Home About Archives RSS Feed

@theMarket: Rising Rates Create Headwinds for Stocks

By Bill SchmickiBerkshires columnist
The saga of rising interest rates in the long end of the U.S. Treasury market continued this week. Investors, fearing runaway inflation, sold both bonds and stocks. Will the selling continue, or Is this a buying opportunity?
 
It depends upon which asset class we are talking about. Yields on the 10, 20, and 30-year U.S. Treasury Bonds, I believe, will continue to rise. How far? It is possible that the benchmark "Tens" could finish the year at 2 percent. In the short-term, however, I expect yields to fall a bit on profit-taking.
 
Last week, I warned readers that the rise in rates was not over. I expected yields on the U.S. Ten Year Treasury Bond to hit the 1.70 percent level or higher. Currently, they are yielding 1.75 percent, which is a fairly steep move in less than a week. It is the speed of the ascent in yields that is most spooking equity investors.
 
But where is the Fed in all of this? The simple answer is that the Federal Reserve Bank controls short-term interest rates, while long term rates are determined by the buying and selling of you and me. But it goes further than that.
 
Investors have been conditioned over many years to expect the Fed to be pre-emptive in guiding monetary policy. If, for example, the FOMC board members believe inflation might be getting out of hand in the future, they will nudge rates higher now to head off that danger.
 
Not this time. The Fed, and its Chairman Jerome Powell, want inflation to rise and plan to wait until that happens before reacting. This is a new concept for market participants.
 
For the first time in a long time, the Fed is making employment its priority and not Wall Street. The real unemployment rate in this country is thought to be about 9 percent, depending on what data you look at. The Fed wants to let the economy grow until that number drops dramatically. If that means the economy grows "hot" and inflation rises for a quarter or two to achieve that goal, so be it.
 
The Fed believes that any sustained, long term rise in the inflation rate will only become a problem if wages start to rise and rise substantially. Consider that back in 2019, when the unemployment rate was as low as 3.5 percent (the lowest since 1969), the inflation rate was only 1.81 percent, despite wage growth of 4.6 percent. Given the still high rate of unemployment, it is hard to imagine that wage growth and any potential inflation it might cause will occur any time soon.
 
But what about the record rise in commodity prices, like food and energy? Isn't that inflationary? The Fed considers these price movements short-term aberrations. Consider the oil price, which can fluctuate by as much as 4-5 percent in a day. On Thursday, for example, crude fell 7 percent. The Fed is concerned with the long-term trends, while you, me, and Wall Street are focused on today, tomorrow, and at the latest, next week.
 
But who is to say that if the Fed waits to react to a 2.5 percent-3.5 percent uptick in the inflation rate, they will be able to put the genie back in the bottle? Can we trust the Fed to let the economy grow hot enough to employ America's workers without unleashing a new and damaging multi-year trend of inflation? The market seems to doubt that.
 
I advised investors to raise some cash in highflyers, mostly in the new tech area, in February because I believed this month would be volatile at best. That is proving to be the case. Over the next few weeks, readers should start putting that cash back to work on the market's down days.   
 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

0 Comments
     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Brian J. Dempsey MD Pediatrics Welcomes New Pediatrician
BCC Announces Virtual Info Sessions for Criminal Justice and Human Services Programs
Q&A: Williamstown Barn Restoration Moving to Next Phase
Adams Aiming for Summer Reopening of Public Buildings
Images Presents Annual 'Fresh Fest' on Food, Farming
Eagle Newspaper Group Sells Off Vermont Publications
Berkshire Money Management Welcomes Two New Team Members
Four Ward Races Open in Pittsfield Election
Pittsfield's New Road Bridge to Reopen Friday
Medical Matters Weekly Welcomes State Veterinarian for Tick-Borne Illness Discussion
 
 


Categories:
@theMarket (368)
Independent Investor (450)
Retired Investor (42)
Archives:
May 2021 (1)
May 2020 (8)
April 2021 (9)
March 2021 (8)
February 2021 (8)
January 2021 (5)
December 2020 (6)
November 2020 (8)
October 2020 (7)
September 2020 (6)
August 2020 (6)
July 2020 (10)
June 2020 (7)
Tags:
Taxes Housing Debt Debt Ceiling Stock Market Bailout Interest Rates Wall Street Economy Election Stocks Deficit Markets Europe Rally Europe Japan Energy Recession Metals Stimulus Euro Commodities Currency Federal Reserve Selloff Banks Pullback Oil Greece Jobs Retirement Crisis Congress Fiscal Cliff
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
The Retired Investor: Are Inflation Fears Real or Imagined?
@theMarket: Fed Signals Equities 'All Clear' But Markets Don't Care
The Retired Investor: Empty Oceans
@theMarket: Stocks Hit With Possible Tax Hike
The Retired Investor: Our Hospitals Are in Trouble
The Retired Investor: A Highway of Opportunity
@theMarket: Stocks Grind Higher as Bond Yields Retreat
The Retired Investor: Water Becoming a Rare Commodity
@theMarket: Spring Has Sprung in the Markets
The Retired Investor: Will Infrastructure Spending Boost Clean Energy Stocks?