SENTIMENT U-TURN ON BOND MARKET CONCERNS

The major stock market averages rolled over this morning. The Dow is currently down 379 pts and the SPX is off by 1.7%. The Nasdaq is down 2.1%. Energy, financials and materials—the sectors that tend to do poorly when interest rates drop—are down by more than 2% in early trading. On the other hand utilities, real estate and consumer staples—defensive sectors that do well in slower growth, lower-rate markets—are in the green. European stock markets closed down more than 1.5%, although most of Asia was in the green overnight. Commodities are mostly lower today. WTI crude oil backed down to $58.50/barrel. The bond market is rising as yields fall. Clearly, some capital is draining out of stock and flowing into bonds today. The 10-year Treasury yield fell to 2.43%, the lowest since December 2017.

Media commentary is decidedly more bearish today. There are the usual “fears over global growth” headlines that seem to be a cut-and-paste every time stocks dip. But today is a bit different—falling bond market yields are grabbing attention. First, the yield curve (mentioned yesterday) continues to flatten. The yield on the 3-month Treasury Bill, 2.46%, is now higher than the 10-year Treasury Note, 2.43%. In other words, part of the Treasury curve is now inverted. The key spread between the 2-year and 10-year Treasury yields is still positive, but barely so. The reason this is of such interest to investors is that the yield curve tends to invert in advance of economic recessions. Second, the German 10-year sovereign bond yield just slipped back into negative territory for the first time since 2016. The yield went negative after a disappointing report on Gerrmany’s manufacturing sector. Apparently, economic growth is slowing further in Europe, which is already dealing with an uncertain Brexit plan and recession in Italy.

The flip-flop from high optimism after the Fed meeting on Wednesday, to the dour mood today should be treated with skepticism. The fundamentals of investing don’t change that quickly. But it could be that stocks are looking for an excuse to dip. The SPX has climbed about 13% since bottoming on December 24th, and one should expect a period of consolidation after such a sharp recovery. That would be considered normal. Remember, though, the news media needs to sell excitement and nothing does that like the words “bear market” and “recession.” So we’ll no doubt get a ration of that in the coming weeks.

US existing home sales recovered nicely in February to an annualized rate of 5.5 million transactions. That’s the fastest rate of sales since last August. Sales activity has been falling over the last couple of years due to low for-sale inventory and low affordability. But with a strong job market, rising wages and now lower mortgage rates, we can probably expect some type of rebound.


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