April 11, 2016

The Markets

It’s like déjà vu all over again!

This wasn’t the first quarter, or even the first year, that bond markets have not performed in the way Wall Street strategists have expected.

During 2014, bond yields were expected to rise. They did not.

During 2015, bonds were predicted to finish the year yielding about 2.8 percent to 3.3 percent. On December 31, they were at about 2.3 percent.

In the first quarter of 2016, despite persistent predictions yields would move higher after the Federal Reserve’s rate hike, yields fell and bond values increased.

Looking back in time during January of 1982 , the 10-year U.S. Treasury yield was about 14.6 percent. Since then, rates on Treasuries have declined and investors have reaped the rewards of steadily rising bond values.

The Federal Reserve began tightening monetary policy in December 2015 by raising the fed funds rate. Late in the month, the rate on benchmark 10-year Treasury bonds reached about 2.3 percent. Quite a bit different from 1982 I’d say.

Overseas, the picture was a bit more complicated. An expert cited by Bloomberg explained, “Of the five countries that performed best – Germany, Belgium, Denmark, Japan, and the United Kingdom – the two-year debt of all but the United Kingdom has negative yields.”

When bonds have negative yields, investors are paying to lend their money. Why would anyone do that? The Economist reported there are three types of investors who buy bonds when yields are negative: 1) central banks and other entities that must own government bonds, 2) investors who expect to make money when a country’s currency gains value, and 3) investors who would rather suffer a small loss in government bonds than risk a bigger loss investing in something else.
That something else might have been a stock market during the first month or so of the quarter. Globally, stocks underperformed bonds, returning 0.4 percent for the first quarter of 2016. However, the end-of-quarter return doesn’t really tell the whole story. Fears of global recession, among other things, produced a wild ride for stock market investors during the first months of the year. Worldwide, stocks were down about 11.3 percent through mid-February and then gained 13.2 percent to end the quarter slightly higher, overall.

At the end of last week, the Bureau of Labor Statistics’ monthly jobs report showed more people were looking for jobs, increases in employment exceeded analysts’ expectations, and average hourly earnings had moved higher. These were positive signs for the U.S. economy.

Investor Feelings

The American Association of Individual Investors (AAII) surveys investors weekly about whether they are bullish, bearish, or neutral on stock markets for the next six months. Last week, the majority of participants indicated they were neutral. There was less bullish sentiment than the previous week, but bulls maintained a slight edge over bears:

  • Bullish: 27.2 percent
  • Neutral: 47.1 percent
  • Bearish: 25.8 percent

The AAII also asked whether participants were better off, worse off, or as well off as they had been eight years ago. More than one-half (54 percent) said they were better off. The remainder was almost evenly split. Twenty-four percent indicated they were not better off, and 23 percent said they were as well off.

Weekly Focus

This reminded me of the first quarter market volatility:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…”

-Charles Dickens, A Tale of Two Cities

Image used in accordance with Creative Commons 2.0 Generic License.

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