointment. While the market should be rebounding because of the big fall in mortgage rates, the opposite seems to be happening. New home construction fell by the most in five months in July. Housing starts fell 4% despite lower mortgage rates. The fall came despite expectations for growth, and June numbers were also revised downward. An economist at Zillow summarized the situation this way, saying “Scarce land and high labour costs have plagued builders for much of the year, factors that have been exacerbated by unrelenting uncertainty in the global markets … This week’s flare-up, with bond markets flashing recession warnings, does not provide fertile ground for new housing investment”.
FINSUM: The market seems to be perpetually slowing, but it has not reversed outright despite over a year of weak data. Time has proved that real estate seems a little disconnected from the rest of the economy right now; in other words, it does not seem to be an indicator of much.
The yield curve is sending increasing warnings that a recession is coming. While the three-month and ten-year yield has been inverted for months, a new inversion occurred yesterday, when the ten-year yield moved below the two-year yield. Even more eye-opening was that the 30-year bond yield fell to just 2.06%. That figure shows that investors have abandoned all fear of rising rates and all economic bullishness.
FINSUM: We don’t know whether to be more worried about a big correction in bonds, or that the economy may actually be as bad as bonds are suggesting! Either way things look bad.