With the Fed seemingly on pause and bond yields sharply off their highs – markets are optimistic. Equities have surged the past few weeks – up around 17.6% year-to-date. The S&P 500 added 10% in just 3 weeks! The narrative (as far as I can tell) is we’re headed for “soft landing”. But can we be so sure? Past experience suggests a “hard landing” is the more likely outcome. And absent other evidence, when the Fed hikes this much (and especially this fast) – we should expect one.
Fed Warns, Stocks Shrug
“We still have a long way to go” – that was the not-so subtle warning from Jay Powell this week. After what many felt was a slightly less hawkish Fed Chair last week – sparking an equity rally – Powell attempted to adjust his tone at an IMF event. Was he successful? That’s hard to say – as equities seemed to shrug off any warning from the Fed – surging ahead to be up 15% year-to-date. Here’s my question: are investors being too sanguine about what’s still unknown?
The Battle-lines are Drawn
Here’s today’s question: do you think 18.3x forward earnings is a good risk/reward bet? For me, the answer is no. And I say this because investors have a very compelling alternative. We don’t need to look any further than bond yields. For example, the 12-month US treasury yield offers investors 5.45%
Now less about the Fed… It’s about Bond Yields
In ~11 years writing this blog – I’ve never seen a move in bond markets like the past 24 months. 10-year yields traded below 0.5% not that long ago. Money was next to free. Now that instrument will return 4.25% risk free. The 12-month T-Bill is a very attractive 5.34%. But it’s not just in the US – it’s global. Germany, Australia, Japan and the UK… yields on major fixed-income benchmarks are moving higher. In the UK, the 10-year gilt is yielding its most in 15 years. For me, where the market goes is more about bond yields than what the Fed do next…
For a full list of posts from 2017…