But would someone please tell the bond market how awesome things are? Because it sure isn’t behaving like it.
Heck, zero-coupon Treasury bonds are having a phenomenal year. The Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) has surged almost 14% in value year-to-date, while the Vanguard Extended Duration Treasury ETF (EDV) has gained around 13.5%.
Both ETFs invest in “zeros,” or bonds that feature no periodic interest payments/coupons. That means they’re loaded with “duration risk,” or interest-rate sensitivity. You can read more about how they work here. But suffice to say, they’re absolutely terrible investments when growth is booming and inflation is rising … but they’re great to own when the economy is tumbling toward recession and deflation.
|Are we heading for recession and deflation? The bond market might be giving us a good hint about it.|
Zeros aren’t the only recession plays that are rising in value, either. ETFs that invest in traditional Treasury notes and bonds are also handily beating stocks this year. The iShares 7-10 Year Treasury Bond ETF (IEF) was recently up around 5% year-to-date, more than double the 1.8% return on the SPDR S&P 500 ETF (SPY).
And what do you know? The 2-10 spread just collapsed again. Specifically, the difference between yields on 2-year Treasury notes and 10-year Treasury notes dropped to less than 96 basis points today – the lowest going all the way back to December 2007. A flattening yield curve is yet another signal of impending economic trouble.
Even within the stock market, recession-resistant stocks and sectors are far outpacing economically sensitive ones.
Take a look at the Utilities Select Sector SPDR Fund (XLU), up 15.5% … the Consumer Staples Select Sector SPDR Fund (XLP), up 7.3% … or the iShares U.S. Telecommunications ETF (IYZ), up 7.1%. Those sectors are all considered defensive. That’s because people still have to turn the lights on, wash their clothes, make phone calls, and otherwise buy the products and services the underlying companies sell even in a lousy economy.
Compare those year-to-date results to the results from the Powershares QQQ Trust (QQQ), down 5.1%, the Financial Select Sector SPDR Fund (XLF), down 2.3%, or the SPDR S&P Retail ETF (XRT), down 3.5%. Technology, financial, and retail firms are all much more closely tied to business and consumer spending.
Bottom line: Big-money investors are giving the U.S. economy a big “thumbs-down.” They’re saying that Fed forecasters and Wall Street economists don’t know what they’re talking about, and that there’s a lot of trouble brewing behind the scenes.
|“Big-money investors are giving the U.S. economy a big thumbs down.”|
So are they right? Or is the Fed? Are long-term bonds and other recession plays the best investments to own here? Or should investors load up on cyclical stocks and sectors instead?
You should know where I stand, based on all the columns I’ve been writing (and the presentations I just delivered at the MoneyShow Las Vegas, if you had the chance to go). Now I want to hear from you in the comment section below.
Speaking of the MoneyShow, I didn’t get back home until after 2 a.m. Exhausting for sure. But I enjoy the one-on-one interaction I get to have with individual investors like you at these events, not to mention the investor intelligence you can pick up. So it’s totally worth it.
The next chance for us to get together face to face is on the Money, Metals & Mining Cruise this summer. I’ll be joining several other market and precious metals experts on the Crystal Serenity, sailing from Anchorage to Vancouver from July 10-17. There will also be a one-day, post-cruise symposium in that Canadian city.
Click here if you’d like to get more details. Or you can call 800-797-9519, and be sure to ask for the Money, Metals, & Mining special rates.
Meanwhile, you certainly had a lot to say while I was gone about the economy, the latest mega-bearish market bets by billionaires, and the future direction of stocks.
Reader Jim B. said: “A wise man once said that our entire economy is based on people buying stuff they don’t need, with money they don’t have, on credit. When that is shaken, and people realize they don’t really need that new pair of shoes, or that their 30K mileage car will last a couple more years, we’re toast.”
Reader Howard added: “The central ingredient in all of this is trust. People don’t know who to trust anymore. Washington’s figures don’t add up, the Fed is interfering with interest rates, commodity markets don’t make sense, and the public isn’t stupid.
“Who would buy stocks at the top of the market cycle even with negative interest rates? The global reserve banks are doing their best to destroy the value of money. What else can ordinary citizens do who aren’t listened to by Washington, but display a lost confidence in the system?”
Speaking of the Fed and stocks, Reader Mark B. said: “It is not mere coincidence that the Fed began pumping credit into the banking system just before the arrival of the ‘bull’ market seven years ago. Free money has so distorted the economy, and created concentrations of wealth, that recovery of a productive economy may be impossible.
“Those same multinationals that are currently holding $3 trillion offshore to avoid U.S. taxation are the same companies that have borrowed dollars from the Fed to build and expand foreign plants that have decimated our manufacturing base. The U.S. government has been financing the decline of the U.S. economy! What a country.”
But Reader Phil said: “Icahn is going short because he hopes to make a quick buck if/when stocks dip this summer. For longer-term investors, remember that Warren Buffett and Bill Gates (the biggest billionaires) are long, and staying long.”
Which side do you fall down on? Are you with Icahn … or Buffett? Druckenmiller … or Gates? Color me skeptical about this market and the underlying economy. I believe the risks to both are the highest they have been since the last collapse. But again, I’d love to hear your opinion in the discussion section.
The government said retail sales rose a better-than-expected 1.3% in April, and 0.8% once you exclude autos. Economists were looking for gains of 0.8% and 0.5%, respectively. At the same time, retail executives continue to say business stinks – Shares of Nordstrom (JWN), Dillard’s (DDS), and J.C. Penney (JCP) all tanked in the last 24 hours after joining the long list of companies reporting lousy retail results.
Apple (AAPL) shares have been trading like death warmed over recently, a side effect of slowing demand for smartphones, a lack of product innovation, and concerns about the economy in key markets like China. But the firm does have a huge cash war chest, and it just spent $1 billion of it on an investment in China’s Didi Chuxing Technology Co. That company is competing with Uber Technologies for ride-sharing business in the Asian nation.
Thieves apparently snuck into the “Swift” messaging system used to transfer money from bank to bank again, according to The New York Times. They already stole $81 million from the central bank of Bangladesh a few months ago, and this time, they targeted an unidentified commercial bank for an unspecified amount of cash. Banks and government officials are frantically trying to shore up the decades-old system in the wake of these recent violations.
Last but not least, the world has lost its oldest living resident. Susannah Mushatt Jones, age 116, passed away in New York last night, according to the Gerontology Research Group. The company tracks elderly citizens, and anointed Jones as the oldest living person after a 117-year-old Japanese citizen died last year.
So were retail sales as good as the government claims in April? Or are they as bad as corporations are suggesting? What do you think of the recent struggles for Apple shares, and its latest Chinese investment? Should we be worried about bank safety too? Hit up the comment section and let me know your thoughts on those or other topics.
Until next time,