|Dow||+109.14 to 17,265.99|
|S&P 500||+9.79 to 2,011.36|
|Nasdaq||+31.24 to 4,593.43|
|10-YR Yield||+0.029 to 2.629%|
|Gold||-$10.40 to $1,225.50|
|Crude Oil||-$1.35 to $93.07|
We’re on the cusp of two huge, monumental events. One for the U.K., and one for the interest-rate market here at home. The ramifications are potentially very large for you, and for your wealth, so let’s get right to it.
First, Scottish voters are at the polls as I write. They’re deciding on whether or not they will gradually secede from the U.K. after more than 300 years together. The vote is very close, with opponents apparently having a slight edge over proponents according to the latest polls.
If Scotland votes “yes” to secession, it will likely roil the currency market and cause the British pound to drop even further than it already has. It topped out at around 1.72 to the dollar back in July, and fell as low as 1.6050 a few days ago before bouncing by a couple of cents.
It will also likely result in Scottish-based banks and other companies with large operations there relocating to the English side of the future border, or cutting back on Scottish investment. That’s because they fear the economic fallout, including currency revaluation risk, interest-rate risk and slower growth, that would likely follow.
|The people of Scotland are deciding whether to end a partnership with the rest of the United Kingdom that has lasted more than 300 years.|
For the broader markets, it could unleash yet another wave of geopolitical turmoil — akin to what we’ve seen periodically during the Ukraine-Russia conflict. But unless the tremors are incredibly severe, the impact should be relatively short-lived for U.S.-focused and U.S.-based companies.
One reason is that the economic data here continues to come in hot. Initial jobless claims just plunged 36,000 to 280,000 in the most recent week. That was a much bigger decline than expected. Continuing claims fell to the lowest level since May 2007, while an unemployment rate embedded in the report slipped to the lowest since November 2006.
And that brings me to my second major market development — the post-Federal Reserve meeting movement in INTEREST RATES. A lot of the ill-informed commentary I’ve read in the wake of the Fed focused on how Janet Yellen was supposedly dovish. Don’t believe that for one bit!
|“A lot of the ill-informed commentary focused on how Janet Yellen was supposedly dovish.”|
The markets are all saying something completely different. Eurodollar futures, which track expectations about the future direction of Fed policy, are dropping in price. Treasury bond and note futures are falling in price. The dollar is holding its large gains from recent weeks. And most importantly, the yield on the five-year Treasury Note is starting to break out to a 39-month high!
Take a look at this chart below and you can see that yields have been making a series of higher lows over the past several months, even as longer-term yields corrected lower. Then today, they poked their head above the key 1.85 percent level shown by the top horizontal blue line on my chart.
If this move can stick, I believe it will extend — perhaps as high as 2.5 percent over the next few months. That’s a big move and it would leave yields at levels we first saw on the downside way back in 2008!
Bottom line: There’s the potential for some short-term volatility associated with the vote in Scotland. It could temporarily impact stocks and make it a bit tougher for yields to break through this important level.
But if the vote is a “No,” I believe it’s “Look Out Above” time for interest rates. And even if it’s a “Yes,” the change in the Fed’s outlook I discussed yesterday and the strong U.S. economic data, both point towards yields resuming their climb after a correction.
So what does all of this mean for your stocks? Your ETFs? Your wealth? Well, you can bet I will have much, much more on this topic in coming weeks.
But suffice it to say your bonds, bond funds, and bond ETFs are at risk of renewed price declines. I would make sure that anything you own has a duration or maturity of three years at most, and preferably less than two years. This column I wrote back in February has some more on that topic, as does this “Rate Quake” column from a couple months ago.
I also recommend you pare back your exposure to rate-sensitive stocks like utilities and REITs. Shift your funds to economically sensitive stocks focused on sectors that are knocking the ball out of the park — including energy, steel, health care, aerospace and manufacturing. Many of them are doing very well, and should continue to do so.
Above all, please recognize we are talking about very significant market shifts. The increased cross-border money flows that they will fuel should not be ignored, and offer tons of profit opportunities — provided you have the right guides by your side!
So what is your take? Which way do you think the Scots will vote, and what will the ramifications be? What about interest rates? Are you watching the potentially significant moves that are underway, and adjusting your holdings to protect against them — or to profit?
What are you seeing in your backyard on the economic front? Is the U.S. going to continue to outperform other economies based on what you’re seeing? Sound off when you can at the Money and Markets comment section below.
|Our Readers Speak|
Two hot topics in the wake of this week’s developments are the Fed and the Middle East.
Weighing in on the conflict overseas, Reader FWG said: “All of our government officials have it wrong as they have for a very long time. We should let the local people deal with their local problems. Instead of interjecting our authority and opinion into their matters, we should monitor what is going on there while focusing on strengthening our borders and defenses.
“Our message to all who want to come to America is then very simple. Come as a law abiding friend and we will welcome you, come illegally and we will send you home, come as an enemy and we will destroy you. Period!”
Good insights FWG. But that hasn’t been America’s policy for many years, whether under a Democratic or Republican administration? I believe our interventions overseas are likely to persist, and the cycle of war is likely to continue for years.
As for the Fed, Reader Joan said: “These extended, artificially low interest rates have been a plague in my view, financial repression, that have been a major force in holding the economy back. Probably politically motivated as to the longevity, enabling Congress and President to service the debt and explode the federal debt with crazed social spending to secure votes.”
Reader Lorne weighed in on the same topic, saying: “Yellen professes to care for the unemployed and the less fortunate, yet she and Bernanke before her have engineered the biggest reverse Robin Hood robbery of ALL time — taking billions from the savers and transferring it to the rich. I don’t know how she and her merry dupes can sleep at night.”
Hear, hear! Low rates stopped helping things like the housing market a long time ago, and have been robbing seniors and others blind. I’m glad this era of ridiculous policy appears to be coming to an end, finally!
As always, the comment section below is the best place for you to add any further thoughts. Can’t wait to hear ’em!
|Other Developments of the Day|
- The ISIS scourge has spread to Australia, with officials there saying a group of ISIS adherents were planning to carry out random beheadings on Aussie soil. Police detained 15 people, and charged two with crimes. They are also seeking 33-year-old Mohammad Ali Baryale, accusing him of being ISIS’ top ranking official in Australia.
- The mega-IPO of Chinese e-commerce firm Alibaba Group Holding (BABA) is hitting the markets! The company is selling 123 million shares at a price range of around $66 to $68 tonight, then trading on the public markets tomorrow. If it raises $25 billion, it will be the world’s largest IPO in history.
- Instead of QE, the Federal Reserve should just give every American family $56,000 directly. Or so says this article, citing a research piece in Foreign Affairs magazine.
Is this really what the world is coming to? Sheesh. How about the Fed stops doing cockamamie things with the economy, gets out of the way, and lets companies and consumers invest, work, and save on their own?
Until next time,
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