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Market Strategy 6/10/2019

  • John Stoltzfus
  • June 10, 2019

Don’t Get Fooled Again

We quote The Who as we ponder the message from the bond market

Key Takeaways

  • We urge investors to consider that near record low Treasury yields might not signal so much a recession ahead but another bond market misread of the economic landscape.
  • News over the weekend that the US would not impose tariffs against Mexico should remove a significant negative overhang.
  • Stocks worldwide rallied last week as a softer than expected nonfarm payrolls gain raised expectations for a Fed rate cut sometime this year.
  • For all the noise around recent volatility, a glance at the last 12 months of the VIX index suggests that at current levels, volatility’s bark is worse than its bite.
finance charts

We suggest that investors don’t confuse recent swings from “risk on” to “risk off” behavior and an appetite for market rotation and rebalancing as signs of an imminent recession. Traders on the other hand can “knock themselves out” enjoying the current rise in volatility until markets consider that perhaps the reason why yields have fallen so low is simply that bonds have become over bought after becoming markedly oversold last November.

From our perch on the radar screen, the economy stateside and worldwide currently reflects the effects of a trade war that has been extended into a second year as well as some normal economic slowing passing through the ecosystem after experiencing a patch of growth that was a good bump higher over the last three quarters stateside.

The flavor of the week in terms of recent market sentiment appears to read the bond market’s current behavior as signaling imminent recession while the equity market complacently passes through a blinking amber signal at the proverbial crossroads.

Before investors get hooked into savoring the drama of negative extrapolation, we’d suggest they put things in context of bond market misreads that have occurred over the course of the last five and a half years. In our view the current “fright” exhibited in near record low yields may be just another misread along the timeline of the wall of worry that global economies and markets have traveled over the last decade.

Bond market misperceptions about Federal Reserve policy or intentions has caused significant volatility in the US fixed income markets before, without having unsettling or even dire projections being realized.
Aided and abetted by institutional memory (which appears as short lived as ever—despite the existence of artificial intelligence), a shortage of recollection appears to have risen once again when it comes to bond market misreads.

Quotation from Aenean Pretium

In our view the current “fright” exhibited in near record low yields may be just another misread along the timeline of the wall of worry that global economies and markets have traveled over the last decade.

The Bond Market’s Foggy Crystal Ball

Consider 2013 when the yield on the 10-year Treasury jumped from 1.62% in early May of that year to a high of 3.02% at the end of that year (December 31) only to fall below 3% in the first month of 2014 and stay below that level for nearly five years. 

The “misread” by the bond market in May 2013 occurred when then-Chairman Ben Bernanke intimated in a public forum that the Fed felt the economy was doing well enough that the central bank might consider tapering its then-monthly bond buying program. Practically overnight, the bond market began a sell off that took the yield of the 10-year Treasury some 141 basis points higher (from 1.62% to 3.03%).  

Curiously the stock market in 2013 did not misread the intent of the Fed nor did it take the “Taper Tantrum,” the sharp increase in the yield of the 10-year Treasury, that seriously as the S&P 500 returned some 29.6% in price (and 32.4% in total return) for the year. 

This time around, the 10-year Treasury yield has taken a reverse direction in what we think is a major misperception and over-reaction to conditions as its yield has fallen from 3.24% as recently as November 8, 2018 to a low of 2.07% on June 3 just last week. In that same space of time, the market thinking around the direction of interest rates has reversed from “unbridled normalization until it hurts” to “the Fed will never raise again” to “the Fed might have to cut soon before the second half of the year.”

So What’s It All Mean?

Are we likely to see a recession ahead? Is financial Armageddon around the corner? Is there financial malaise ahead? None of these we think. Our view rather is that the bond market is doing what it often does – overreacting and revealing its inherent dour nature over what is most likely a very natural response to a trade war that has gripped the world economy for over a year and thus far shows some risk of becoming a protracted negative overhang restricting global growth.

At this juncture we remain steadfastly in the camp of belief that a resolution to the trade/tariff war remains “in the wings” if not yet at center stage in the geopolitical drama that is taking place. The alternative to resolution of the trade/tariff war is at best too impractical for world leadership to consider in light of the real challenges that exist worldwide from developments in technology (good and otherwise) as well as global climate change.

No “risk off” signal has ever been sounded over the markets in our thirty six years of experience. Opportunities appear significant in solution-based thinking in contrast to risks created by current disharmony at the geopolitical level.

We persist in our constructive view on equities, favoring cyclical sectors over defensive sectors. Our favorite sectors remain information technology, consumer discretionary, industrials, and financials.

John Stoltzfus of Oppenheimer Asset Managment Inc.

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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