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.

IMPORTANT DISCLOSURES

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.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
All marks referenced herein are the property of their respective owners. This Report is licensed for non-commercial use only, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an institution, without written authorization from Brenton Point.
Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2019

Brenton Point - Careers

Michael Schaus

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…

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