Sometimes I like to share the views of others, views that deserve serious consideration. One of those views is that the Federal Reserve is about ready to tank the stock market.
Although there are some, not all of those who believe this think the Fed is about to drive a stake through the heart of the bull market in stocks on purpose. Others think the Fed will do so as a part of its typical blundering.
105 years of Fed calamities and dollar destruction convince us that both views are possible. Let me sketch some of the evidence.
Interest rates are flirting with levels that haven’t been seen in seven and a half years. The benchmark 10-year Treasury bond traded this week with yield of almost 3.23 percent, the highest since May 2011.
Behind that climb lies three increases in the Fed funds rate already this year.
Meanwhile, the chairman of the Fed, Jerome Powell, has virtually promised more rate hikes in the not-too distant future. Stock market investors have already lost $1.5 trillion this year following speeches from Powell. That calculation comes from JPMorgan Chase & Co. analysts.
Today’s sky-high stock prices are the result of years of massive interest rate manipulation by the Fed on the downside. If lowering rates drove the markets to these levels, what will a regime of higher interest rates do?
Bond expert Jeffrey Gundlach of Doubleline Capital said this week that bond market action, with the 30-year Treasury having closed twice over 3.25 percent, foretells significantly higher rates. “The last man standing was the 30-year, and it has definitively broken above a multiyear base that should over time carry us to significantly higher yields,” he said.
Let’s sample some other opinions:
“We look for 10-year Treasury yields to hit 3.5% at some point – later this year, early next year – and I think that’s going to be a real problem for stock markets.” – Bob Baur, Principal Global Investors
“Although some say the neutral rate is difficult to observe, stocks see the barrier quite clearly. A ‘maximum tolerable peak’ for the fed funds above the neutral rate has been associated with bear markets since the late-90s global-debt boom.” – Stifel analyst Barry Bannister.
“The Powell Fed is playing with fire.” – Bretton Woods Research
Let me be blunt: Higher rates are not good for stocks or bonds.
Those of our clients that have enjoyed the stock market run over the last ten years are strongly encouraged to move profits into gold now.
As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at 602-955-6500 or toll-free at 877-354-4040.