Friday, February 2, 2018

The Heck Is.........

So, the U.S. economy created a net 200,000 new jobs in January, employee wages rose at the fastest pace in 9 years, and 95.9% of Americans show up somewhere to work most days of the week. On top of that, half of the S&P 500's constituents have reported 4th quarter results with 77% beating analysts' earnings estimates and 67% exceeding revenue expectations.

And, as I type, the Dow's down 400 points. What the heck?

Well, "the heck" is bonds, or interest rates to be precise. 

Now, we can get into the weeds and discuss how higher interest rates present competition for the stock market, how higher interest rates mean higher borrowing costs for 2/3rds of the horsepower behind the U.S. economy (the consumer), how higher interest rates (amid a strong economic backdrop) may lead to a stronger dollar (which creates a business headwind for U.S. exporters and a currency headwind for foreign-made earnings), and how higher interest rates mean higher borrowing costs for the companies whose stocks occupy your portfolio, which is all important stuff to consider as we weigh the economy's wherewithal to produce earnings growth off into the future. However, for now, it's much simpler than that: Frankly, it (higher trending interest rates) is just plain different than what investors and traders collectively have grown accustomed to over the past several years, and it makes for a less easy market going forward. 

Of course you regular readers knew full well this was coming, right? And, as we've been preaching, absolutely!! this is healthy, and absolutely!! this is necessary; as every bull market needs periodic checking as it grinds its way higher: Which was something that, as we've preached ad nauseam, last year sorely lacked.

In terms of intermarket signals for today: Regular readers also know we're presently no fans of precious metals, which often is where investors and traders go to hide out when they think the markets are about to cave in. As I type, stocks (S&P 500) are down 1.2%, yet gold is down 1.4% and silver's off 2%. Oh, and the 10-year treasury bond (another "safe haven") -- the "problem" as we speak -- is down 0.4%, with the yield up 2.11% (from 2.78 to 2.84%). 

So while folks with very short memories may not be accustomed to multiple triple-point down days in the Dow, at this juncture -- per the first paragraph (and the one immediately preceding this one) -- it's clearly not because we're on the precipice of the next recession (a possibility we're always open to, and forever on the watch for), which is typically what a true bear market demands.

We'll keep you posted...

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