The Knowledge Vault Newsletter Sign-up >>>

 

Posts Tagged ‘stock bear market’

Correction Over

January 30th, 2023 by Kurt L. Smith

Yes, the correction in both stocks and bonds is now over. For the past forty-or-so years that would have been a good thing. But in a bear market, the end of a correction should be foreboding as the trend to lower prices reasserts itself.

As in the past several years, U.S. treasury bonds are taking the leadership position. After many months of weakness in 2021 and 2022, the correction in bonds began in November as treasury prices across all maturities began to rally. Oftentimes, corrections in a bear market can seemingly occur on a dime and suddenly thrust prices higher. The correction lasted until the middle of January and now the bear trend should reassert itself.

It is the municipal market, of all places, where we can see the correction at its fullest. Last year was among the worst ever for bond market performance but even horrible markets correct. Beginning in mid-November, prices on treasuries leapt upwards and yields, which had been moving higher, suddenly plunged lower.

Municipal bonds are a spread product. Investors buy them because the tax exemption gives them a higher net yield after taxes. So, it would make sense that municipal bonds would rally in the correction like the prices of US treasury securities.

(more…)

Not Matching Expectations

December 20th, 2022 by Kurt L. Smith

In the hustle and bustle of the season, we would expect no less in a bull, bull, bull world. Our experience matches our expectations. Such is not the case with the financial markets.

While we are a couple weeks away from posting final 2022 results, the bull, bull, bull world has failed to deliver results. Depending on your yardstick of choice, you might categorize the results as poor, bad, or even horrific. Yet we cannot blame investors for not trying: the rally in both stocks and bonds from October to early December appeared to have legs…until it did not.

There is a reason for this expectation/performance mismatch, and it is not inflation. The reason is the bull market is over. And while stock investors may continue to believe they have seen this movie before, bond investors are surprisingly acting the same way.

Nowhere is the bull, bull, bull world more apparent than in the world of bonds. One example is in spreads. In writing about the treasury market, Jeff Sommer at the New York Times says “this has been an awful year for U.S. bonds — so bad that 2022 may end up as the worst calendar year in history.” Maybe that explains how Idaho Housing sold its 4.384% taxable municipal at 11 basis points below treasury yields (higher priced) last week (per Bloomberg). The bond is not a treasury! Idaho Housing bonds due six months later sold to the spread of seven basis points. Yeehaw! A lack of spread to treasuries is very bull, bull, bull.

(more…)

It’s A Bull, Bull, Bull World

November 30th, 2022 by Kurt L. Smith

After forty years of bull market in financial assets, one can only imagine how difficult a change in trend may be to recognize. We live in a bull market world, enjoy the bull market experience and we have been doing so, for so long, we believe it is just the way things are.

The bull market has existed for both stocks and bonds for decades. Rather than serve to diversify one’s portfolio, stocks and bonds have been in a tortoise/hare race to the top. Unlimited optimism, or even abundant optimism, can only push bond prices so high, but for stocks, truly the sky was the limit.

So, it might make sense that the bond market might be the first to signal the bull market is over. The bond market performance story for 2022 has not yet been fully written, but unprecedented, the word used in these letters over the past several months, will surely be included.

Yet despite a treasury bond trading at half its value over a two-plus-year span, you would think investors would recognize this as a bond bear market. Staring at not only the worst bond market return in decades, but perhaps ever, we saw bond prices soar in November with Bloomberg saying last week “municipal bonds are having their best month in almost four decades.”

(more…)

The Madness of Crowds

November 4th, 2022 by Kurt L. Smith

Several weeks after my March 2020 letter calling the end of the multi decade bull market in bonds, the US treasury sold $22 billion in 1.25% treasury bonds due May 15th, 2050, at a slight discount. In August 2020 those bonds sold at a slight premium and on October 21st, 2022, the same bond sold at below fifty cents on the dollar (all prices per Bloomberg).

The crowd, rather than sell at the top in 2020, instead chose to buy. This is the madness of crowds. Since 2020 my experience in the marketplace tells me that few have chosen to sell bonds. Treasury bonds, like stocks, are priced based on the last trade. It does not take a large quantity of bonds to set a new price. It may not involve many trades at all. But now, a mere two years and two months later, 50% of the value of this bond has been wiped out.

In the annual running of the bulls (actual bulls versus the financial creature) in Pamplona Spain, the crowd can serve as protection. Bull markets are like that, as rising tides do float most ships, and after almost four decades of bull markets investors may be forgiven for not remembering what a bear market cycle looks like. In contrast, bear markets do not afford the crowd such protection and investors are likely to be gored as we have seen in buyers of the 2050 treasury bond.

Selection does matter, but more important is identifying a bear market. I was serious about my March 2020 letter, and I hope you received it as such. The multi-decade bond bull market (like all bull markets) was always going to end. We just did not know when. The reason I chose to specialize in municipal bonds is I saw a market that offered my clients a unique opportunity in both bull and bond bear markets.

(more…)

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.

(more…)

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.

(more…)

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.

(more…)

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.

(more…)

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.

(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…)

NEWS FEED

The $247 trillion global debt bomb washingtonpost.com/opinions/the-2…