Rising Bond Yields Help Sell Off Stocks!
Scouting- the action of gathering information about enemy forces or an area.
“Altogether, Cavalry operations are exceedingly difficult, knowledge of the country is absolutely necessary, and ability to comprehend the situation at a glance, and an audacious spirit, are everything.”
-Maurice de Saxe
Throughout history, military operations have been some of the most efficiently run organizations in the world. When you think of great generals like Patton, Napoleon, MacArthur, or Norman Schwarzkopf, each employed their own unique tactics to succeed. All, however, probably used advanced scouting patrols to identify and observe where the enemy was located. Probably the most famous scout in history was our first President, George Washington, who explored Virginia as a young boy and then later as a military officer during French and Indian war. Similarly, in sports, before you play an opponent, coaches send scouts in advance to watch and chart what kinds of tendencies the bad guys have as a way to prepare. In politics, knowing the other sides policy positions in advance is quite important if you want to persuasively influence the general public into voting with your side So, the idea of scouting is nothing new and is applicable in a wide variety of areas, many of which I did not mention. This brings us to our topic, the financial markets, and why scouting has a broad range of important implications. Investing, especially in the equity of public companies (also venture capital or angel investing), is about projecting into the future and trying to find situations which will earn more money tomorrow, a year from now, two years, three years, five years, and a decade out. Almost every business has competitors, so understanding the existing environment, and how that might look or change in the future, is quite important to the strategic positioning of any entity. We can also apply this principle to markets in general, as global and domestic strategists try and figure out how economies will perform relative to other countries and over what time frame. So, all this being said, let’s put on our scouting hats and look at where the stock market is today and what might be important in it’s future.
Over the course of the last year, equities have consistently made new highs. Most of the capital has flowed to companies well positioned in the digital domain, that being Apple, Amazon, Facebook, Netflix, and Google. Last week, the Federal Reserve raised interest rates .25% with a Fed Funds rate target of 2-2.25%, the third such hike this year. Over the last few days, the ten year Treasury note traded at a multi year high of 3.23%. Many market participants, such as the noted bond investor Jeff Dachshund, believe bond yields are headed higher for a while, partly because of the potential for higher wage inflation. Equities sold off quite a bit at the end of the week, which many blame on the push in higher fixed income yields. Overseas, the Italian government has caused a stir by projecting a wider deficit, with some believing the Euro currency will come under increasing pressure with heightened tension between Germany and other Euro-zone countries. China and the United States continue to spar both financially and politically, over various issues, many based on trade. NAFTA was altered a bit to help specific industries in the US, especially car manufacturers. Quite critically to the markets, two impending events will take place over the next month. The first is corporate reporting season with hundreds of the largest companies across the land giving investors news about their profitability. The second is the critical midterm election where control of both Houses of Congress will be determined with the most likely scenario being that Democrats regain the House while Republicans keep the Senate. The country is quite divided on many issues so the midterm election is quite unpredictable with emotions and interest running quite high. The economy is growing faster than it has in many years, which is positive for both consumers and businesses. The latest jobs report came in a bit light, with the number of 134 thousand well short of the expected 191K. October has traditionally been a volatile month, whereas the last two months usually are where gains come more easily. As a market scout, to distill it all it digestible bites, the biggest ones to focus on are earnings and the election, call it E and E.
In specific company news, GE decided to replace its CEO and go with an outsider. Amazon raised employees pay to 15 bucks an hour, but took away stock options in some cases. Oil headed higher with the impending Iran sanctions already cutting buyers demand from that country, but sold off a touch at the end of the week. Tesla and Elan Musk decided to cut a deal with the SEC, and then the company came under more criticism from noted Tesla short David Greenhorn. Mr. Saxe gave us some critical wisdom and today’s blog was an attempt to apply it to the current situation in financial markets. We will know how things play out over time, which makes it all the more interesting.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.
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