Still Runnin’ Against the Wind
By John Stoltzfus,
Chief Investment Strategist
The More Things Change, the More They Stay the Same
Stocks edged lower last week and bears again growled
With the major stateside indices posting modest declines last week, the bears by week’s end seemed to be out in force proclaiming once again the end of the bull market even as earnings reported in the current season continued to surprise positively and monetary policy at the Fed looked steady and committed to interest rate normalization and a tapering of its balance sheet—both of which are happening at modest pace likely not to cause immediate disruption to improving fundamentals or the equity markets in our view.
The yield on the 10-year Treasury edged higher over the course of last week to 2.39% on November 10 from 2.33% on the prior Friday.
We’d note that for all the talk about rates moving higher, the yield on the 10 year has declined slightly from the start of the year when it was at 2.45% and somewhat more from when it climbed to 2.6% in March 2017.
In our view the yield of the 10-year benchmark reflects the market’s expectation that inflation will remain low for longer than those of “hawkish interest rate persuasion” believe.
Skeptics on the domestic economy on the other hand point to the two-year Treasury’s yield rise to 1.65% from 1.19% at the start of the year. They warn that a flattening of the yield curve signals that the bond market is indicating a slowing ahead or—should the yield curve invert—even a recession.
In our opinion the spread between the yield of the 2-year and the 10-year Treasury currently reflects the Federal Reserve’s stated commitment to interest rate normalization at the short end of the curve and the market’s reflection on price inflation data that continues to cross the transom (particularly that tied to wage increases) that remains at a modest rather than robust pace.
“Once again we suggest that it’s not that things are so great but rather that they are not so bad.”
This supports our belief that stateside economic growth is likely to continue at an annualized pace of around 2% to 2.5% even without the current Administration’s agenda, (which to date has not shown widespread support from even one side of the Congressional political aisle).
For now we will right size our expectations and look for the equity market to search for reasons to grind higher once it gets through the current season for tax loss selling, rebalancing, and rotation in advance of the calendar year end.
Growth versus Value
“Growth” remains the word for now as “value” remains disfavored but likely waits in the wings for a sign from Washington that would signal corporate tax relief and an economic boost.
In our view, last week’s respective declines in the Dow Jones Industrial average, the S&P 500 and the NASDAQ Composite signal a comprehension of the aforementioned conditions rather than a signpost of an impending correction for equities or even a slight “haircut.”
That said, we never will underestimate the willingness of markets (and the investors that drive them) to find a catalyst to sell good stocks even if just to take profits particularly when so many of the sectors are showing double digit gains this year (n.b. the S&P 500’s information technology sector is up over 27% year to date).
We urge our readers to review the economic and market data that follows this section of our report and provides illustrated detail on pages 3 to 6 of the fundamentals (and gauges that measure their progress) which keep us positive on equities stateside and internationally as the year moves forward to the close.
We speak regularly with both professional and private investors and continue to find no signs of irrational exuberance or animal spirits when it comes to their perception of the equity markets. If anything they are worried that markets have come too far too fast—until they consider the fundamentals that continue to improve and underpin the progress of equities this year.
Once again we suggest that it’s not that things are so great but rather that they are not so bad.
Bitcoin and Bubbles
“While Bitcoin has surged well beyond skeptics and detractors’ expectations of where it was headed this year, the fact remains there is no apparent patent on the block chain mechanism even if traditional banking and payment platforms adapt the mechanism. “Caveat Emptor” (“buyer beware”) remains our adage on bitcoin even as its methodology may gather further interest and even implementation outside its realm.
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