What exactly are investors worried about?
Stocks and Treasury bonds were routed last Friday, with the Dow Jones suffering the biggest one-day drop since the Brexit vote in June of 2016. The long-term Treasury bond suffered its worst drop since the election in November of 2016.
Monday mornrning, Jay Powell was swornrn in as the new Chair of the Federal Reserve. In his statement following the ceremony, he reiterated that “the economy is growing, and inflation is low,” and he and his colleagues at the Fed “will support continued economic growth, a healthy job market, and price stability.”
Powell also assured us that “our financial system is now far stronger and more resilient than it was before the financial crisis that began about a decade ago…”
Remember when, just last June, former Fed Chair Janet Yellen said that another financial crisis like the one that happened in 2008 was not likely in our time? She was referring to Fed actions in regulation and intervention along with current Fed vigilance in preventing a repeat of 2008.
No doubt as comforting to you as it is to me!
Powell’s assessment that the economy is improving is in fact supported by recent data. Take a look:
- Employment has been strong, spending and business investment have been solid, and wage growth is starting to tick higher.
- Last week’s data supports Powell’s statement. December’s Personal Income and Spending data were strong, and income beat expectations of 0.3% at 0.4%. Spending was expected to grow 0.5% but came in at a healthy 0.4%.
- The Fed’s preferred inflation measure, the personal consumption expenditure price index (PCE), came in as expected. The core (ex-food and energy) index fell year over year to 1.5% but is still far below the Fed’s 2% target.
January’s Institute for Supply Management’s (ISM) Manufacturing Index came in better than expected. New orders were the best in 10 years, and backlogs were strong, while input costs are at six-and-a-half-year highs. The overall number was held down by employment, signaling employers can’t find enough workers to keep up with production.
And the January employment situation report was solid, as non-farm payrolls increased by 200,000 and beat the expected rise of 175,000. More important, wages grew 0.3%, as expected, but the year-over-year growth rate surprised the market by jumping to 2.9% versus an expectation of 2.6%.
So, is good news now bad news?
The data is improving, yes, but the stock market has moved way ahead of itself, as Harry has mentioned many times.
Aside from a stock and bond market bubble, gridlock in Washington, and another possible governrnment shutdown, what’s there to worry about?
Apparently, a lot! The stock market tanked another 4%-plus on Monday. Treasury bonds improved a bit, as long-term yields moved above 3.12%. But by the end of the day they were back near 3%, as investors moved out of some of their stocks and into the safety of bonds.
Volatility has spiked over the last couple trading days, as you might have expected. In Friday’s selloff, the CBOE Volatility Index, known as the VIX, closed at 17.1, up about four points from Thursday’s level. On Monday it closed at about 33, up nearly 100%. This mornrning the VIX is around 50, up another 185%!
Equity markets are again under pressure, so it stands to reason that volatility is elevated. Treasury bonds are also under pressure, and yields are on the rise.
My Treasury Profits Accelerator readers are already positioned for a rise in long-term Treasury rates. Are you?
Editor, Treasury Profits Accelerator