The single, unifying catalyst driving the price of assets of all kinds has been excess central bank liquidity. Anything that suggests the so-called monetary stimulus will level off, or worse, be withdrawn, causes tantrums that impact all the assets that have been swept up in the mania.
Just look at the catalyst for today’s crushing: The European Central Bank refused to extend or boost Euro-QE at its meeting yesterday. That got the ball rolling. Then Boston Fed President Eric Rosengren followed up this morning with hawkish talk about asset overvaluation, and laid out a case for another rate hike in 2016. This is noteworthy because it follows up a devastating speech he gave several days ago highlighting the madness going on in commercial real estate which I pointed out here.
Anything can happen, of course, especially with more Fedspeak next week and with both Fed and Bank of Japan meetings looming later this month. But there’s no arguing we’ve just come through a period of extraordinary calm and complacency in the markets. Now, three major trends are threatening to break investors out of their torpor …
Trend #1: Interest rates are starting to rise. Not by a huge amount, mind you. But the bond market bacchanalia of the past couple of years is showing signs of getting long in the tooth.
Trend #3: Bonds and stocks are starting to trade in the same, rather than opposite, directions. You’d typically expect money to rotate out of bonds and in to stocks in a bullish economic environment, or you’d expect money to move out of stocks and in to bonds in a bearish one. But over the past few days, both asset classes have sold off. That’s a new and potentially troubling development.
|When stocks and bonds move in lockstep, then what’s a trader to do?|
My advice: Make sure you have stop losses under your positions, especially in some of the high-flying sectors of late (Safe Yielders, emerging market stocks and bonds, tech, etc.). Use inverse ETFs and select put options as downside insurance or profit opportunities (I’m getting very busy again in my more-aggressive All Weather Trader service, which you can get on board with here.
Most importantly, for your longer-term funds, continue to invest with an emphasis on safety – just like I do in my Safe Money Report. That should help you make it through this period of increased volatility in solid shape.
So what do you think about these emerging trends and today’s beat down? Should we be concerned about what’s going on in the interest rate markets, or how stocks AND bonds are selling off in unison? Or are markets going to find their footing again and march higher into year end? Let me hear about it in the comments section below.
Until next time,
The markets have been mired in a tight range for a while. But they’re now showing signs of weakening around the edges. Is this the start of something more? If so, what forces could be driving it, and where is the underlying economy headed? Those were some of the questions you attempted to answer online.
Reader H.C.B. said that he expects to see more volatility, with perhaps a positive bias into year-end: “The big ‘risk-on’ move may be right around the holidays this year and into next year. Ditto with gold miners. If U.S. equities are on fire, emerging markets will also be on fire. International stocks may go from the weakest asset class of late to the top of the pack in so many months. Time will tell.
“Energy and the U.S. dollar are weakening for now, adding fuel to the fire. It’s going to be a wild roller-coaster ride for many investors over the next few years. Better buckle up.”
Reader Mark sounded more pessimistic though, saying: “The U.S. and global markets have been one big lie for the past 10 years due to central bank, Fed, U.S. Treasury, IMF, and world governments’ manipulation and intervention. The Dow, Nasdaq, and S&P are all overpriced and will collapse to fair market value, which will probably mean sinking by 60%.
“Real economic data such as GDP is in recessionary territory, with the awful labor market data, such as the labor-participation rate, at all-time lows. This will end badly.”
Speaking of the economy, Reader Al said: “The services-industry decline scares me more than the manufacturing-sector decline. We, after all, have become a services-industry nation, having given up our manufacturing to China and others. Hopefully this is not a trend, but an outlier situation for now. Global economic decline overall has possibly affected our services industry as well.”
Meanwhile, on the subject of interest rates, Reader Todd S. said: “Despite all that has been written about negative yields, I still find myself experiencing brain freeze every time I contemplate them. It amazes me that one party – either a government or a business – can guarantee to return less money in the future than an amount borrowed today, and find someone else to accept the deal.
“I eventually find myself wondering if it’s possible to compete in this market by borrowing a sum today, and promising to return a smaller amount tomorrow, rather than several years from now. It seems like a person with the integrity to follow through on the promise could make this work.”
And on oil, Reader Ross L. said: “The oil-market chatter is just that. A few weeks ago, Iran mentioned they may come to the OPEC table to curtail production and the price neared $50 per barrel. Then it dropped around 10% to the mid-$40s as reality took hold once more. There is so much baggage between the largest producing nations that I wouldn’t bet a nickel that they would be able to cooperate to cut production.”
Thanks for taking the time to weigh in on these diverse topics. The interest-rate situation is so tough to comprehend precisely because it is so unprecedented. There are signs the devil’s bargain between central bankers and bond buyers is starting to unravel, though, as I mentioned earlier.
When it comes to the economy, all the evidence I’ve seen suggests growth is decelerating again here in the U.S. My cyclical work tells me a recession driven by tightening lending standards is the most likely scenario for later in 2016 and 2017. But as always, time will tell.
Anything else you want to add to the debate? Then use the discussion section as your outlet.
Speaking of interest rates, Japanese bonds have gotten crushed in the past few weeks. They just suffered their worst sell-off in 13 years amid worries the Bank of Japan is losing control of that nation’s bond market, and fears the BOJ could modify its QE program in unexpected ways a couple weeks from now.
Megabank Wells Fargo & Co. (WFC) agreed to pay a massive $185 million fine as part of a new settlement with federal and state regulators. They alleged company employees illegally opened hundreds of thousands of credit card and bank accounts for customers in order to get credit for hitting aggressive cross-selling targets set by management. More than 5,300 employees were let go as part of the probe.
Rogue nation North Korea carried out its fifth and strongest nuclear detonation test to date overnight. The 10-kiloton explosion is part of a series of tests North Korea has conducted since 2006 in an effort to come up with a warhead it could mount on a ballistic missile.
U.S. Secretary of State John Kerry and his Russian counterpart Sergei Lavrov are meeting in Geneva, Switzerland, after all. They previously couldn’t agree on whether to meet about Syria or not amid tensions between the two countries. More than 280,000 people have died in the brutal Syrian civil war over the past few years.
What do you think about the reversal in bonds over the past few weeks – is this a temporary phenomenon or are central bankers losing control of the monster they created? How about the Wells Fargo settlement – is it something that would prompt you to stop doing business with that bank? Any thoughts on the latest geopolitical turmoil in Asia and the Middle East? Share them in the comment section when you get a minute.
Until next time,