I wrote this for CFA Institute and first published it on the Enterprising Investor.
Celebrating Easter and April Fool’s Day both on the same day feels appropriate in 2018.
Interest rates have risen again, and plenty of traders are waiting for the punchline.
My task this weekend starts with assuring you it’s all for real. If the world feels a little crazy, it’s because you are paying attention. But stick around. We’ll try to turn it into fun.
I found a lot of charts that I want to talk about, so let’s jump in with one that gives me very mixed feelings.
You have to wonder: Why all the silence?
It shouldn’t be that hard to come up with material to tweet about. Maybe he’s just being polite to his colleagues in the eurozone, who are contending with a sudden and surprising reversal in their macroeconomic fortunes.
The difference between the European and U.S. Economic Surprise Indexes is now the highest since 2012. (The euro index has been cratering). pic.twitter.com/xQWyZ5aCho— Tracy Alloway (@tracyalloway) March 26, 2018
Importantly, the US economy isn’t just looking good by comparison. The United States is large and diverse, but growth has been a reliably urban phenomenon since the Great Recession.
Bullish on the heartland: "In 2017, rural areas outperformed their share of the economy with respect to job growth. We see a continued rise in outer exurban areas...at growth levels not registered since 2008." https://t.co/jG0Ygy6vlw pic.twitter.com/cw3PfXzCmT— Damaris Colhoun (@damariscolhoun) March 28, 2018
The gap between upbeat headline economic statistics and dire lived experiences is not new to the United States. It’s been a reliable feature of post-Great Recession life. And you would expect the mood as it reverses to be buoyant.
So what’s killing the vibe?
The unfortunate side effect of growing faster than our trading partners is that it directs their money and attention here.
Today has been the best day for the Dollar ($DXY) since Oct 26 - second best since the bear trend started at beginning of 2017: pic.twitter.com/g31qZl2wFG— John Kicklighter (@JohnKicklighter) March 28, 2018
The dollar has caught a bid, and that’s just the beginning. I talked about the bond market’s “dangerous curves” last month. Perhaps I should have written about dangerous lines instead.
It feels ever more as though we can forget January's market melt-up. The Treasury yield curves (2s-10s) is now as flat as it has been since the first week of the year: pic.twitter.com/KSN3M67gM4— John Authers (@johnauthers) March 27, 2018
The standard fear when this condition presents comes straight out of economics textbooks, where flattening yield curves are typically described as harbingers of a recession.
Of course, that’s not automatic.
One might see the above chart, count the red circles, and conclude that in four out of seven cases a flattening curve is a sign that the party will continue for several more years. But of course, be careful. Anything is possible.
It does feel a bit weird, though, to hear the last few months’ trading described as a “bear market in bonds.” Thirty-year Treasuries have spent most of the month rallying and were trading at 3.01% at the close of business this Thursday. That’s 12 basis points lower than they were at the end of February.
As it happens, the long bond opened 2017 yielding 3.04%. That was a selloff from 2016’s open of 2.98%, but it’s hardly a bloodbath.
I don’t mean to minimize forward-looking concerns, like the increasing amount of the US federal budget going towards debt service payments.
It’s hard not to feel that the market is evolving some very particular tastes regarding leverage.
Look in particular at how many “investment grade” bonds, in fact, receive the lowest grade: BBB.
Could this perhaps have something to do with the lack of “high-yield” bonds?
The profit-free nature of recent equity issuance certainly makes it seem like capital markets are feeling promiscuous.
And the experience of more seasoned offerings has shown that a company’s multiple can expand significantly as a reward for simply staying in place.
$STC earnings trend has been flat to negative over past 10 years however,valuation is at all time high. The #MSCI & #FTSE index inclusion trade has forced many people into speculative behavior that will result in future disappointing returns. #ValueInvesting #TASI pic.twitter.com/pXXYIAimw8— Mohammed AlAlwan,CFA (@m_alalwan) March 27, 2018
Of course, that’s only true for individual equities.
Some active managers have been experiencing the opposite, turning in significant outperformance only to be greeted by a chorus of redemptions.
So I’d forgive you for wanting to go corporate. The market verdict seems to be that consistently manufacturing alpha isn’t worth quite as much as an ability to say “We’re Number 1” frequently and with tremendous conviction.
greatest corporate strategy slide of all time pic.twitter.com/tY1kpClPpP— modest proposal (@modestproposal1) March 16, 2018
I hope you found this useful. Here are a few other links you might want to peruse:
- If you want to keep going with great charts, check out Favorite Figures, which features some great exhibits from economics papers. (Paul Goldsmith-Pinkham)
- And who doesn’t love a conspiracy theory? There’s a statistically significant increase in taxi traffic from the Federal Reserve Bank of New York to the leading commercial banks nearby around Federal Open Market Committee (FOMC) meetings. Perhaps some information is being communicated? (University of Chicago Booth School of Business)
- Every investment professional should read “Inside Wall Street’s Complex, Shameful, and often Confidential battle with #MeToo.” I wear black almost every day, too. (Vanity Fair)
- Some good news if you’re distractible, as I am: In praise of attention deficit hyperactivity disorder (ADHD). (The New York Times)
- And finally, the question that’s on everyone’s mind: Do Sloanes still exist today? (Town and Country)
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