Market Pulse: On earnings and interest rates
We’ve become so use to wide daily swings that the media seldom even acknowledge them.
On Monday the Dow rose 300 only to fall 180 on Tuesday. Stocks are volatile, but year-to-date most indexes only have minimal gains.
While success as a stock investor is mostly about anticipating future earnings and interest rates, in the short term any number of factors can impact prices, as we’ve seen. Every week’s economic data are simple enough. Numbers are numbers.
Other factors unrelated to Wall Street and not even quantifiable can set a tone and make investors more optimistic or less so.
Most of this year’s stock selling came at a time when the yield on the 10-year Treasury note was steadily rising. Cause and effect? Yes, some say. Not so fast. Although the 10-year Treasury rate is above 3 percent, the income vehicles I follow haven’t retreated much.
A couple rose a touch, most fell a bit. Nothing unusual there. So I concluded that investors using real money, not like the media and analysts using mere words, are not concerned that rates will keep rising.
Utility stocks, always held up as the one sector to avoid when rates edge higher, have moved sideways for the last four months.
I’ve mentioned this dichotomy before to support my view that rates will not rise far. Conditions, both for inflation and credit demands, won’t call for significantly higher rates. Sure, the yield on the 10-year Treasury could go to 4 percent or even higher. Stock investors need not worry. If it rises that far (still relatively low) it will be because the economy is strong and credit demands are rising. Importantly, profits would be rising as well and with them stock prices.
One more point: Forecasting interest rates has always been a humbling business even at the highest levels on Wall Street and in Washington. And it will continue to be.
No matter how certain one is about their course, things can happen. For that reason the prudent thing to do is have exposure to vehicles that will do well if your forecast is correct, but also have some that will do well if just the opposite happens. Not necessarily 50-50, but have exposure to both.
For that reason I’ve held onto the Utilities ETF (XLU) and a couple utility stocks. I’ve also held the preferreds and exchange-traded debt. Good thing, too.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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