Displaying items by tag: fed
Stocks are roughly flat on the year, and there is a growing body of evidence that we may have finally come to the end of this economic and market cycle. Commercial construction is slowing, car sales have peaked, and banks are tightening lending standards even as demand is falling—all signs of an economy headed downward. According to Mike Larsson of Weiss Ratings “It is the type of stuff you see at the end of credit and economic cycles … I am concerned about the durability of this market and economic expansion”.
FINSUM: Only time will tell if the economy slows down. If so, markets will probably follow suit. Q4 GDP numbers were not nearly as good as they looked, as without trade war related boosts, growth would have only been 0.6%.
Investors seem to have every reason to worry about bonds. Prices are high, yields are low, and low quality companies are accessing easy financing even in the face of an uncertain economic future. With all that said, there might not be any reason to worry at all. Central banks are still gaming the system. From the Fed being really conservative with rates, to the ECB and BOJ doing massive QE, the whole central bank mechanism is conspiring to prop up bond prices in a major way.
FINSUM: As long as that pre-condition of huge central bank support is in place, it is hard to see bonds taking much of a hit.
Some investors live and die by it, but all should pay attention. The stock-bond ratio is an old investing indicator that can tell you when one asset class may be ready to head higher, and right now it is sending a strong signal. Ned Davis Research says that the ratio tends to bottom before economic recoveries. Therefore, if we have truly hit the bottom of the current economic cycle, then the ratio (S&P 500 divided by the US long-term treasury bond index) should start improving. “Barring an escalation in the trade war, we should see a recovery in early 2020 based on historical lead times”, said Ned Davis Research.
FINSUM: This is a very handy way to think about, and keep track of, risk-on/risk-off.
Despite all the worries that plagued the market this year, things have actually been very strong. Exceedingly so. But don’t expect that any longer, says Blackrock. The world’s largest asset manager expects returns in 2020 to come way down. The firm says that the big changes in monetary policy this year outweighed the geopolitical issues and caused huge returns, which won’t happen next year. Blackrock thinks returns in the mid single digits in 2020 seem realistic.
FINSUM: This is sort of a middle of the road call in terms of forecasted numbers, but we like the summary of what happened this year and how next year’s performance is not likely to be duplicated.
Bank of America has just made a bold call on the direction of yields. The bank has sharply increased its forecasts for where bond yields will be at the end of the year. Its previous forecast for the ten-year was 1.25%, but it has just moved that up to 2%. It made similar adjustments to its forecast for German and British bonds. “Relative to our more pessimistic revision in August, the US and China are working to de-escalate trade tensions, no-deal Brexit risks have been banished for now, global data have started to stabilize, and central banks have shifted from dovish to neutral policy stances”.
FINSUM: Based on the change in mood amongst investors and central banks, this forecasted change makes total sense to us.