But the bounce was far from convincing. Many of the troubled European banks that have been leading the way down barely budged. Others, like Credit Suisse (CS) and Royal Bank of Scotland (RBS), traded in and out of negative territory all day.
Thirty-year Treasury yields actually undercut yesterday’s lows, falling to 2.25%. Plus, yields on every single Japanese government bond, including the 40-year, fell below 0.1% for the first time in history. One Tokyo-based strategist told Bloomberg: “Only God knows how far yields will fall.”
We also continued to see more political dysfunction in Europe and in the U.K. European Parliament members booed and hissed at Nigel Farage, the head of the U.K. Independence Party. The leader of Britain’s Labour Party lost a “no confidence” vote by a whopping 172-40 margin. And, Germany’s Angela Merkel warned the Brits not to think they could get away with “cherry picking” what EU benefits they want, while rejecting the rest.
So what’s it going to take to get a lasting rebound, rather than a short-term oversold bounce? Forget the ridiculous calls for even more so-called central bank “stimulus” you’re hearing on Wall Street. None of that stuff is working, as I explained yesterday.
|Germany’s Angela Merkel warned the Brits that there would be no free ride after a Brexit.|
We would need to see: A) Full-blown fiscal stimulus in multiple countries … B) A lasting turn in the credit markets … and/or C) A sustainable turn in the underlying economy here.
I don’t think we have the political momentum for A. So I’d scratch that off the list.
With B, I warned that the improvement in credit spreads we saw in March and April was of the “Memorex” variety, rather than “live.” That’s because it was only spurred by European Central Bank corporate bond buying, rather than an improvement in credit fundamentals.
Sure enough, we just saw the single-biggest one-day surge in the spread between yields on junk bonds and Treasuries since 2011. I expect that spread and others to widen back out from here, putting more downward pressure on stocks. See this primer on the “Golden Ratio” for more details on what that means and what to do about it.
As for C, we got a decent consumer confidence reading today. But data on industrial production, business spending, and consumer spending remain lackluster. Throw in the ongoing collapse in the Treasury yield curve, and I believe recession is a much more likely outcome than an acceleration in economic growth.
So my advice would be to sell into this bounce. Specifically, unload vulnerable cyclicals, materials, financials, and energy shares.
For the funds you have to keep invested in stocks, re-allocate into the “Safe Yielders.” I have banged on the same drum for months. You may want to also review my “Bear Market Playbook” from back in January for more guidance on markets like this one.
That’s my take, anyway. So what’s yours? Is the selloff over, or is there more pain to come? Do you think the inability of weak euro-banks and interest rates to rally is a warning sign for the broad market? Or can stocks advance even without them rising? Sound off in the comment section when you get a chance.
Brexit-driven market turmoil. Rock-bottom interest rates. Demographics and housing. You discussed a little bit of everything at the website in the past 24 hours.
Reader Nels said the following about the British vote: “All the excitement is about nothing, so far. There have been no changes, and there won’t be any change for a long time, so the financial upheavals are anticipating what might, someday, happen.
“The British referendum was advisory, not binding. Cameron has resigned. But the coming British elections will amount to another referendum. Then, IF a nominally pro-Brexit government can be formed, we will see whether the British people and Parliament can actually force their government to act in the country’s interests.”
Reader Dana added: “I lived in the U.K. for 15 years, and each year while Tony Blair was in power saw an average of 40,000 (yes 40,000) pieces of legislation come from Brussels. The people were sick of it!
“The fishing industry was especially mad as you saw European fishing trawlers in your waters, but the British could not fish. Brussels was telling everyone what to do, while continuing to increase taxes to pay for their (un-voted) lifestyles. Before the voting even started, I knew that the British were going to Leave.”
As for the markets, Reader John H. said: “I don’t know about Europe. But I think the selloff in the U.S., which isn’t really justified in the first place as we are not an EU nation, is winding down. Still, I don’t see any reason for the SPX and other U.S. indices to break through to new high ground – and so far they haven’t. But they have hung around just under resistance, so there’s more optimism out there for stocks that I’ve been given them credit for.”
With regards to bonds, Reader Frebon said: “Anyone who wants to loan the U.S. government money at 2% for 30 years should have their head examined. If they had any common sense, this would be a perfect time for the Fed to undo Operation Twist and to have an exit strategy for their bloated balance sheet. But alas, common sense is not data dependent.”
Finally, Reader Davis D. offered this take on real estate: “I think we as a nation are on the edge of a major turning point on lots of fronts, including housing. Baby Boomers are ready to downsize due to their age. One spouse is either ill or has died, the children are grown with no need of larger housing, and money is tight.
“At some point, there will be a huge amount of larger houses on the market with no buyers. Kaboom – another huge bubble exploding!”
Thanks for sharing those observations, regardless of topic. As I’ve been saying recently, the Brexit vote is the obvious cause of the turmoil over the last couple of trading days. But the bigger, underlying, longer-lasting threat is the unwinding of the massive “Everything Bubble” caused by too much easy money from the world’s central banks.
Stocks look vulnerable to deeper declines … potentially, much deeper ones … in that scenario. So stick with those “Safe Yielders,” lower-risk bonds, gold and other conservative investments.
I do take a bit of risk in search of potentially much higher returns in my All Weather Trader service. My subscribers had the opportunity to bank several double-digit and triple-digit gains in the three rounds of turmoil we’ve seen since last summer. And if I’m right about more volatility coming down the pike, we’re just getting started.
The final estimate for first-quarter GDP came in at 1.1%, up from 0.8%. But while corporate profits and trade were revised to look more positive, the government’s estimate of household spending dropped to 1.5% from 1.9%.
Central bankers are increasingly losing control of the markets. That’s a thesis I first laid out many, many months ago, and more investors are waking up to that fact these days. The Wall Street Journal covers one angle here, noting how divergent policy paths around the world are leading to wild swings in the currency market. Worth a read.
Volkswagen is going to have to cough up $14.7 billion in the U.S. as part of a settlement related to cheating on emissions tests. The money will be used to cover research into zero-emission technology, to pay off the Environmental Protection Agency, and to fund car buyback efforts or cash payouts to owners of the German firm’s vehicles.
Dow Chemical (DOW) is planning to lay off 2,500 people, or around 4% of its workforce, as part of a restructuring tied to its Dow Corning joint venture. The company will close manufacturing plants in North Carolina and Japan that produce silicone.
What do you think of the GDP figures, and the lackluster consumer spending outlook? How about the latest currency market chaos, and the inability of central banks to respond effectively? Are you surprised to hear about layoffs at Dow, or are you expecting more of that kind of news in the weeks ahead? Let me know in the comment section.
Until next time,