While the Fed continues to increase short-term interest rates as the economy chugs along, we had a new wrinkle appear this quarter. Previously, long-term rates remained relatively stable as short-term rates rose. This had the effect of a flattening of the term structure of the yield curve, an indicator that future growth may slow. This month however, those stable long-term interest rates have begun to rise sharply in pace with short-term rates controlled by the Fed. The cause of this is quite unknowable at this point, but we note that oil and some commodity prices have been rising together with wage increases finally showing signs of life. The takeaway here is that the economy remains robust and that a slowdown or recession does not Continue reading 3rd Quarter Update Summary – The Economy Chugs Along, But Whither the Markets?
The market meltdown in the previous few days was unmistakably a reaction to sharply rising bond yields which previously were rising slowly if at all in response to Fed rate increases. It was not likely a response to inflationary fears as leading inflation indicators (metals and commodities) were unmoved if not down. Add it all together and present value theory of stock prices required a downward move in prices in response to those bond yields. The consequence? The Fed, now chaired by a Wall Street insider, has no reason to be too aggressive in raising short rates and may even temper its planned sales and reductions of its massive bond portfolio.
Yes. There’s yet another cardinal rule that tells you when to get into the market and when to get out (more or less). It has never failed us and following it, helped us avoid entirely the catastrophic markets last year and turn in positive performance for 2008. You’ve all heard it before but let’s restate it because it’s important and it works. Herewith: “Don’t Fight the Fed!”