If it seems like you’ve seen those numbers before, that’s because you have. We have hit them again … and again … and again since the markets began to top out in 2014-15.
I would almost argue that stocks have become a sideshow, and the REAL action is in bonds and gold. Just today, long bond futures soared to an all-time high of 175-and-change before pulling back. Interest rates move in the opposite direction of bond prices, so that move drove yields sharply lower.
The 30-year yield just plunged as much as 9 basis points to 2.21% earlier, tying its all-time low from January 2015. The 10-year yield fell 6 basis points to 1.41%, tying its July 2012 low. The 5-year still has a way to go, recently dropping to 0.98% against a July 2012 low of 0.55%. But even it has now taken out the early-2016 panic low.
At the same time, gold soared as much as $21 an ounce to more than $1,344. Silver exploded to $19.53, its highest in almost two years. Even the Japanese yen started perking up again after a period of gains consolidation.
|Keep your eyes on gold and bonds for clues to what’s ahead for the economy.|
What’s going on? Let’s start with the domestic economy. The news hasn’t been completely awful, but it has been indicative of a slowdown. We learned today that the ISM Manufacturing index came in at a better-than expected 53.2 in June (expectations were for 51.4). But construction spending dropped another 0.8% in May against estimates for a gain of 0.5%. April’s number was revised down to -2%, the biggest drop since January 2011.
At the same time, the international outlook remains in significant flux. Central bankers in Europe and Japan are buying every bond they can get their hands on. Plus, the Bank of England just suggested it’s going to cut rates or do more QE, too. It had been sitting on the sidelines for a while.
The economic data prove none of that stuff works to spur inflation in the real world, of course. Japan’s consumer price index just dropped 0.4% in May after falling 0.3% a month earlier. The “core” figures also fell 0.3% from a year ago, making the Bank of Japan’s 2% inflation target almost laughable.
Here in the U.S., a market-based gauge of inflation expectations down the road also just fell to its lowest since at least 1999. The Federal Reserve has said it follows the gauge closely, so the renewed drop speaks volumes about the “success” of QE in our country.
But just because their policies don’t work doesn’t mean central banks won’t keep pursuing them. They can’t admit their failure. So investors are doing the logical thing – they’re front-running the central banks to make a buck in bonds. And the lower that interest rates go globally, the more attractive 0%-yielding gold and silver looks.
|“The economic data proves none of that stuff works to spur inflation.”|
My advice? If you want to know where stocks are going, keep your eyes on bonds and gold. Don’t neglect the profit opportunities in those alternative markets, either. Stocks may have gone nowhere in the last 20 months. But the same sure as heck isn’t true in those other asset classes!
So what do you think is going on? Why do you think bonds and gold keep soaring, while stocks keep treading water? What can change that dynamic? Are you selling bonds and gold and buying stocks in hopes of a reversal in trend? Or are you sticking with the horses that won the race in the first half of 2016? Share your comments in the discussion section below.
Finally, let me take this opportunity to wish you a safe and enjoyable Fourth of July weekend. I hope you enjoy the extra time off with family and friends.
Brexit? What’s that? The markets quickly shrugged off the two days of carnage amid some massive rebalancing trades by big money investors and talk of potential rate cuts or additional QE in the U.K. But is the underlying economy sicker than people appreciate, and will that hurt stocks eventually?
Reader F151 said: “The Dow is looking very bullish right now with a pattern that could carry. Another 100 points up, one more step back of a few hundred points, and then it should be off to the races for a while. The final blow-off races before the big, big fall. If it can break through resistance, I think Dow hitting 18,600+ would not be unreasonable.”
Reader Gordon weighed in on what he thinks is driving stocks, saying: “Corporate earnings mean nothing anymore. Stocks are no longer income- or performance-related. They are now tied to all the foreign money flooding into the market that has ‘the best dirty shirt in the laundry basket’ reputation.
“Performance today is borrowing oodles of money and buying your stock back and bumping up the CEO’s salary. Sanity and reasoning are long gone, replaced by greed and financial mayhem.”
But Reader DD said this can’t last for long: “The global elites are so pathetic. First they say Brexit will be catastrophic. Now they say it can be managed though still negative. The markets have peaked!”
Finally, Reader Ray F. said: “I believe that a recession is in our near future. Too many negatives are out there for any other outcome. Start now reviewing your secondary job prospects. People have become complacent, and the winners will be those who double down on their work ethic.”
We definitely bounced back more quickly from the Brexit turmoil than I expected. But here’s the thing: The stocks leading this market are NOT the stocks that lead in a strong economy and healthy bull market. It’s the “Safe Yielders” that are rampaging higher, along with gold and Treasury bonds. That tells me the broad market could continue to struggle, even as those kinds of stocks and assets outperform dramatically.
By the way, I have been long all of those assets for a while now, in various forms, in my Safe Money Report. So my subscribers have a lot to be happy about, with several rounds of single-digit and double-digit gains.
Tesla (TSLA) is under fire today after the driver of one of its Model S cars was killed in a May 7 accident in Florida. Joshua Brown was reportedly driving the Tesla in self-driving mode, and neither he nor the car noticed and reacted to a tractor trailer that was turning in front of the vehicle. Will the accident result in more aggressive government scrutiny of self-driving cars? Let me know in the comment section.
Apple (AAPL) is exploring the purchase of streaming-music service Tidal, a move designed to expand its reach in that business. Tidal is owned by the rapper Jay Z and other artists, and has around 4.2 million subscribers who pay for access to its library of 40 million songs.
Less money for Wall Street investors, more for Main Street wage earners? That’s what many would like to see, and this Financial Times story uses the cases of McDonald’s (MCD) and Wal-Mart Stores (WMT) to suggest things are moving in that direction. It notes there is increased upward pressure on minimum wages, and downward pressure on corporate profits.
What do you think about Tesla’s struggles? Apple’s more-aggressive push into streaming music? A potential tilt in the balance of power between wage earners and investors? Hit up the comment section sometime over this Fourth of July weekend and let me know.
Until next time,