Past the Point of Fundamentals: It's All on the Central Banks

The post-season for Major League Baseball is in full swing and the World Series features two teams with the best pitching, the most consistent hitting and great defense.

Sorry Cubbies fans… fundamentals matter!

Last week brought more poor earnrnings results and 2016 earnrnings are being lowered substantially. But what made stocks move late last week were promises by the European Union for continued quantitative easing.

Piling on top of those promises by the EU for continued easing, the Chinese central bank cut interest rates for the sixth time in a year last Friday. Traders sold out of the safety of U.S. Treasury bonds and bought more stocks.

Even yesterday’s poor new home sales report along with a disappointing Dallas Fed manufacturing survey didn’t send stocks much lower. So, as long as central bankers are helping out, investors won’t be inclined to sell their stocks.

It seems that fundamentals don’t matter in today’s market. Investors aren’t looking at the current state of our economy or even future corporate earnrnings. They are just looking for more help from central banks around the globe and wondering if, hoping that our Fed follows suit.

And that’s the big if!

With equities trading near all-time highs, and the economy doing relatively okay at least compared to the rest of the world, an interest rate hike is a little more likely.

Fed Chair Janet Yellen can certainly hold off on raising rates based on low inflation and wage growth. But maybe she’ll look at the bubbling stock market and hike anyway. We’ll have to wait and see if the Fed caves to internrnational pressure (again) and holds off on a rate hike.

While stock market volatility has been high, bond volatility has been extremely low. The chart below shows the long-term Treasury yield has gone nowhere in the last month (red arrow) but the longer trend lower is still intact (green arrow).

30 Year US Treasury Bond 30 Days 10-27

It’s very likely the Fed will continue to talk about a possible rate hike, but I doubt they’ll act without an improving economy.

Over the longer term, U.S. Treasury yields should continue to fall unless fundamentals improve in our economy, and Dent Digest Trader subscribers are well positioned for the longer term trend.

Lance Gaitan

Editor, Dent Digest Trader