Four Days Down from All-Time High is Too Early for Dow Investors to PanicI’ve got news for you, bull markets don’t die this fast so expect some backing and filling over the near-term. I don’t see a “crash” coming, but short-term corrections are inevitable because rates are rising. These attractive higher rates are offering investors alternatives to the stock market for the first time in years and that’s alright for me.
Four days down from its all-time high and some Dow Jones Industrial Average analysts are already explaining how to navigate the next bear market. Six days down from its all-time high, and the headlines are saying a hawkish Fed likely probably helped put the top in.
I’ve got news for you, bull markets don’t die this fast so expect some backing and filling over the near-term. I don’t see a “crash” coming, but short-term corrections are inevitable because rates are rising. These attractive higher rates are offering investors alternatives to the stock market for the first time in years and that’s alright for me.
Too many unqualified investors have been riding the stock market rally knowing that at their age they have no business holding equities that represent 80 to 100 percent of their net worth. So if they get the opportunity to lock up attractive rates then more power to them. This is just part of the asset allocation process. It works both ways but right now, the smart thing to do is sell a little stock and lock in attractive guaranteed government yields.
The volatility in the market is not being fueled by these investors anyway. It’s coming from the day-traders and the quants. They know the market goes down faster than it goes up and they are probing for that one exit that triggers the next steep slide in prices.
Professional know about asset allocations. However, they may be a little rusty in applying the technique since it’s been a long time since they actually had to press the sell button or write the sell ticket for you old timers.
Don’t blame the Fed either if there is excessive selling pressure. They have laid out a beautiful plan for pulling out stimulus, reducing their balance sheet and raising rates. Except, Treasury investors didn’t believe them. Now they are playing catch up and driving yields higher.
I again I want to emphasize that I think professional stock market investors can figure out ways to deal with higher yields, but I don’t think they like the pace at which they are moving higher. Once rates begin to flatten out then the volatility in the stock market should settle down.
Bond Market Signaling ‘Sluggish or Uncertain’ Growth ahead, Fed’s Kaplan says
Earlier on Tuesday, Dallas Federal Reserve President Robert Kaplan offered his take on rising Treasury yields. He said the bond market is sending a pessimistic signal about the longer-term prospects of the U.S. economy.
While the headlines were telling us last week that rates were moving up rapidly because inflation is looming, Kaplan was telling the Economic Club of New York that the flattening of the yield curve that has been taking place over the past several months is an indicator that the market sees growth slowing.
This is likely to be the next sore spot for Fed policy watchers. Two weeks ago the Federal Open Market Committee was telling us that rates should be raised in December, three times in 2019 and at least once in 2020. Last week, Fed Chair Powell was telling us that he feels the FOMC has a ways to go before it reaches neutral, a statement perceived as hawkish by the market.
Now Kaplan is saying that the message the market may be sending is that “prospects for future growth are somewhat sluggish or uncertain.”
Hopefully, Powell and Kaplan will get on the same page by December.