It is now official. The bear market has arrived for US Bonds. At the end of 2017, the US Treasury Yield Curve was as follows:
- 5 Year 2.21%
- 10 Year 2.41%
- 30 Year 2.74%
As last Friday, barely five weeks into the new year, that same yield curve stood at:
- 5 Year 2.59%
- 10 Year 2.84%
- 30 Year 3.09%
The value of those bonds has declined as follows in that period:
- 5 Year -1.77p
- 10 Year -3.68%
- 30 Year -7.22%
This is a rather large move in a short period of time. There is no doubt in my mind that we are beginning the much-anticipated end of the bond bull market which began in the early 1980s. I was actively pairing back on fixed income positions for clients last week. I cannot emphasize enough the need to reduce risk to bonds in one’s portfolio.
The news will only get worse for the bond market for several reasons. The US economy is rapidly expanding. Inflation is beginning to rise in the US, The FOMC is in a tightening cycle.
Unfortunately, the stock market has become a victim of the bond market woes. It is a case of good economic news being bad news for stocks. Stocks will tend to get a short-term repricing as interest rates correct. This is a matter of financial theory. However, the beginning of the bond bear market does not imply that the stock market rally is over. It is just on hold as after all, a much-needed correction for stocks was overdue after a huge rally since the 2016 US election.
You must however, remove a few fallacies from your consciousness. First, is that Friday’s sell-off was due to the release of the FISA memo. As I mentioned before, it was due to the bond market breaking down. Second is that the loss on Friday was a monumental move. In absolute terms, for example, the 665-point decline in the Dow Jones Industrials (INDU) was one of the largest declines in history for that index. However, that only equated to a decline of 2.54%. Recall that on Black Monday 1987, the INDU declined 508 points or 22.6%. That was meaningful.
The S&P 500 (SPX) declined 2.12% on Friday. That is hardly the end of the world. In fact, since 1950, the SPX has declined greater than 2% on 358 trading sessions. That is about 5 times per year. We have just been spoiled that the last occurrence of a decline greater than 2% for the SPX was September 9, 2016.
Stocks might correct further. We really don’t know from top to bottom the magnitude of the correction. We also cannot pick the exact top and bottom of the correction.
Just keep in the back of your mind the fact that corporate earnings are on the rise and that is the lifeblood of stock prices.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long DIA, DDM, UDOW, SPY, SSO & SPXL — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is also a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
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