Treasurys are surging as stocks get slammed

07 February, 2018, 01:54 | Author: Salvatore Jensen
  • Dow Jones decline

Now let us look at the trailing market valuations (P/E) and bond yields.

The Standard & Poor's 500-stock index fell 2.1 percent Friday, ending its worst week in two years. "Investors had the weekend to worry about what happened Friday, and they sold on Monday".

Photo Passersby watched an electronic display of stock market data on "Black Monday" - Oct. 19, 1987.

"The president's focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening US economic growth, historically low unemployment and increasing wages for American workers".

Japan's Nikkei stock average dropped more than 6 percent in early afternoon trading, after falling 2.5 percent a day earlier.

Key stock indexes in Europe also fell Friday. The full 2017 reading was 2.3 percent, just marginally higher than past years that have averaged 2 percent.

It is an iron law of finance math (discounted cash flow, specifically) that future cash streams like corporate earnings and dividends are worth steadily more as interest rates fall. And with the robust jobs report Friday showing the fastest wage growth in years, some think the pace of rate increases could quicken. Yet long-term interest rates remain low, thanks to monetary easing in the US and elsewhere.

"Such easy monetary policy helps families and companies through lower borrowing costs, for mortgages and student loans, for example". Politicians, including Trump, campaigned on giving USA workers raises.

The heart of the stock market sell-off is about inflation.

Late last week, the President of the San Francisco Federal Reserve Bank, John Williams, hinted at the possibility of four rate hikes in 2018. But if inflation picks up, the Fed could raise rates more often and more steeply than it had planned. A stronger economy generally strokes inflation. But markets may fear inflation could quickly grow overheated.

The Aussie dropped 0.3 percent to 79.07 USA cents. "There is a high chance of the economy overheating".

No one really knows what a bond bear market would look like, largely because yields have been on a downtrend in the United States for more than 30 years.

- Bond yields have risen fast in recent weeks as people have moved money out of stocks into these traditional havens.

Rising rates have myriad consequences, including making it more expensive for companies and individuals to borrow money, like for buying a home or a auto. While Japanese, European and Australian shares had decent corrections throughout the year of around 5 to 7%, the USA share market as measured by the S&P 500 saw only very mild pullbacks of less than 3%. But Ed Yardeni, head of Yardeni Research, notes that this bull market has had 60 "panic attacks", where there's a dip that gets everyone buzzing, even though it doesn't turn out to be a full correction. "We're going to have more days like this".

"It's not all that complicated", said Jared Bernstein, an economist at the Center on Budget and Policy Priorities. Even 2.9 percent is well below historic norms.

A cooling-off period would be a good thing. "Our biggest fixed income exposure is through the Royal London Short Duration Credit fund, which acts as protection against this rising inflationary environment".

The top 10 holdings in the Schwab ETF, constituting almost 44 percent, range from technology heavyweights like Intel Corp (INTC.O) and Microsoft (MSFT.O) to Verizon (VZ.N) and Coca-Cola Co (KO.N), among other Dow 30 members. On Wall Street, it's the equivalent of giving someone a time out.

After rising sharply last week, U.S. Treasury yields fell from four-year highs on Monday as the selloff in equity markets sparked demand for low risk debt.

That strategy, in many ways, paid off.

Half of the index's companies have reported so far and 78 percent of them have beaten Street expectations, according to Thomson Reuters data.

Another factor that might have investors finally pricing in more risk is the rising federal deficit. S&P 500 e-minis were down 20.75 points, or 0.75 percent, with 328,542 contracts traded.

7-year -10 bps @ 2.665%. The market downturn isn't being driven by bad economic news.

The change of leadership at the Fed brings another sort of uncertainty. Trump has yet to nominate a vice chair of the Fed.

The market's tumult may hold another sort of message.

Euro currency rates also are fluctuating amid speculation on whether the European Central Bank will end its quantitative easing program at the end of September.


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