If it isn’t one thing it’s another–always something.
So as income investors we watch interest rates–which are the primary driving force of share price movements. On the other hand both macro economic factors as well as company specific financials certainly have effects on preferreds and baby bond share prices.
This week we have had a sharp downward movement in interest rates. On Tuesday (Monday was a market holiday) the 10 year treasury closed at 3.31% which was 7 basis points above the close from the previous Friday–then the 10 year yield fell by 15 basis points on Wednesday and another 8 basis points today to close at about 3.07%. This close is 40 basis points under the high from the past month at 3.48%.
In theory with rates moving this much lower we should have seen a rally of some magnitude–but it was meager – about 1% thus far. It is obvious that fears of a recession and the resultant damage it would do to corporate profits is outweighing falling interest rates. Of course falling rates for a couple of days means little as it is highly likely they will pop back up soon.
Next week Wednesday we will have the PCE (personal consumption index) Inflation numbers for May released and it is said that the Fed pays attention to this inflation indicator more than any other. You can be certain that if this number comes in above expectations interest rates will re-inflate quickly.
All of the “expert” commentators, as well as the ones on this website, don’t really have any idea as to where interest rates are headed in the next several months. Why–because there are too may unknowns as to the future of the U.S. economy in the next several months. We all have to make our own decisions as to how to invest our funds.
I am about 30% in cash and intend to invest it in preferred stocks and common stocks as they go lower in price. Definitely not trying to pick the bottom, just gradually buying as prices go lower.
I definitely believe that the Fed will back off if we appear to be headed into a severe recession. All this talk from the Fed about firmly controlling inflation is just talk. When push comes to shove, the political pressure on the Fed will be more than they can bare. If politically necessary, the Fed chairman will be removed and an easy money replacement will be installed.
In addition, and very importantly, the U.S. can’t service its enormous debt with high interest rates. We made our bed with easy money the last several years and now it’s time to pay the piper. Next step for the U.S. is a low low growth stagnant economy such as Japan has been experiencing for many year. JM2C
This what you said is very true Randy
“All of the “expert” commentators, as well as the ones on this website, don’t really have any idea as to where interest rates are headed in the next several months. Why–because there are too may unknowns as to the future of the U.S. economy in the next several months. We all have to make our own decisions as to how to invest our funds.”
Last week I mentioned I was moving some of my safe money allocation into 9 and 12 month treasuries because their yields had spike to 2.84 and 3.03% respectively. Someone asked me why now, why not wait knowing the Fed was still raising and my answer was it is hard to know what exactly the market is baking into existing rates. So I was going to buy in some now hold some funds and see what happens with rates in a month or so. Well those same 9 and 12 month rates today were 2.71 and 2.83% My point being what you said, we all have to make decisions based on our goals and plans and no one can predict where rates fluctuate given the various unknowns. So I am like you – buy some when opportunities present themselves but still keeping enough dry powder for future buys
How would a Fed chairman be removed?
This ‘splains part of it…
https://fred.stlouisfed.org/series/BAMLC0A4CBBB#0
https://fred.stlouisfed.org/series/BAMLH0A0HYM2
Grid & Tim – You are right, spreads are starting to widen. I believe every hiking cycle we have seen the fed funds rate above PCE which currently sits at 5.2%. We better hope PCE comes down. That’s going to hurt if it doesn’t.
Thanks for this note, Tim. Given all of the dire predictions out there, I thought this piece published this morning in the WSJ was interesting:
+++++
America’s Cash Hoard Could Cushion a Downturn
Americans have something that they usually lack heading into a recession: A lot of cash
…
“All that cash doesn’t mean that people will spend willy-nilly, especially if worries about the economy continue to mount. And when it comes to the durable goods such as washing machines and couches that people loaded up on over the past two years, a lot of consumer appetite has probably been sated. But the sort of belt-tightening that typically comes with a recession might not happen, which would blunt the depth of any downturn—or prevent a downturn from coming at all.”
Shared link to article from WSJ:
https://www.wsj.com/articles/americas-cash-hoard-could-cushion-a-downturn-11655991031?st=xo94agcbmhpqh0b&reflink=desktopwebshare_permalink
Most cash ever, and the ironic gasp about it the average investor will buy at the top with it, when your next door neighbor has a stock tip.
The contrarian part of me looking at very bearish sentiment indicators and now the 10 year treasury in the 3,s adding that the fed is boxed in with rate hikes and short term debt. We are not far off from a break in rate hikes, maybe the bottom SP 3200- 14X forward PE?