Market Pulse: Words matter
Yes, words. I’m referring to two words in particular, “recession” and “tariffs.”
Investors are taking them seriously. They should, because stocks don’t do well ahead of a recession, and no one knows when the tariff skirmish will end or its ultimate impact.
Treasury rates have fallen sharply. Not long ago the 10-year Treasury yield was 3.25%. Now it is 2.13%. Under what conditions would today’s yield be attractive?
That is 2.13% before taxes and inflation. Perhaps a condition in which prices are falling (deflation). Possible, if only temporarily in a recession, but very unlikely. Perhaps in a financial crisis like we saw in 2008, but banks are healthier than ever. They made $60 billion in the first quarter, up 8.7% year over year.
The only condition that would explain rates falling so low is a pervasive risk aversion among investors concerned about growth and perhaps a recession. That is not a new condition. Many trillions of bonds in Japan and Europe trade with negative yields.
Other issues are close to negative and central banks are cutting rates. In all likelihood rates will be cut here. Virtually all economists expect a cut later this year with 60% seeing one next month.
Add it all up and you have a slowly weakening economy amid concerns for growth here and abroad plus lingering or worsening problems with trade and tariffs. Our trading relationship with China is unfair, but ongoing confrontation is in no one’s interest. China wants a deal, but they might wait to see the outcome of the next election.
Investors are playing it safe, buying stocks in companies unaffected by tariffs.
Energy infrastructure companies are good examples. Enbridge and Kinder Morgan, with their high yields, have edged higher.
Utilities have done well and set an all-time high.
Large drug companies like Merck and Pfizer have also done well.
These companies and others in those sectors are pretty much out of harm’s way and have good yields that are especially attractive now.
A rally would gain more legs and may be explosive if there is a hint of some progress with China on tariffs. All involved are using tariffs as bargaining chips in the bigger negotiations. Still, investors don’t really know what to make of this. They must still be fairly confident since stocks are up 15% year to date and within striking distance of an all-time high.
There are even better days ahead.
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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