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Posts Tagged ‘stock bear market’

Correction Highs (And Lows)

July 11th, 2019 by Kurt L. Smith

For the past several months we’ve seen giddy up; now we are left only with giddy. Be it Stocks, Bonds, or even Gold, asset prices have generally had a nice 2019 bounce. To a large extent asset prices have peaked together. Unfortunately the rallies appear to be over, meaning lower prices from here.

How can that be? The news is great, prices are rallying and even the Federal Reserve appears poised to lower interest rates as yields have shriveled as US Treasury note and bond prices have jumped. The trend should be our friend and the trend is up, across the board for assets, right?

Wrong! The trend is not up. Despite nice gains for this year, assets are in the midst of finishing upward corrections. Gold, which peaked in September 2011 at $1921, bottomed in December 2015 at $1047 where it began a rally that may have recently ended at $1440 last month (all asset prices and dates per Bloomberg). While an additional advance may unfold, the next major move in my opinion is lower, to new lows rather than new highs.

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Bonds Are Markets Too

June 12th, 2019 by Kurt L. Smith

The bond market has been on quite a tear of late. With lower yields and higher prices, bond market articles have been on the front pages of The New York Times as well as other prominent articles in their business section.

Stocks on the other hand ended last month with their sixth consecutive down week. With bonds moving higher in price and stocks moving lower maybe there is something new going on. Perhaps your stock portfolio hasn’t been performing as it once did. Is something new happening?

From our vantage point, there is nothing new going on in the markets. The bond bear market began in 2012. Others may argue with me on this but that gives us a sense of how long a topping (or turning) pattern may take to develop or be fully recognized.

The bond (price) topping pattern or yield bottoming pattern has unfolded over many years already. Perhaps we will see something similar time-wise with stocks, but perhaps not. Perhaps the reason your stock portfolio isn’t performing the way you think it should is because we are in a similar topping pattern currently with stocks. If this is the case, which I believe, the key issue we need to address is one of risk versus reward.

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Another Milepost

April 4th, 2019 by Kurt L. Smith

Last month we talked inflation (there is almost none), unemployment (almost none of that either) and yields on treasury securities (very little, or let’s just call it historically low). The Fed has nothing to do except patiently wait. Last month something happened; the treasury yield curve inverted for the first time since 2007. Egads!

Simply, the yield curve is called inverted when short-term rates are higher than long-term rates. This is usually not the natural order of things as investors usually prefer to be paid more yield to invest longer because something usually does happen later and it might not be good. Older people usually explain the difference using words like inflation (again, see last month’s letter).

I could write an unlimited number of narratives as to why the yield curve is inverted and anyone could write one regarding what it portends. Traditionally an inverted yield curve portends lower growth prospects, according to the Federal Reserve, so it made sense for them to lower their 2019 forecast to 2.1% from 2.3%. Or maybe one has nothing to do with the other.

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Inflation Worries?

March 4th, 2019 by Kurt L. Smith

In order to be worried about inflation I would presuppose you probably had to experience it rather than try to picture it from a textbook or figure out why economists keep talking about it. Ask your children or grandchildren to explain inflation, or better yet, ask them how important it is or whether they are worried about it.

Inflation, or the control of it, is the price stability part of the Federal Reserve’s dual mandate. Maximum sustainable employment is the other piece. So it must be important since the financial press always seems to be tracking the Federal Reserve’s every move.

Defining inflation has never been easy, so don’t be too hard on your children or grandchildren if they can’t define it easily. One formula utilizes U.S. Treasury note and bond prices to help define future inflation. If U.S. Treasury securities are viewed as riskless securities then we can say that it is future inflation that accounts for the differences between short-term U.S. Treasury interest rates and long-term U.S. Treasury interest rates. As the current two year treasury is about 2.5% and the ten year is 2.65% and the thirty year is 3%, one might presume the outlook for changes in the inflation rate over the next umpteen number of years is probably very little. With the advent of Treasury Inflation Protected Securities, or TIPS, the calculation for the outlook for future inflation was made even easier. With the ten year treasury at 2.65% and the ten year TIP at .70%, expected inflation is 1.95% (all basis Bloomberg). That’s greater than nothing but, again, it shouldn’t elicit fear and constant monitoring either.

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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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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…)

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…)

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