In the wake of the last Federal Reserve meeting and monthly jobs report, interest rates fell. That helped set off the strongest rally in stocks since November 2021. But will concerns about Treasury supply derail that strength? Or will the market finally move past rate worries and focus on other things that matter…like corporate earnings? Top MoneyShow expert contributors weigh in this week.
The US Treasury had to issue more debt recently because they could not issue any before the debt ceiling deal, and also because they have to issue more bonds at much higher interest rates to pay the coupons on the ones they had issued already. The situation is starting to look like an out-of-control debt spiral.
Debt
On the chart above, you can see how quickly we went from $22 trillion in Treasury debt (in mid-2019) to over $33 trillion at the end of September 2023.
There were three notable bumps. In 2020, it was COVID spending (necessary to prevent the economy from entering a Second Great Depression). Then it was the Biden Administration’s pet spending projects in 2021 and 2022. Then, the last four rising columns on the right represent the turbo-charged issuance after the debt ceiling deal, coupled with surging interest rates.
As I have stated here before, the deficit situation is not a Republican or Democratic problem, but a deeply entrenched national problem. All four administrations since 2001 ran deficits, but with different excuses. My simple point is that I think we are running out of excuses. Out-of-control spending that was supposed to help the economy recover will end up running it into the ground at a time when interest rates rise at a record pace.
Surging Treasury yields should be self-correcting, in theory; if they rise too fast, they can cause a recession, which by itself will push them lower, along with falling inflation. The reason this has not happened yet is because of the mountains of fixed-rate debt not yet affected by the yield spike.
For example, in the US we have a huge base of fixed-rate mortgages. When interest rates rise, most mortgage payments stay constant. This is not the case in many developed markets in Europe, where a rise in interest rates pushes mortgage payments higher for everyone.
Treasury Yield
As for the Treasury market, an oscillator like the Relative Strength Index is starting to make lower highs, as we are making higher highs in yield, similar to October 2022. All we need is a few weak economic releases or, worst-case, the military situation in Israel to deteriorate, and the 10-year rate could fall closer to 4%, faster than most would anticipate.
Robert Isbitts ETFYourself.com
The shifts in investor sentiment have been a whipsaw. Maybe this is the start of a generational opportunity to “buy the bottom” in long-term bonds. Or, maybe it is just Lucy pulling the football away from Charlie Brown again as he’s about to kick it. Let’s see what a quick set of charts does to help us understand the story the market is trying to tell us.
First, here is the chart of what’s driving a lot of the sudden sense of urgency for some investors. The iShares 20+ Year Treasury Bond ETF (TLT) is an ETF that tracks 20-to-30-year US Treasuries, which tend to be more volatile than shorter-term bonds. And is that ever an understatement lately!
iShares Barclay
The pink line shows the downtrend in place since late 2021. You can see how in August of this year, its rate of decline increased. That dropped the price of TLT by more than 15% in just three months.
The near-term market reaction has been “buy the bottom in long-term bonds.” But while TLT quickly jumping through the pink downtrend line is encouraging, it’s not “game over” for bond bears. The blue line is a more important target, since anything short of that is a “bear market bounce.”
Conclusion: The recent rally in TLT and its peers is a good start. But I still see it as a high-reward/high-risk situation.
Second, for much of this year, the Invesco QQQ Trust (QQQ) was the only thing in the global stock market showing up. The returns of the top seven or eight stocks were so big, it masked the very low positive or negative returns of most of the market during 2023. QQQ dipped by about 11% from July until last week, when it burst out of the gate like a thoroughbred.
QQQ
And while the S&P 500 looks like it is having a tepid, tenuous bear market rally, still within its trading range, QQQ just peaked its head above its recent downtrend line. So, perhaps there’s another 4% rally in store until it regains the full amount of that recent drop.
Even if that happens, my question is, then what? With so many laggard effects on the economy from the Fed’s 11 rate hikes just starting to hit the economy and employment levels, can the stock market just keep blowing it off? No crystal balls here, but the stronger the “Naz” and its small number of giant stocks carries the load, the more it starts to look like the “safe haven” asset, the only place where stock returns can be had.
I’m not on board with that yet, but I do know that this is the time of year where professional money managers may feel pressure to play catch up. Or “chase” the part of the market they didn’t own when the QQQ was soaring earlier this year.
Hilary Kramer GameChangers
Earnings for the S&P 500 are now trending 2.7% above last year’s levels. That doesn’t look like much, but it’s the first progress we’ve had to work with in about a year. Positive growth is a good thing. Companies with expanding cash flow are logically worth more over time. Every share is more valuable in real terms.
And the thing about growth or any other dynamic trend is that there’s a time component. When investors buy low and sell high, it usually means we buy a company when it’s smaller, hold on for the intervening growth, then sell our stake in the bigger enterprise for more money than what we put in.
This is how the market normally functions. Corporate earnings tend to increase over time. These aren’t static entities that drift around the economic landscape. They’re run by smart people with vision and the power to execute their growth agendas, investing money in the present to lay the groundwork for that kind of value creation.
Anyway, it’s good to see that once again those smart people are collectively creating more value than outside forces like the Fed, labor strikes, war, and bond yields are managing to destroy. The current quarter should be even better…enough to tip the entire year into the “progress” category. And then from there, 2024 looks like business as usual for Wall Street.
What I like about these numbers is that it isn’t just Amazon (AMZN). It’s a lot of consumer stocks like Nike (NKE) and Whirlpool (WHR). It’s Domino’s Pizza (DPZ) and even strike-plagued General Motors (GM). The banks are doing well. The chip makers are doing well.
And it’s worth noting: There’s always a recession somewhere, just like there’s always at least a relative boom elsewhere in the economy. The kind of “recession” the government economists care about is so deep and so broad-based that it affects almost everyone, one way or another.
From Silicon Valley’s perspective, last year was the recession. They laid off a lot of people and emerged leaner and more profitable than ever. As far as the banks go, the whole of the past decade was the long recession: Zero interest rates poisoned the traditional lending business and made it very difficult for these institutions to do more than support themselves.
Suddenly the right balance sheet is a competitive advantage. We’ll see merger talks as bankers try to fit the right deposits onto the right loan books and come out the other side with a stronger joint enterprise. Those who don’t want to sell will accept premium prices to change their minds.
These are good things for investors. The present finally looks better than the past in fundamental terms. The future looks even better. While you might not want to buy a lot of stocks at these levels, there’s nothing wrong with holding onto what you already have here.
Lindsey Bell, Barry Ritholtz, Jeff Hirsch
In this interview, Lindsey Bell is Chief Strategist at 248 Ventures and a CNBC contributor. Barry Ritholtz is Founder and Chief Investment Officer at Ritholtz Wealth Management, as well as the creator of Bloomberg Radio’s “Masters in Business” podcast. Both acclaimed market experts spoke at the 2023 MoneyShow/TradersEXPO Orlando – and took time out there to chat for this MoneyShow MoneyMasters Podcast double episode.
