@themarket: Global Interest Rates Rise, Global Stocks Fall
It is something we really haven't seen in quite some time. Back in the day, before the financial crisis, interest rates and stocks most often moved in opposite directions. This week investors got a taste of what the future might hold.
U.S Treasury yields on the 10-year note (the benchmark average) ticked up to 2.39 percent at one point. Across the pond, the German Bund (their benchmark) rose .5 percent. Those were big moves in the debt world. Why are interest rates on the rise all of a sudden after years of declines?
Some would say it just had to happen. Global central bank policy has just been too loose for too long. I don't necessarily agree with that view, but at the same time, our own Fed has given the markets ample warning that the time to tighten is upon us.
But before we bid adieu to their past policies, let's give all those central bankers a hand. In the absence of any fiscal help from the world's politicians, these heroes single-handedly not only pulled us away from the brink, but have guided global economies to their present state of growth. What is different this week from other weeks is the perception among investors that other central banks may now be following our lead.
Throughout the first half of the year, I wrote that it was not Trump and his promises, but low interest rates, a growing economy, and declining unemployment that was supporting the stock market. I also warned that the real arbiter of further equity gains would be the Fed and how they implemented their new tighter, monetary policy.
So far, their actions have been transparent, moderate and, to the best of their ability, telegraphed to the markets well ahead of any future moves. The problem now is that if (and right now, it is only an if) other central banks begin to tighten, than no one knows what will happen.
How will various central banks coordinate policies? What will tighter monetary policy overseas mean for our bond market yields? Will Japan start to tighten as well, and if so, what will that mean for both U.S. and European interest rates? One thing we do know is that today's traders are quick to pull the trigger before taking the time to see what transpires.
Stock indexes hit six-week lows this week. That doesn't mean much in the grand scheme of things. Granted, we hit my target on the S&P 500 Index at 2,444 weeks ago but that doesn't mean I called a "top." We could still start to rally back next week when this holiday-shortened work week is over. In the summer, when participants are on vacation and volumes are low, it is easy to manipulate the markets.
Technically, we had better rally hard in the coming week because we are hovering just over support for the S&P 500 index at 2,414. The action of technology stocks is also bothering me. It is this sector that has led the market up and it feels like we still have more to go on the downside.
But so what; I and everyone else have been waiting for a sharp, shallow sell-off of the 5-6 percent variety so let it happen. July would be an auspicious months for that. As for your portfolios, do nothing right now. If this is truly the beginning of that downdraft, I see 2,345 as the first support for the index. That would bring us down to a 4 percent decline or so. Big deal!
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The Independent Investor: The Market's Half-Time Report
Financial markets worldwide ended the first six months of the year much better off than they started. Here in the U.S., the Dow and the S&P 500 Indexes both gained 8 percent, while NASDAQ delivered 15 percent.
The Russell 2000, the small cap index, underperformed (up 4 percent) and the Transports gained 5 percent. All-in-all, it paid to be in large-cap, especially the large cap growth sector for the first half. At the same time, the Volatility Index continued to make new lows, despite the fact that at least half the investing population was/is worried and fearful of our new president's agenda.
All of the top 20 economies around the world are growing this year. That recovery is broadening out to include emerging markets as well. It's the best global growth investors have experienced in five years. And economic forecasts have continued to indicate gains, especially in Europe. While over in Asia, recession-ridden Japan has managed to gain ground (up 8 percent).
Their economy is stronger than at any time in the last 10 years.
As a result, international developed markets outperformed our own stock market. The French market gained 15 percent, Germany 16 percent, while Spain and Italy also gained by double digits.
Emerging markets have done even better, racking up a 17 percent gain. Individual countries like Hong Kong were up 16 percent, while China lagged (only up 12 percent). Most investors do not realize that the decline in the dollar since the beginning of the year had a lot to do with that overseas performance.
As the greenback fell, the foreign currency-denominated stock prices overseas gained.
Just this currency effect alone boosted foreign returns by 5 percent or more. If you subtract out the currency impact, foreign stocks actually lagged their U.S. counterparts, despite stronger economic growth. All of this was especially impressive given the political climate, as well as the changes in monetary policy here at home.
For years, investors have been concerned with what might happen to the stock market once the easy money policies of our central bank ended. Dire predictions of major declines caused by Fed tightening have not come true. Given that we have weathered three rate hikes since December and stocks are at or near record highs, says volumes about those overblown fears.
Two variables have saved the market from those bearish predictions. The economy and employment are both gaining with the jobless rate hitting historical lows over the last six months.
Low foreign interest rates have also kept a lid on rising rates here at home. Believe it or not, even at these low rates, foreigners are buying our bonds because interest rates and bond yields are much lower in their own countries.
But what about all this crazy partisan politics, tweets and the like, why hasn't this political turmoil decimated the markets as so many expected? Well, I come to discover (thanks to work done by Ned Davis Research, the Fed and Liz Ann Sonders, Charles Schwab's equity strategist), that "stocks rise faster when partisan conflict has been elevated on an absolute basis and relative to the recent past." There have been times since 1984 when the S&P 500 Index has made gains of 17 percent annually under these circumstances.
It simply proves that stocks do climb a wall of worry. But what is in store for us in the second half of the year? It appears that as long as the same set of circumstances prevails, we should have another strong year in the stock market. Let's hope they do.
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