Main financial assets discussed:
- Inflation
- Interest rates
- Treasury yields
- Medical Properties Trust (MPW)
- S&P 500 (SPY)
Top 3 key points:
1. Negative real rates have been the norm for the past two decades, but currently, we likely have positive real rates. It is important to use the right measurement periods to evaluate real rates accurately.
2. Inflation should be defined more precisely, and the use of trailing data for housing in inflation indexes can lead to underestimation or overestimation of market price changes.
3. The Federal Reserve may raise rates again, driven by the desire to maintain a tough image and the market's optimism about a no-recession scenario. However, strong real economic growth is unlikely.
Recommended actions: **Hold**
### Summary
The US economy and markets appear to be in good shape, with a strong stock market, low inflation, and low unemployment. However, there are potential risks on the horizon, including the impact of the Federal Reserve's monetary tightening, supply and labor shocks from the pandemic, political polarization, and the possibility of another government shutdown. While the overall outlook for investing remains uncertain, it's important for investors to prepare for any eventuality.
### Facts
- The US stock market is close to its 2022 peak, inflation is less severe than a year ago, and the economy remains strong with low unemployment.
- The Federal Reserve has raised interest rates by 5 percentage points, which could lead to economic growth faltering.
- The US economy is facing supply and labor shocks from the pandemic and commodity shortages caused by Russia's war with Ukraine.
- Falling prices in China could contribute to disinflation in the US and elsewhere.
- Political polarization in the US and the possibility of another government shutdown could negatively impact the economy and markets.
- Despite the resilience and stability of the economy and markets, there are still risks to consider, including a crisis in commercial real estate and the potential for inflation to flare up again.
- Some economists and surveys predict a 50% probability of a recession occurring within the next 12 months.
- Investing should be based on a long-term outlook and a diversified portfolio, with cash on hand to cover expenses.
Note: Due to the nature of the text provided, some of the facts may be subjective or based on the author's opinion.
### Summary
Wharton finance professor Jeremy Siegel believes that increased productivity will prevent a resurgence in inflation in the US.
### Facts
- đ° Wharton finance professor Jeremy Siegel is not worried about inflation rebounding in the US, despite the signs of a resilient economy.
- đź GDP is expected to grow 5.8% over the third quarter, according to an estimate from the Atlanta Fed.
- đź Job growth and wage growth remain strong, with the US adding 187,000 payrolls and hourly earnings up 4.4% year over year in July.
- đź The recent improvement in statistics is attributed to a turnaround in productivity, which was poor last year.
- đź Siegel believes that the bounce-back in productivity will keep inflation in check and justify higher wages.
- đź However, other experts, like BlackRock, are more skeptical about the path of inflation.
- đź The Fed remains concerned about inflation and is open to more tightening measures.
- đź Stocks have slid as investors bet on the Fed hiking rates before the end of the year.
### Summary
The S&P 500 returns over the last one, five, and ten years are only slightly above their long-term averages, suggesting that the stock market is not unanchored from reality. However, the performance of long-term US Treasuries has been poor, with even 10-year Treasuries resulting in losses over the last five years. Slower economic growth may be on the horizon, but it remains uncertain whether it will be enough to bring down inflation rates.
### Facts
- The S&P 500 returns over the last one, five, and ten years are only slightly above their long-term averages.
- The performance of long-term US Treasuries has been weak, resulting in losses for investors even after accounting for coupon payments.
- Slower economic growth may be on the horizon, but it remains uncertain if it will bring down inflation rates.
- The nature of the stock market rally suggests that investors are still searching for buying opportunities rather than thinking about selling.
- Energy, industrials, and financials have become favored sectors, while technology stocks have started to decline.
- The Chinese economy is struggling, with retail sales and industrial production growth slowing down.
- The Federal Reserve has expressed concerns about inflation but also noted downside risks to the economy.
###
đ Money managers who loaded up on US government bonds as a bet against recession are now facing subpar returns and a deepening selloff as Treasury yields rise.
đ The annual return on US government bonds turned negative last week as Treasury yields reach a 15-year high, suggesting that interest rates will remain elevated and the economy can handle it.
đ Bob Michele, CIO for fixed income at J.P. Morgan Asset Management, remains undeterred and is buying every dip in bond prices.
đ Other prominent money managers, including Allianz Global Investors, Abrdn Investments, Columbia Threadneedle Investments, and DoubleLine Capital, believe that the impact of Federal Reserve rate hikes is just starting to be felt by the economy and predict a recession.
đ Fund managers are making adjustments to duration to hedge their positions, with some shortening duration while others maintain overweight positions.
đ Historical patterns suggest that rate hikes often lead to slumping economies, but it remains uncertain whether yields will follow the same pattern this time.
đ The borrowing needs of wealthy economies and the flood of debt issuance may lead to higher yields.
đ Despite the current environment, some funds that took short bond, long stock positions have faced significant drawdowns, indicating that rates may remain elevated.
đ J.P. Morgan's Michele is confident that bond yields will fall once the Fed finishes its tightening cycle, even before the first rate cut.
### Summary
- European stocks rebound after a drop last week, while bond yields rise ahead of the Fed's Jackson Hole event.
- China's smaller-than-expected rate cuts and weak economic data disappointed investors.
### Facts
- đ European stocks edge higher after last week's rout.
- đ China stocks hit a 9-month low as rate easing underwhelms.
- China's central bank trims its one-year lending rate by 10 basis points, while leaving its five-year rate unchanged.
- Expectation remains for further stimulus from China.
- Asian shares decline due to disappointment, with Chinese blue chips falling to a nine-month low.
- Energy companies outperform as oil prices rise.
- Oil prices edge higher after a seven-week winning streak.
- Bond market sell-off leads to higher government borrowing costs.
- U.S. Treasury yields continue to rise, with the 30-year yield touching a fresh 12-year high.
- The U.S. Federal Reserve's Jackson Hole conference is the key event for the week.
- Markets anticipate that Fed Chair Jerome Powell will address rising yields and strong economic data.
- Polls indicate that a majority of analysts believe the Fed is done hiking rates.
- Traders bet on a just under 40% chance of a final Fed hike by November.
- U.S. dollar trades flat after five weeks of gains.
- Gold prices affected negatively by the rise of the dollar and yields.
- Prices for liquefied natural gas (LNG) supported by a potential strike at Australian offshore facilities.
- Dutch payments processor Adyen's shares drop amid concerns over weak earnings.
- Earnings from Nvidia will be closely watched.
Note: The given content contains parts that do not match the provided date range.
US bond-market selloff continues as resilient economy prompts investors to anticipate elevated interest rates even after the Federal Reserve finishes its hikes, leading to a 16-year high in 10-year yields and increased inflation expectations.
A stock market rally is expected in the near term, as recent market corrections have created potential opportunities for investors to increase equity exposure, despite the possibility of a 5-10% correction still lingering. Additionally, analysis suggests that sectors such as Utilities, Staples, Real Estate, Financials, and Bonds, which have underperformed in 2023, could present decent upside potential in 2024, particularly if there is a Federal Reserve rate-cutting cycle.
US equity markets were relatively stagnant last week, with major indexes trading up and down around their 200-day moving averages, indicating a lack of direction and potential resistance, while Treasury markets appeared to stabilize despite an inverted yield curve, suggesting a potential recession on the horizon. Fed Chair Jerome Powell's hawkish speech on Friday emphasized the need for caution and the possibility of higher interest rates, while Nvidia's strong earnings highlighted the company's dominance in the artificial intelligence sector.
Stock investors have been reacting positively to "bad economic news" as it may imply a slowdown in the economy and a potential halt to interest rate hikes by the Federal Reserve, however, for this trend to change, economic data would have to be much worse than it is currently.
Jeremy Siegel, known as the "Wizard of Wharton," believes that the US stock market is in a good position due to receding inflation threats, and that the housing market is resilient as investors view both as valuable hedges against inflation. Additionally, a softer labor market could delay the Federal Reserve's interest rate hike until December.
Bond traders are anticipating that the Federal Reserve will continue with interest-rate hikes, and next week's consumer-price index report will provide further insight on how much more tightening may be required to control inflation.
The Federal Reserve is expected to keep interest rates steady and signal that it is done raising rates for this economic cycle, as the bond market indicates that inflation trends are moving in the right direction.
The upcoming U.S. Federal Reserve meeting is generating less attention than usual, indicating that the Fed's job of pursuing maximum employment and price stability is seen as successful, with labor market data and inflation trends supporting this view.
The Federal Reserve plans to continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities, which will have an impact on stock markets, while keeping interest rates at current levels due to the lagged effect of monetary policy and the need for the commercial real estate market to adjust; however, there are concerns about the impact of tighter credit conditions on hiring and an increase in strikes, particularly in the auto industry. Elevated interest rates will pressure dividend-income investors and affect Real Estate Investment Trusts (REITs), while the reduction of securities by the Fed may lead to a decline in stock indices. The Fed is considering raising rates in November or December but is uncertain about how long rates will remain at current levels. The core personal consumption expenditure is falling, and rising energy prices are increasing overall inflation, but the Fed is excluding energy prices due to volatility and suggests that high oil prices may impact its stance in the future. Stock market traders have a short-term time frame and may find instruments like Instacart (CART) and Arm (ARM) more suitable, while long-term investors should prepare for the market adjusting to the Fed's restrictive policy by moving capital gains into money market funds, considering energy stocks at lower prices, and being cautious of high-flying technology stocks and IPOs.
The Federal Reserve's updated projections suggest a potential shift in focus towards increased vigilance on unemployment and GDP growth, which may impact inflation; the US economy is expected to face significant constraints in 2024; active stock picking is recommended over passive index investing as valuations for the S&P 500 remain fair but not necessarily cheap; investment opportunities lie in tech product category expansion, penetration rate, and customer growth for struggling small and mid-cap companies, as well as in e-commerce; overall, investors should research alpha opportunities and be selective in their portfolio positioning for 2024.
The Federal Reserve's recent hawkish stance and the sharp tightening of financial conditions have triggered jolts in bonds and stocks, raising questions about investor positioning going into the final quarter of 2023.
The recent surge in bond yields, with 10-year Treasury yields hitting levels not seen in over 15 years, is impacting the stock market as investors shift their focus to safer bond investments, which offer higher yields and less volatility than stocks.
Rising Treasury rates and oil prices are creating an unfavorable situation for consumers, investors, and the economy, making it challenging for the Federal Reserve to manage inflation without causing a recession. The potential for a "soft landing" and decreased inflation remains, but the economy should prepare for possible sector-by-sector recessions and a full-blown recession, along with government shutdowns and fiscal policy disputes becoming normal occurrences. The discrepancy between short-term and longer-term rates controlled by the Fed has gained importance, with higher borrowing costs disrupting the stock and bond markets. In this volatile period, long-term investors should hold on and ensure they have enough money saved to weather the storm. While the Fed has pushed short-term rates higher, it has also benefited savers with higher yields on money market funds, short-term Treasury bills, and high-yield savings accounts. However, a strong dollar has impacted S&P 500 earnings, leading to a struggling stock market and increased costs for imports and exports. Rising interest rates pose the greatest economic challenge, affecting consumer loans and dampening spending. Traders who bet on long-term bonds have faced losses due to rising rates, highlighting the inverse relationship between interest rates and bond prices. As a result, it may be advisable to purchase shorter-term Treasuries and keep bond durations lower. The surge in bond yields has also disrupted stock investors' expectations of controlled inflation and the Fed's tightening, leading to stock market losses. The economy and markets may experience more turmoil, as there are various factors beyond the Federal Reserve's control.
Summary: Michael Pento, founder of Pento Portfolio Strategies, warns that a recession is still on the horizon due to policy lags and market risks, contrary to the optimistic outlook on the US economy, citing factors such as rate hikes, tightening lending standards, and indicators like the National Federation of Independent Businesses' survey, the Treasury yield curve, and The Conference Board's Leading Economic Index. Pento also highlights concerns over high valuation measures in the stock market, including the price-to-sales ratio, equity risk premium, and household equity ownership, suggesting that a stock market sell-off may be imminent. Other market veterans, such as Jeremy Grantham and Gary Shilling, share a similarly bearish outlook.
The U.S. bond market is signaling the end of the era of low interest rates and inflation that began with the 2008 financial crisis, as investors believe that the U.S. economy is now in a "high-pressure equilibrium" characterized by higher inflation, low unemployment, and positive growth. The shift in rate outlook has significant implications for policy, business, and individuals.
Billionaire investor Bill Ackman predicts that the Federal Reserve is likely done raising interest rates as the economy slows down, but warns of continuing spillover effects and expects bond yields to rise further.
The bond market is causing concern for investors, particularly due to the actions of bond vigilantes who have increased control over the Treasury market and are pushing up yields. This has raised worries about the escalating federal budget deficit and its impact on bond demand and market clearing. The vigilantes have also left the high-yield corporate debt market untouched, leading to speculation about their views on government securities.
The major stock indexes are expected to open lower as the 10-year Treasury yield hits a 16-year high, with investors monitoring employment data for potential impact on interest rates; meanwhile, stock futures in Asia and Europe slumped as the Federal Reserve's message of higher interest rates reverberates worldwide.
The recent surge in U.S. government bond yields, with prices falling, has raised concerns about the stability of the bond market and the economy, potentially leading to more bank failures and market upheaval.
Morningstar's chief U.S. market strategist, Dave Sekera, is closely watching economic reports, including the ISM and PMI readings, as well as payrolls and unemployment data, while expecting a slowing rate of economic growth but no recession; Sekera also discusses the rising yields on the 10-year Treasury, their impact on the stock and bond markets, and provides insights into sector and investment style performance and valuation heading into the fourth quarter
The Federal Reserve's shift towards higher interest rates is causing significant turmoil in financial markets, with major averages falling and Treasury yields reaching their highest levels in 16 years, resulting in increased costs of capital for companies and potential challenges for banks and consumers.
CNBC's Rick Santelli discusses rising bond yields and their implications for the Federal Reserve as he sees the Fed running out of options.
Concerns surround the upcoming release of U.S. payrolls data and how hawkish the Federal Reserve needs to be, as global markets experience a period of calm following a tumultuous week that saw Treasury yields rise to 16-year highs, crude oil prices drop, equities decline, and the yen strengthen. Japanese government bond yields are also causing concern, as investor sentiment towards the Bank of Japan's stimulus remains low.
The chaos in the bond market is largely attributed to the Federal Reserve, as panic over higher interest rates has led to a selloff in long-dated Treasurys, although some market experts believe this panic is disconnected from market fundamentals and that interest rates are unlikely to remain high for long.
Market observers are concerned about a sharp jump in Treasury yields similar to that of the 1987 crash, and Saxo Bank's chief investment officer Steen Jakobsen suggests that investors reduce risk by increasing cash balances, hedging portfolios, rotating into short-term bonds, favoring defensive sectors over cyclicals, and avoiding mega-cap stocks.
The fixed-income market is experiencing the "greatest bond bear market of all time" according to Bank of America Global Research, as the yield on 30-year US Treasuries hit a peak-to-trough loss of 50% and bond funds saw $2.5 billion in outflows, while shorter-dated paper and equity funds continue to see inflows.
Investors are awaiting the jobs report to determine the Federal Reserve's next move on interest rates, with wage growth and revisions to previous monthly totals being key factors to watch, amidst indications that the economy is less sensitive to rising interest rates due to lower household and corporate debt levels.
The rise in Treasury bond yields above 5% could lead to a more sustainable increase and potential havoc in financial markets, as investors demand greater compensation for risk and corporate credit spreads widen, making government debt a more attractive option and leaving the stock market vulnerable to declines; despite this, stock investors appeared unfazed by the September jobs report and all three major stock indexes were higher by the end of trading.
The Federal Reserve is expected to continue reducing its bond holdings despite the recent surge in bond yields, as key measures of volatility and liquidity in the bond market are not indicating a significant risk, and higher credit costs align with the central bank's goal of restraining growth and lowering inflation.
The Federal Reserve is facing a tough decision on interest rates as some officials believe further rate increases are necessary to combat inflation, while others argue that the current rate tightening will continue to ease rising prices; however, the recent sell-off in government bonds could have a cooling effect on the economy, which may influence the Fed's decision.
Investors' nerves were settled by dovish remarks from Federal Reserve officials, suggesting that rising yields on long-term U.S. Treasury bonds could have a similar market effect as formal monetary policy moves, potentially reducing the need for further rate hikes.
Despite disappointing performance in 2023, bond market experts believe that fixed income investments, particularly bonds, have a positive outlook due to the expectation that the Federal Reserve will soon stop raising interest rates. The rise in bond yields presents a buying opportunity, with reasonable valuations and high yields offering potential returns. However, the threat of elevated interest rates remains, impacting the value of fixed income investments. The experts advise diversifying within the fixed income asset class, considering options such as Treasuries, municipal bonds, and high-yield bonds, while being cautious about credit quality and duration.
Investors are closely monitoring the bond market and September CPI data to determine the Fed's stance on interest rates, with Seema Shah of Principal Asset Management highlighting the circular nature of market reactions to yield spikes and their subsequent declines. She suggests that while there are concerns about upward momentum, the equity market will find comfort in a continued drop in yields and could remain range-bound for the rest of the year. Diversification is recommended as the market narrative remains unclear, and investors may consider waiting until early 2024 for greater clarity on the economy and the Fed's actions.
The U.S. stock market is currently trading at a discount to fair value, and Morningstar expects rates to come down faster due to optimism on inflation; strong growth is projected in Q3, but the economy may slow down in Q4, and inflation is expected to fall in 2023 and reach the Fed's 2% target in 2024. The report also provides outlooks for various sectors, including technology, energy, and utilities, and highlights some top stock picks. The fixed-income outlook suggests that while interest rates may rise in the short term, rates are expected to come down over time, making it a good time for longer-term fixed-income investments. The corporate bond market has outperformed this year, and although bankruptcies and downgrades may increase, investors are still being adequately compensated for the risks.
As the U.S. national debt continues to rise and interest rates increase, concerns are growing among top investors about buying U.S. Treasurys and the potential for a debt crisis in the country. Regulators are working on reforming the structure of the Treasury market to avoid market failures like those seen during the COVID-19 pandemic, but progress has been slow and questions remain about whether it's enough. The rise of electronic trading and high-frequency-trading firms has also brought new challenges and instability to the Treasury market. With a growing supply of government debt and little discussion about deficit reduction, the stability and future of the Treasury market are uncertain.
A rise in bond yields and volatility, coupled with weak market breadth, suggests a potential market sell-off, as highlighted by the author's analysis.
Federal Reserve officials are expected to pause on raising interest rates at their next meeting due to recent increases in bond yields, but they are not ruling out future rate increases as economic data continues to show a strong economy and potential inflation risks. The Fed is cautious about signaling an end to further tightening and is focused on balancing the risk of overshooting inflation targets with the need to avoid a recession. The recent surge in bond yields may provide some restraint on the economy, but policymakers are closely monitoring financial conditions and inflation expectations.
Billionaire stock picker Ken Fisher criticizes the Fed and advises investors not to pay too much attention to its announcements, stating that the Fed never knows what it will do; Fisher suggests that the current stock slump is similar to previous ones and that the bull market will continue, offering his recommendations for stocks to take advantage of the market's resumption, including ServiceNow and Union Pacific.
According to Allianz Chief Economic Advisor Mohamed El-Erian, the impact of higher Treasury yields and the Federal Reserve means freezing the housing market, higher borrowing costs for households and businesses, and a lack of stability in the bond market, urging for greater vision from the Fed as the U.S. economy faces points of inflection.
The bond markets are going through a volatile period, with collapsing bond prices and rising yields, as investors dump US treasuries due to factors such as fears of conflict in the Middle East and concerns about President Joe Biden's high-spending approach, leading to higher interest rates and impacting mortgages and debt.
The recent market rout on Treasury bonds may have gone too far, as even prominent bond bears like Bill Ackman and Bill Gross are suggesting investors buy bonds, while Federal Reserve Chairman Jerome Powell believes the spike in yields may lessen the need for future rate increases.
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