Take a look at the following two charts. The first shows S&P 500 stock futures. The second shows the yield on the 30-year Treasury bond.
|The big rally.|
You can see that the S&P 500 rallied all the way back to where it broke down in the first place. Futures climbed from around 1,804 to 2,048, roughly where they finished 2015.
But the rally in long-term bond yields was much less vigorous. The 30-year was yielding around 3% at the end of 2015, and 2.4% at the February panic lows. But it only managed to climb back to 2.75% or so during the stock bounce before running out of gas. Since then, it has been sinking anew.
Or how about today? Dovish comments from Federal Reserve Chairman Janet Yellen helped send the Dow Industrials up 97 points. But that ostensibly “bullish” move was accompanied by a surge in bond futures prices of more than a point, and a drop of another three basis points in yield.
What’s going on? Why aren’t bond yields rising further and faster, and thereby confirming the stock market advance? I believe it goes back to where we are in the credit and economic cycle.
Big money investors simply don’t believe that another round of central bank hocus-pocus can extend a bull market and credit orgy that’s on its last legs. Instead, as I pointed out in mid-March, the vast majority of institutional investors believe we’re in a late-cycle environment.
That’s also why defensive stocks and sectors are leading this rally, rather than the traditional “risk on” names. The Utilities Select Sector SPDR Fund (XLU) jumped to within a whisker of an all-time high, for instance, while the Financial Select Sector SPDR Fund (XLF) tacked on all of four pennies. If we were truly on the cusp of another vigorous credit boom and economic expansion, you’d see financials, industrials, technology, and materials names surging to new highs.
So how can you profit? I’ve given you several pointers here in Money and Markets over the past several weeks. And I’m happy to announce that I’ll have the chance to go into even more detail at another upcoming event.
Specifically, I’ll be participating in The MoneyShow Las Vegas, scheduled for May 9-12 at Caesars Palace. This free conference features an impressive lineup of experts who will help position your portfolio for success during 2016 and beyond.
|Defensive stocks and sectors have led the rally this time around.|
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Now I’d like to get your take. Why do you think the bond market isn’t buying into the stock market’s enthusiasm? Is that a negative sign for the economy and risky assets? Do you “trust” bond traders more than stock investors, or do you think the latter group has the environment right? Let me hear about it in the comment section.
Meanwhile, European turmoil and risky lending here at home were the biggest topics on your mind in the past day.
Reader Howard offered the following thoughts on Europe’s litany of woes: “It appears to me that the Europeans have brought this on themselves by inviting refugees to come by the hundreds of thousands. The people smugglers are making money and millions are looking for sanctuary. There is little chance for assimilation and their open-borders policy has created a flood that has no solution at the moment.
“For me, as a person who values my own and my family’s freedom and safety, I wouldn’t go there as a tourist and I wouldn’t invest there either. The markets everywhere look overbought at the moment, and it seems like a good time to be in cash despite the lousy returns.”
Reader Thomas added: “Radicalism in any religion always ends in death, destruction and chaos. Right now you have all the elements of a perfect storm in Europe: Over 1 million refugees scattered all over Europe … record unemployment among the youth … severe austerity measures on all citizens … right-wing neo-Nazi growth … EU travel freedom under the Schengen treaty destroyed … a euro currency under severe pressure … a possible Brexit … Greece in trouble yet again … and on and on.”
As for the impact on investors, Reader Anthony G. said: “I see a global economy selloff in the immediate days. This market is overbought, and the gains from the recent rally will soon melt down.”
Reader Dave also warned about the potential impact of European turmoil on world markets, saying: “From a business standpoint, I am with you, Mike. Europe has so many issues to deal with that business can’t help but be affected. Stay away awhile longer.
“Here at home, the time has finally come when we must re-set our expectations a bit lower, and either stay with cash and value stocks, or be capable of discerning the future.”
Separately, on the topic of renewed home-equity lending, Reader John B. said: “I survived The Big Short. Alas, I was on the wrong side of the equation. Now today I see the same game going on in real estate loans, auto loans, and energy loans. Watch out below!”
Reader Mike S. also warned of future problems, saying: “This will all end badly. The cause is the Federal Reserve manipulation of interest rates. The banks are reaching for products to increase their bottom line. I have seen this act before.”
I appreciate everyone taking the time to weigh in. I’m definitely concerned by what I’m seeing in the auto-lending business, as well as commercial real estate. As for the risk of losses on energy loans, the writing is on the wall there too. All of this will make for an increasingly turbulent environment for major bank and financial stocks in my view.
If there’s anything else you’d like to add, the discussion section below is a great place to weigh in. I’ll cover as many of your comments as possible.
The U.S. government dropped its court fight against Apple (AAPL) over encryption on the iPhone. That’s because the Department of Justice was able to access information on the smartphone of San Bernardino, Calif., terrorist Syed Rizwan using other methods. But the debate over privacy vs. security will no doubt rear its head again in future terrorism or criminal cases.
A hijacker took control of an EgyptAir jet and diverted it to the island of Cyprus today. But the event appeared to be related to a dispute between the man and his ex-wife, rather than yet another terrorism-linked crisis. All 56 passengers and seven crew members were ultimately released, and the hijacker was arrested.
“Flood of Central Bank Moves Can’t Get World Economy Out of Rut?” That’s the headline of a Bloomberg story, and basically what I’ve been saying about the global central bankers here in Money and Markets for the last year or two. It’s worth a read if you have a few minutes.
The campaign for a $15 minimum wage has succeeded in California. The state’s base wage will climb gradually to that level by 2022, thanks to a deal struck between legislators and Gov. Jerry Brown.
Do you think California’s wage plan is a good or bad one for workers and employers? What do you think about the government dropping its fight against tech giant Apple? And is it just me, or would we be much better off if central bankers would stop trying to do the impossible and just get out of the way? Let me know your thoughts in the comment section.
Until next time,