Friday’s weaker-than-expected employment report led to a good-sized drop in the yield on the U.S. 10-year note…which closed at 1.55%. It is bouncing slightly this morning up to almost 1.58%, but it is still within the sideways range we talked about last week. (It’s just closer to the lower end of that range now.)
It will be interesting to see if the late-week drop in rates has any legs. We think the odds that the 10yr yield will drop below its recent sideways range are low, but at the same time, we cannot dismiss the chances either. If they DO fall below the 1.53% level in a meaningful way, it should be quite bullish for the tech stocks. That, in turn, should be positive for the broad stock market…thus a move like that would force us to change our cautious stance on the intermediate-term potential for the market.
The question is…why are we skeptical? Well, we have written about this issue ad nauseam recently, so we’ll just highlight our main theme. However, there are two new developments that have emboldened our view, so we’ll cover that as well.
The most important reason we think that rates will resume their climb before too long is because we believe (and have believed since the very beginning of the year) that the Fed has already made the decision to taper back on their QE program. Therefore, it is coming sooner rather than later…no matter how strong or weak the data is going forward (unless, of course, the data completely implodes). We just believe that Dallas Fed President Kaplan’s comments that the Fed should “taper” as soon as possible…and that the “markets will find their natural level”…are very telling. We believe this is yet another example of the Fed laying the ground work for their upcoming less accommodative policy.
We strongly believe that the “natural level” Mr. Kaplan is talking about mean higher interest rates…and lower stocks. Their massive stimulus last year was THE key catalyst for the huge rally in the stock market over the past 15 years, so as it subsides, so should the rallies they induced…….No, it does not mean that that interest rates will skyrocket (as bond prices fall) or that we’re headed for a major bear market in stocks. However, we DO think it means that we’re going to see another pick-up in volatility before long.
So, what are the newest developments we’re talking about? Well first of all, the Fed announced last week that it would begin unwinding its corporate bond holdings it acquired last year (the SMCCF program). Yes, we realize that several members of the Fed (both past and present) have tried to say that this is not a “taper” move, but only a complete idiot would believe those words!.....THEY’RE “UNWINDING THEIR CORPORATE BOND HOLDINGS.” THAT, by definition, IS a “taper” move!!!..….How stupid do they think people are??? (Don’t answer that question.)
The second development is the comments from Treasury Secretary Yellen this weekend…when she said that higher interest rates would be positive for the country. In many ways, we agree with Secretary Yellen. However, we hope you noticed that she said would be good for the country…and did NOT say that higher rates would be good for the stock market. In other words, if the stock market sees a negative reaction to higher long-term interest rates, that would likely be a plus for the country over the longer-term. It would wring some of the froth out of the market. That would be bearish for the stock market over the near-term, but it would be positive for the economy (and thus the country) over the longer-term. Thus, Ms. Yellen’s comments are not as bullish for the stock market as some pundits are trying to portray.
More importantly her words are more in a series of comments from the people at the top of our financial hierarchy in the U.S….that is laying the groundwork for the fact that interest rates ARE heading higher. They KNOW the rise in rates will almost certainly hurt the stock market…because it almost always does. They’re merely trying to dampen the reaction…and keep it from causing a major “unwinding of leverage” event. They might be able to achieve that latter goal, but we seriously doubt they can keep it from causing a correction in the stock market…and we think Secretary Yellen and the Fed are quite aware of this.
We’ve been wrong before and we’ll be wrong again. So maybe we’ll be wrong about this issue as well. However, from what everything the Fed is saying AND doing…and from what Treasury Secretary Yellen is saying, investors should definitely be preparing for higher long-term interest rates (and higher short-term rates eventually as well). We can disagree about what impact this move will have on the stock market (as well as stock groups and individual stocks), but investors should still be adjusting their portfolios NOW…to what THEY believe will happen when those rates do indeed rise……..Said another way, interest rates ARE going to rise…so investors should be preparing for this inevitable development one way or the other…….Then again Jeff Bezos is going to spend 11 minutes in space next month, so we guess there is nothing to worry about.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.