ALL BETTER NOTHING TO SEE HERE
I recently spoke to a group and quipped that if you didn’t pay attention to the bond market in 2023 you would be inclined to think it was a ho-hum year, as the 10-year Treasury yield ended the year right where it started. Of course, at one point it did close at a high of 4.99%, so the trip from and back to 3.88% was definitely not in the category of “uneventful”. We are a full-service shop, meaning we manage a variety of equity and fixed income strategies and alternative funds as well. Regular readers know I come from a bond background and most of my direct investing time is spent on bonds. Last year our Senior Leadership team held an offsite, and the keynote speaker emphasized keeping the “main thing as the main thing”. Right now, whether it is stocks or bonds, the “main thing” is what is going on with rates.
After ending 2023 at 3.88%, the 10-year Treasury has currently moved back to 4.13% and this is an increase of 23 basis points over the last 30 days1. The 2-year Treasury has increased to 4.41% over the last month, representing a move of +8 basis points1. The 2s-10s remains inverted and this has historically presaged a recession. As I have written recently, the consensus view and hope are for a soft landing. I am writing this just before 8:00 a.m. while traveling on Amtrak heading to spend a few days with our equity team in the Boston office. Stocks have been melting up at the same time that rates have increased. More recently, the review of December retail sales shows that while up, there are cracks in the consumer. The employment market is also showing signs of stress and job growth is slowing. So, with all of this as a backdrop, I spent some time this morning reviewing credit spreads and they remain tight by any standard.
What does this all mean? I think the logic is that stocks have increased some due to money on the sidelines and a general belief that the Fed will lower inflation to an acceptable range. While this is occurring, we will see an economic flow down that will approximate a soft landing and cause the Fed to start unwinding all the Fed Fund increases thus leading to more equity gains. All better and nothing to see here!
We, however, remain skeptical of this idyllic view of the markets and the world. The U.S. is directly engaged with the Houthis, and this is a proxy war with Iran. Nothing is better with the Ukrainian situation or the conflict in Gaza, and unless Nikki Haley can stage a massive surge, we are back to Biden versus Trump. I personally think that if Trump is the nominee we will see a change in the Democratic ticket, with Gavin Newsom being an obvious choice for the Democrats.
You see, things are not all better and there is plenty to see here! With that said, we will be working on our thoughts of where to next and will be back!