Risk/Reward Vol. 267
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Give me one reason to stay here
And I'll turn right back around”---lyrics from “Give Me One Reason” sung by Tracy Chapman
“I'm friends with the monster that's under my bed
Get along with the voices inside of my head”---lyrics from “Monster” sung by Eminem feat. Rihanna
“Out along the edge
Is always where I burn to be
Highway to the danger zone”---lyrics from “Danger Zone” sung by Kenny Loggins
So what caused the stock market to “turn right back around” on Thursday with the Dow Jones Industrial Average and the S&P 500 both gaining 1.1% and the S&P setting a new record high? The financial rags on Friday were noticeably silent as to why. If I were to “give you one reason” it would be the disappointing Producer Price Index published Thursday morning. Unexpectedly, it showed that the average selling price of domestic products fell 0.4% in April. In the minds of many, this deflationary news lessened the likelihood that the Federal Reserve (which so desperately wants inflation at 2%) will raise rates any time soon. This caused the yield on the bellwether 10 Year Treasury Bond (“10 Year”) to drop more than 10 basis points by the close on Friday. Indeed, the Fed Funds Futures market now pegs the chance of a rate increase earlier than year end at less than 50%. No rate increase means a continuation of easy money, and easy money has fueled the bull market for the past six years.
But is that easy-money bet wise? “The voices in my head” tell me that a rate increase will happen this year. Will it happen in June? Now, probably not. In September? Could be. This year? Probably. And based upon the “taper tantrum” that occurred when the end of QE was first discussed in 2013, the reaction in the bond market will be swift and violent once a rate increase becomes more certain. See the discussions at Vols. 172 and 211 www.riskrewardblog.blogspot.com . For income investors such yours truly, the ones whose favorite securities trade in relation to the yield on 10 Year, a violent increase in rates is “the monster that’s under my bed.” Something that is always there; something that is to be feared and avoided.
Accordingly, if I remain mostly on the sidelines for the next several months, so be it. I do not see any segment of the market catching fire. Despite the nice run in the indices this week, they remain in a tight trading zone with returns in the 1-3% range; returns not warranting the risk. At my age and stage, I have no reason to be “along the edge”, let alone on a “highway to the danger zone.” In times past, that “is always where I get burned.” For the reasons discussed in the past few editions, I look for both the stock and bond markets to remain choppy for the foreseeable future.
When it comes to this market, I find solace in the lyrics of Kenny Loggins. When will the rate increase come? I don’t know. Certainly, I’m NOT prepared to announce:
“(This is it) Make no mistake where you are
(This is it) Your back's to the corner
(This is it) Don't be a fool anymore”
That said, I remain very cautious. “Footloose”, I am not. Instead, I am overweight in cash. There, “Dip, dip,dip/I’m alright/Nobody worry ‘bout me.”
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