Let It Ride

Let it ride.  Stocks climbed to new highs yet again as investors believe in a bright trade future. NAFTA 2.0 was approved by the Senate in a rare show of bipartisanship.

 

N O T E W O R T H Y

 

• It was twenty years ago today.  Where were you twenty years ago?  For that matter, where will you be in twenty years from now?  I am a big advocate of long term planning, especially when it comes to financial wellness, and in my view twenty years out is worth considering.  If you are, the US Treasury has some good news for you.  Last night WHILE YOU SLEPT, the Treasury announced that it was going to offer 20-year bonds. Treasury bonds, as we know them today, were first introduced in 1963.  The word “bond” distinguishes them as issues with maturities greater than 15 years.  Back then, the bond had a 25 year maturity but ultimately became a 30-year maturity in the 1970’s. The treasury bond is also referred to as the “long bond” and was an important benchmark for bond traders in the 80’s and 90’s.  In 2001, treasury bond issuance was suspended when the government began to aggressively cut down on the national debt.  Imagine that concept.  That didn’t last too long as the bond was re-introduced in 2006.  By that time the 10-year treasury note took over as the bellwether issue and has remained in that position since.  Demand for long bonds was lower than in prior years as the flatter yield curve meant that investors were not getting enough premium to lend their money for an additional 20 years.  Or maybe investors just became a little more short-sighted. Long bonds today are mostly utilized by insurance companies and pension funds who match up maturities with future obligations.   Today the Treasury offers treasury bills (T-bills) in 4, 8, 16, 26, and 52 week maturities, treasury notes in 2, 5, 7, and 10 year maturities, and treasury bonds with a 30 year maturity.  A new 20 year bond is not only good for institutions who are maturity matching, but also investors who may want to think about where they might be in 20 years from now.
• Enjoy responsibly.  I hate to keep being “that guy”, but it is my responsibility to make sure that you have some facts.  In case you haven’t noticed, stocks are hot, scoring five new all time highs since the beginning of 2020… just 17 days old.  Some rallies are fundamental rallies, which means that stocks go up when companies are healthy and the economy looks strong.  Other rallies are sentiment rallies which are driven by animal spirits and momentum… call those feel-good rallies, if you like.  Wanna give a guess on what this current upsweep in stocks is?  Spirits are high and for good reason.  The Fed has been accommodative in rates and liquidity injections and trade just got a big leg up this week with the signing of the Phase One trade deal and Congressional approval of the USMCA (taking over for NAFTA).  Earnings season started this week and the first group out of the gate were the banks which had mixed, but ultimately positive results propping the market as well.  I brought up valuations earlier this week but would like to re-emphasize that the forward P/E ratio of the S&P500 is now around 18.4.  That is the highest, or richest, level since 2002!  Before you try to figure out whether it is justified, remember how I opened this passage… this is a momentum rally which has little to do with fundamentals.  If you agree with me, investors need to keep their eyes on the driver of the rally.  That would be the Fed.  If the Fed stops playing ball well… things could get dicey.  One other thing about momentum rallies, just about any bad news item could derail them with stinging results… though the market seems impervious to bad news these days.  All of this comes back around to diversification.  The only way to responsibly participate in this rally is through diversification.  Enjoy responsibly.

 

THE MARKETS

 

Stocks traded up yesterday finding fresh ground on positive trade news and continued strength in retail.  The S&P500 climbed by +0.84%, the Dow Jones Industrial Average advanced by +0.92%, the Russell 2000 jumped by +1.36%, and the NASDAQ Composite Index traded up by +1.06%.  Bonds pulled back and 10-year treasury yields inched up by +2 basis points to 1.80%.

 

NXT UP

 

– Housing Starts are expected to have grown by +1.1% compared to last month’s +3.2%. growth.

– Building Permits are expected to have decreased by -1.5% month over month compared to last month’s growth of +0.9%.

– Industrial Production may have slipped by -0.2% compared to last month’s growth of +1.1%.

– University of Michigan Sentiment is expected to be 99.3, same as the prior reading.

– Philadelphia Fed President Patrick Harker and Fed Vice Chairman Randall Quarles will both speak today.

– This morning State Street Corp and Schlumberger beat while Fastenal and J B Hunt Transportation missed earnings estimates.

– Next week is an abbreviated week with markets closed on Monday for Martin Luther King Day.  Later in the week we will get some more housing numbers, Leading Economic Index, some regional Fed reports, and Markit Manufacturing PMI.  Check back on Tuesday for details.

 

daily chartbook 2020-01-17