Risk/Reward Vol. 341
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Clearly, Mr. Market does not read the papers or watch the news. If he did, he would conclude that the current Administration is out of control and that we are heading, full throttle over a cliff. In such times, why would any rational investor up his/her stake? And yet, the Trump rally continues with the week ending on record highs. Why? Promised tax reform? Yes--- as discussed below. Deregulation? Most certainly. Look at bank stocks. With the promise and reality of relief from the Dodd-Frank Act, bank stocks as a group are up 27% since the election. Coal companies are back from the brink of bankruptcy now that executive orders neutralizing those of Obama have been signed. And master limited partnerships are doing well in a world that welcomes Keystone XL, Dakota and other major pipeline projects.
As for Mrs. Bond, she obviously reads the news, but does so with a healthy dose of skepticism. Fed Chair Janet Yellen took a decidedly hawkish tone this week in her testimony to Congress. She stated that a rate increase will be under consideration in March. Almost immediately the rate on the all important US 10 Treasury Bond rose to 2.5%. But by week's end, Mrs. Bond had digested other, less hawkish parts of Ms. Yellen's testimony including her statement that the Fed's bloated balance sheet will not be reduced any time soon. By Friday's close, the 10Year rate settled at 2.42% almost exactly where it had begun the week. My interest rate sensitive portfolio lost some ground following Yellen's testimony. That said, the stocks comprising it tend to lag movements in the 10Year so I look for them to recover next week.
So why is the bond market so stable while the stock market continues to rise? After all, the Trump rally immediately following his election saw the stock market gain at the expense of the bond market. Last November the rate on the Ten Year spiked from 1.8% to over 2.5% almost overnight. If the current rate stability is of interest to you (and it certainly is to me) I suggest you read John Authers' well reasoned article published in yesterday's Financial Times. It is available free of charge via a Google search. Authers submits that the two markets reflect opposite bets on the amount of tax and spending stimulus that Trump will be able to get from Congress. The stock market is betting a lot; the bond market not so much. I am with Mrs. Bond, at least in the short run. The next few months should be interesting. There will be winners, and there will be losers, at least according to Authers.
Stocks in the oil patch took a hit this week on news that gasoline consumption in the US fell to 8.2million barrels per day in January, a 4.4% year over year decline, and that a record 259million barrels remain in storage. Despite this, the domestic oil rig count grew to 597 last week, a major increase since this summer but still well below the 1609 oil rigs that were operating domestically in October 2014. Who would have thought just a few years ago that we would be talking about an oil glut? Thanks to fracking no one ever hears the phrase "peak oil" anymore. American ingenuity is marvelous.
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