Friday, February 2, 2018

Stocks Struggle Against Higher Bond Yields

Stocks may have had a wondrous January, but February is shaping up to be a story of a different kind.

Not only have yields on all manner of bonds risen with alacrity over the past three weeks, they show no signs of slowing, especially since the Federal Reserve has sent a signal to markets that the federal funds rate is going to be upped at last three times this year, the first hike scheduled at the next FOMC meeting in March.

Higher bond yields make stocks look less attractive by comparison, being that they are virtually without risk, as opposed to stocks, which can rise or fall on whims, trends, poor performance of the underlying companies, or without cause, simply because a company or a sector is "out of favor."

As the 10-year note created above 2.70% earlier in the week, stocks suddenly became not so much of a bargain, especially since valuations have been egregiously stretched as the nine-year-long rally in equities has exceeded all reasonable valuation metrics.

Countering the argument are the voices from the Trump train touting the meteoric rise in stock prices over the past year, and, certainly, the economy is in better condition than it was 12 months ago.

But, a strengthening economy has headwinds, such as higher wages and costs due to inflation, and that's being caused by the endless printing of fiat and buying of securities outright by central banks, which has distorted the landscape of global economics.

The rush to safety has begun, and, once started, such a trend is not easily pushed back. Investors should prepare for a sea change which will wipe out gains that have been largely the result of central bank intervention and stock buybacks by inefficient corporate managers.

At the Close, Thursday, February 1, 2018:
Dow: 26,186.71, +37.32 (+0.14%)
NASDAQ: 7,385.86, -25.62 (-0.35%)
S&P 500: 2,821.98, -1.83 (-0.06%)
NYSE Composite: 13,381.97, +14.01 (+0.10%)

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