Treasury bonds and their associated funds just had one of the worst periods on record. Specifically, they had their worst week since Trump was elected. The iShares 20+ Year Treasury Bond ETF fell 6.2% in a week, the sharpest drop since bond markets panicked on Trump’s surprise election. What is odd about the big drop is that the stock market remained relatively muted throughout. Usually, big losses in Treasuries come when there is a big risk-on rally in stock markets.
FINSUM: There has been a huge rally in bonds, and in the last week, a lot of the pessimism has faded from markets as economic data is relatively stable and trade war fears are ebbing. Accordingly, this could be the start of a real rout.
Investors may be a little hazy on how forthcoming Fed rate cuts might affect stocks. One kind of assumes they will be positive, but then again, rate cuts mean the economy is worsening, so the picture becomes a little hazy. Well, a pair of top research analysts have just weighed in on the question and say the market’s reaction is likely to be positive. The year after a second rate cut stocks generally rise strongly, with the Dow up an average of about 20% in the next one year. However, this only holds if it is not too late to hold off a recession. That said, the gains from a second cut have often been immediate, “Perhaps because the second cut demonstrates the Fed’s commitment, or perhaps because the liquidity from the first cut had begun to work through the system, the gains have been immediate, with an average jump of 9.7% three months after the second cut”, say analysts at Ned Davis Research.
FINSUM: As we have said recently, we think the market is re-entering a post-Crisis goldilocks phase consisting of an accommodative Fed and a not-too-weak economy, the combination of which is very supportive of asset prices.
Dividends hold an interesting place in the current market environment. On the one hand, their yields are looking more attractive after the big fall in bond yields. However, some think the bond rally is very fragile and that it will either fall in a big way or at least stall, in which case the outlook for dividend stocks is bleak. So how to handle the environment? One tip is to buy dividend stocks with the fastest dividend growth, not the highest yield, as they have been fairing the best and will likely be the most resistant to rate fluctuations. One research analyst in the space summarized the situation this way, saying “Companies exhibiting stronger earnings growth to support regular dividend hikes have been in greater demand than those more value-oriented ones offering higher income streams”.
FINSUM: Those with the best trending yields will likely be more defensible than those with higher but more stagnant yields.
If higher inflation could be a headwind to rate cuts by the Fed, then there is new data today that could prove a tailwind. New figures show that retail spending was significantly weaker in August than in past months. The data showed that core retail spending stagnated after several months of strong expansion. The data is crucial because consumer spending, and American consumer health generally, has been a bedrock of the economy.
FINSUM: The American consumer has been keeping the economy afloat despite a lot of negative signs around the margins. This could either be a blip or the start of a worrying trend.
Everything you think about the direction of rates could be wrong. That is the general fear after this week’s inflation report. US core consumer prices hit a one-year high in August at 2.4% year-on-year growth, ahead of the Fed’s target. Importantly, it was also a bit higher than expectations. The Fed’s new cutting agenda is partly predicated on the fact that inflation has been so subdued, so any change to that assumption could prove disruptive to a cutting cycle.
FINSUM: We don’t think one month’s report will change the Fed’s path, but it is certainly something to keep an eye on. It is going to make September’s inflation report a lot more important.