Reduced Long-Term Bond Rating
Investing Environment Review and Outlook – Volume 32
Reduced Long-Term Bond Rating
We cut the bond rating to a bearish 1 this month after the Fed announced they would again expand their balance sheet by purchasing $60 billion of Treasury Bills a month until April 2020. In prior cases of Fed purchases during three quantitative easing programs in 2009, 2011 and 2013, the 10-year yield rose in every case, between 1.2% and 1.5%. With rates so low, any rise in yields has a big effect on bond prices. For instance, the 10-year Treasury bond has a duration of 9.0, meaning that a 1% increase in yield translates to a 9% decline in price, 5x the current annual yield of 1.8%.
Separately, our economic outlook indicators reached 60 for the first time since April, suggesting the economy will likely accelerate unexpectedly in early 2020. In the 6 cases since 1990 when economic outlook indicators reached 60 and the ISM index was weak like today, the 10-year yield rose every time an average of 1.7% over the following year. In addition, the ISM index rebounded higher to an average of 58 (from 48) within a year.
3rd Fed Interest Rate Cut: Bullish for S&P 500
On October 30th the Fed cut the Fed Funds target for the 3rd time this year, to 1.75%. In the 16 prior cases since 1928, the S&P 500 was up an average of 6.7% 2 months later and 12.5% 6 months out. There is no return lag for third cuts like we saw in last month’s letter for 2nd cuts. Combining interest rate cuts with balance sheet expansion, the Fed is providing significant liquidity for stocks and bond yields to go higher.
S&P 500 Strong through October: Bullish for November and December
The S&P 500 was up 21.0% from January through October this year. Since 1950 there were 11 prior years that were up over 18% through October. The average return in November and December combined was 6.5%, and all were higher. The worst year was 1975 up 2.0% and the best year was 1954 up 13.6%. Recent cases were 2013 up 5.7% and 2003 up 6.2%. Also the next 5% move from November 1st was up in all the cases.
In summary, Goldilocks conditions remain, the most bullish environment for stocks. However, this year the Fed and seasonality improve the odds further. The Fed is cutting rates and buying securities for their balance sheet, the most potent lever they possess. The fourth quarter is positive historically, but this year the conditions are stronger with the S&P 500 up 21% through October. Our U.S., foreign and emerging market stock ratings remain at a bullish 5 ranking. Commodities and gold rankings remain at a neutral 3, but we could see more favorable conditions ahead if the economy strengthens, as we expect. Thank you for your support and please contact your advisor with any questions.
This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
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Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2019
Director of Market Research
Michael Schaus is the Director of Market Research for Brenton Point Wealth Advisors and Zweig-DiMenna. Since joining Zweig-DiMenna in 1992, his focus has been on macroeconomic research, the analysis of…READ MORE
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