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Posts Tagged ‘bond bear market’

Cash Outperforms

February 6th, 2019 by Kurt L. Smith

By any measure, 2018 was a tough year for investing. The one asset class that outperformed all others was Cash. That statement, in a world of tens of trillions of dollars of investments at stake, should be chilling.

Besides Cash, with a return of 1.8% for 2018 per S&P US Treasury Bill (0-3 month Index), there were a few small areas of positive performance. Municipal bonds per S&P Municipal Bond Index finished up 1.3%. We discussed municipal bond performance, or lack thereof, as suffering from lower prices. Prices fell on longer term municipal bonds, but not enough to drag coupon income into negative territory.

The predominant problem for 2018 investing was one of trend. We drew our line in the sand with our November 2017 ‘Top of Tops’ letter. Since then the winds of change are no longer at our back for stocks (they changed years ago in bonds), prices are trending lower. Both stocks and bonds are in bear markets now.

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Markets Move, Not In A Straight Line

January 3rd, 2019 by Kurt L. Smith

If the stock market is reflective of social mood, and I believe it is, then we have experienced quite a mood change in the fourth quarter of 2018. From all-time stock market highs to the lows of the year, to what may be the worst December stock market since the Great Depression, the market, and mood, has changed.

Your mood may have changed as no one likes to see gains evaporate, particularly at historic clips. Markets, as I have preached for years, do go up and down after all, so this must be a part of it. Yes they do, but ups and downs do not reflect the true risk with this market.

The reason I find it important to forecast and call changes in trend is because with each later stage of the thirty-plus year (if not ninety year) bull market, I see the risks inherent in subsequent turns as much greater than we have previously experienced. We therefore should not be surprised when the unusual or extreme occurs because, like prior downturns, we are aware the surprising will probably occur.  Or in this case, take December as an example. (more…)

Beginning To Feel It

December 4th, 2018 by Kurt L. Smith

Compared to this time last year, I am willing to bet you are feeling a little less certain about your financial situation. Rather than reading about “global synchronized growth” you are now primarily concerned about U.S. growth or just growth period. And looking at your stock portfolio you may be wondering just what did happen, or not happen, in 2018.

It was this certainty of beliefs that led me in late 2017 to call a Top of Tops in November 2017, not only for stocks but also vis-à-vis bonds at the time. While the timing turned out to be premature, as stocks widely peaked a couple of months later, it was sentiment that led to the forecast.

Some of you may wish that you had lighted upon stocks prior to 2018. Volatility, which seemed to become extinct in recent years, reared its ugly head as a reminder that investments are not a perpetual growth machine; investments are part of markets and their prices will behave accordingly.

This is important to remember as my forecast of a trend change in stock prices has now become an actual trend change in stock prices. Together with the 2012 trend change in the direction of interest rates and you now face the double whammy of bear market trends in both stocks and bonds. (more…)

Stocks Are Down Ten Percent, Now What?

October 31st, 2018 by Kurt L. Smith

This past week the S&P 500 traded ten percent below its all-time high set just a few weeks earlier on September 21st. This letter also marks the one year anniversary of my letter entitled Top of Tops. Why wait until year-end to write the year in review when an anniversary will do.

Last November we were well into the Bond Bear Market that began in 2012, yet few talked about it or even noticed. We have been keeping score using the US Treasury ten year note which hit 2.01% on September 8th, 2017, 2.47% a few weeks later on October 27th and traded October 9, 2018 at 3.26%. Indeed bond yields are running higher, sending longer-term bond prices ever lower.

The bellwether thirty year US Treasury bond posted a low of 2.63% September 8th, 2017 and recently traded at 3.44% on October 9, 2018. A year later we have seen significantly more analysts, pundits and investors join the bond market bear camp but as I said last month, interest rates are rising so slowly (so far)  as to only minimally affect overall fixed income investment returns. (more…)

Slow Moving Bear

October 9th, 2018 by Kurt L. Smith

Having a plan and executing it can be worthwhile in a market in which yields on almost all bonds are rising and their prices are falling. Three quarters into 2018 and yields are up and prices are down on almost all kinds of bonds and across all maturities.

Take a look at this month’s featured municipal bond issue, Eagle Pass, TX, below, and compare it to January’s yields. Yields are higher across all maturities, from short-term to long-term, of at least one half of one percent.  Higher yields mean lower bond prices but yet that message is not is not making a huge dent in performance.  The reason is speed.  Yes, interest rates are up but the speed of change has not had an appreciable negative effect on bond market performance.

Looking at municipal bond indexes we see this.  The S&P Municipal Bond Index is essentially unchanged from January 1st.  Same for the Bloomberg Barclays Municipal Intermediate to Short Total Return Index or their US Municipal Bond Index for that matter (all per Bloomberg).  Check your favorite yardstick and compare.  The reason this is so is because the interest earned so far has been keeping up with principal (price) loss. (more…)

Depths of Summer

August 6th, 2018 by Kurt L. Smith

Heady days and bond markets rarely go together. Nor do the terms ‘bond market’ and ‘news’. Add summer and vacations into the mix and the bond market becomes French. Absent.

I may exaggerate but not much. Thankfully we are not looking to keep up (or primarily down) with any bond index, we are not burdened by scale or the inability to find worthwhile bonds. Every day I get to practice and build my skills and every day things come together. Except in the summer, things come a bit more slowly.

Last month I discussed how the markets are poised for a fall. One more month without the Bond Crash of 2018, but the first of August brought ten year US Treasury note yields back to 3% for the first time in several months.  Most of 2018 has so far been a correction of the dramatically higher yields (and double-digit price losses of longer bonds). Whether we begin the next phase of higher rates and lower prices immediately or whether it takes a few more months, is not important. What is important is you are prepared and you are prepared because you own the proper asset, chosen by The Select ApproachTM. (more…)

The End of Slow

July 6th, 2018 by Kurt L. Smith

Halfway through the year and still no Bond Crash of 2018. Despite the double-digit losses in the longer US Treasury market discussed last month, the sell-off is orderly. With a recent temporary pause (treasury bond prices have bounced the past six weeks), the set up remains quite ripe for the Bond Crash of 2018.

Stocks are doing their part as well. Take a look at the Dow over the first six months of the year. A sharp rise into January’s record highs only to swoon into February’s dive. Given ample opportunity for investors to buy this year’s dip, the Dow has instead delivered how a bear market behaves. Gapping down, filling gaps, falling further and partial retracements of late…these are bearish descriptions of the Dow over the past weeks.

We are left with a bond market bear that began in 2012 and the beginning of one for stocks. This, despite record profits, surging growth, tax cuts and off the chart optimism in just about every metric out there. The market doesn’t care; the market is a market.

The importance of these paragraphs are not because they portend change, a change we can all ride out together. No. These paragraphs and my years of harping on this subject is because the changes will be generational, unfathomable changes. (more…)

Remember Credit Quality?

April 2nd, 2018 by Kurt L. Smith

Since November’s letter, Top of Tops, I’ve discussed the unfolding progress of the new bear markets in both stocks and bonds. While recognizing the risks of an impending bond market crash, we instead were treated to the beginning of a stock market crash.

On March 23rd the Dow closed at 23,533, essentially even with the November 1st close. But what a wild five months it has been for stocks. Almost straight up to the all-time high of 26,617 January 26th, to a 12% sell off in a mere ten days to a new closing low as of this writing.

I don’t just see possible horrific losses for stocks unfolding, I see probable horrific losses for stocks unfolding. This is why I have referenced the 1987 stock market crash (down 22% in one day, down 40% over eight weeks). The seemingly impossible has happened before. Who knows, this time it may be worse.

Conventional wisdom may direct investor’s funds towards bonds if such a stock market panic unfolds. That would be a mistake in my opinion. While stocks attempted to bounce since their 12% sell-off and have failed, bonds did rally. But this rally happened in the midst of a larger bond market sell-off.  With an overall downtrend for both stocks and bonds, if both do get aligned and move strongly lower together the resultant fear could heighten concerns of a crash in financial asset values. (more…)

Shot Across The Bow

March 1st, 2018 by Kurt L. Smith

While bonds continued their slow, steady march to higher yields (and lower prices), the stock market corrected. One thousand Dow points lost in just over an hour. Stock indexes swooned, even falling below the levels I marked in my November Letter as the Top of Tops.

I am sure you didn’t sell in November, just as I am sure you didn’t sell 3,000 points higher at 26,500 in January. You are not conditioned to sell; you are conditioned to buy the dips. We have enjoyed thirty-plus years of bull market reinforcement, not to mention every bit of economic, scholarly and sage advice written to further reinforce stocks for the long run.

Last month’s letter predicts the bond crash of 2018. Despite the stock market’s gyrations of late, the bond market neither soared or crashed.  The bond market continues to deteriorate, yet at a seemingly glacial pace over the past several months. Ten year US Treasury notes were 2.01% on September 2nd and touched 2.95% in February (Bloomberg) while activity in municipal bond markets remain somewhat muted. Overall, new higher yields for US Treasury notes and bonds, furthering the bond bear market but no crash, yet. (more…)

The Bond Crash of 2018

February 1st, 2018 by Kurt L. Smith

Another month of higher interest rates continues the upward trend since my call back in June that interest rates are moving higher.  A slow slog, yes, but bond prices are slowly sinking. The market continues to chip away at the general consensus of  “lower rates longer”.

This is the story of how a gargantuan bond market turns.

Over the course of the thirty-plus year bond bull market no discussion of bonds could be had without mention of inflation. As inflation heated up throughout the 1970s and peaked in 1980, bond prices collapsed…until they collapsed their last. Inflation figures began to decline as well. As double-digit inflation figures became a thing of the past, the bond bull market began to gallop.

Bonds and inflation are believed to be inexorably linked. When asked whether there is risk of even higher interest rates today, most investment professionals will answer no adding that inflation is benign. Ask them why rates are up dramatically in the past few months and  again, most would probably say that there has been a slight uptick in inflation.

As inflation goes, so goes interest rates. Or is it, as interest rates go, so goes inflation. One way or another, the general assumption is that interest rates and inflation are correlated. (more…)

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