Category Interest Rates / Bonds

Equity Risk Premium Isn’t There

The S&P continues its impressive six week rally - up over 22% from its early April low of 4,835. At 5,916 - this represents a forward price to earnings (PE) ratio of ~22x - with earnings per share (EPS) expected to be ~ $270 this year. If we take the inverse of 22x - that gives us the market's earnings yield; i.e., 4.56%. The question whether 4.56% represents a good risk/reward? There's an easy way to answer that... let's explore.

Market Sweats Trump Tweets Over Powell

What matters more to the market: (a) a Trump tweet on any potential trade deal; or (b) Jay Powell's statement on monetary policy? If you ask me it's the former. Today's statement from the Fed was almost a non-event for the market. Powell maintained rates in the 4.25% to 4.50% target range (which was expected). However he told the market that the risk of "higher unemployment and higher inflation" have risen since their last meeting. That's problematic...

Trump Wants Lower Rates – Will He Get It?

Trump is demanding the Federal Reserve lower rates. However, Fed Reserve Chair Jay Powell - is having none of it (and nor should he). This is setting up another showdown between the President and the world's top central banker... a repeat of what we saw in 2018. As we all know Trump is a real-estate guy. Property is a business that relies heavily on cheap money. And this is the same lens Trump is taking with respect to his growth agenda. But he may not get what he wants...

Are We Closer to a Market Bottom?

It's very difficult to know if we're at or close to a market bottom. They rarely occur over the space of weeks - it generally takes months. But I cannot predict when (or what) the bottom will be. However, I think the ~20% correction from the market high (6147) to the low (4834) tells me a large portion of the selling is behind us. For example, we're now starting to see equity exposure significantly reduced and cash levels raised. This is a good sign... as there are a lot less people to sell.

Fed Minutes: Time to Pause QT?

Four things caught my eye with yesterday's release of the January Fed Minutes: (i) worries over tariffs and their impact on inflation; (ii) some members suggesting the fed funds rate is now close to neutral (not the majority); (iii) concerns over the pace of balance sheet reduction targets; and (iv) inflation needing to come down more before lowering rates further. Makes sense to me... But I can't help but wonder when Powell ran a victory lap last September - whether it was premature.

The Key to Growth: Business Investment

With 10-year yields trading around 4.50% (with the possibility to go higher) - why haven't equities sharply corrected? It's a good question. For e.g., on the surface, one might think equities would struggle given the zero risk premium investors are receiving. But that has not been the case. The stock market has withstood the sharp rise in bond yields (for now anyway). However, I believe there is a simple explanation. It's the amount of liquidity in the system. Liquidity is abundant - evidenced by the very low credit spreads in the market (participants see very little risk). Generally credit spreads widening are your first sign of trouble.

Bessent Wants a Lower 10-Yr Yield… But How?

The new US Treasury Secretary - Scott Bessent - is focused on the right goal. He wants a lower US 10-year yield. The former Hedge Fund manager knows how important a lower US 10-year treasury is to the growth of the economy (and the government). His direct language reflects a reality - as most people don't borrow at the short end (i.e., the rate set by the Fed)

The Market’s Addiction

If you needed reminding the market remains closely tethered to monetary policy - we received it this week. Stocks surged on the back of two things: (i) CPI coming in slightly better than expectations; and (ii) the prospect of the Fed having more room to ease rates. Bond yields dropped and stocks jumped. There's nothing quite like the sniff of cheaper money to get the animal spirits moving. However, it's still far too premature to jump to conclusions.

A Bad Day for the Fed

A few months ago Jay Powell claimed victory. Last Sept he said words to the effect of "the time has come to start easing rates". He initially cut rates by 50 points - followed by two more cuts of 25 basis points. Markets were thrilled at the thought of more cheap money - pricing in as many as 6 or 7 rate cuts over the next 12 months. However, at the time I asked why the need to cut? The data simply didn't support it. Jobs were fine. The economy was growing. Inflation was not yet at its desired level. Why cut? However, whilst the Fed was busy running a victory lap - the bond market was less convinced. The US 10-year yield went the other direction -- and appears likely to retest 5.0% in the next few months. What does this do to valuations?

What Could Possibly Go Wrong?

It would not surprise me to see 2025 repeat the drawdowns we saw in 2022. And we could see 10-15% lower in the first half. For example, during Q4 2021 - I warned of excessive valuations (specifically in tech). That was timely. However, it's different this time. 10-year yields are now above 4.70%. And should they continue their march towards 5.0% - valuations (and earnings) will be challenged. That said, Wall St. "experts" are assuming significant earnings growth for next year (evidenced by the average 6,600 2025 target at an expected 25x forward multiple). They're adopting a "lottery ticket" mentality - where the majority of investors naively expect extraordinary returns with little regard for downside risks.