U.S. Treasury bonds have been in a bull market for nearly 35 years, with prices rising and yields falling. Therefore, much of the U.S. population has never witnessed a bear market for bonds, and the majority of their adult life has been lived in an era of declining interest rates. Inflation has been under control for about the same amount of time, although most people have witnessed rising prices in some aspects of their lives.
Some pundits began declaring the imminent arrival of a bear market for bonds in 2008. However, the then 27-year-old bull market paid no attention to the gloomy prognosticators and continued on its remarkable run with only minor setbacks. Today, yields are much lower than they were eight years ago, so it is clear that 2008 was not the end. It will end one day, but predicting when it will happen has proven to be elusive.
The Federal Reserve “controls” short-term interest rates. However, its influence diminishes quickly, or perhaps is nonexistent, with respect to longer maturities. Case in point: The Fed raised short-term interest rates back in December, its first such increase since June 2006. Meanwhile, the 10-year Treasury yield went the other direction, falling from 2.3% on the day before the hike to 1.7% today. The 0.6% drop may not seem like much, but in percentage terms, today’s rates are 26% lower than they were on the day before the Fed began raising rates.
A week ago, the 10-year Treasury yield was about 1.8%, and Fed watchers thought the next interest-rate hike would arrive this summer. Today, a Fed move on interest rates is pretty much off the table for a number of months, and Treasury prices have rallied as the yield fell back to 1.7%. The reason for these abrupt changes was last Friday’s release of the monthly employment reports. Employers added only 38,000 new jobs in May—far below the consensus estimate of 160,000 and an 86% plunge from a year ago. Buried behind the headlines was an even more disturbing fact—people leaving the labor force outpaced job growth at a 17.5-to-1 ratio.
As a result, Federal Reserve Board Chair Janet Yellen wasted no time in trying to reset market expectations. In a previously scheduled speech on Monday, she proclaimed, “new questions about the economic outlook have been raised by recent labor market data.” The Fed has been saying the next move will be data dependent, and it is now saying the current data readings do not look too good.
Meanwhile, stocks are taking this changed outlook in stride. The S&P 500 Index is within a percentage point of establishing an all-time closing high, and all major stock categories are trending higher. The continued upward move in bond prices was previously discussed, and in a rare display of unity across asset classes, commodity prices are also on the rise.
Helped by crude oil moving back up above $50, Energy and Materials continue to deliver the one-two punch of sector leadership. Utilities, Health Care, and Industrials all moved two places higher to round out the top five spots. Their rise forced Financials and Technology three spots lower. Although Technology’s recent rally appears to be thwarted by this retreat to seventh place, it is still well-positioned to jump back into the upper tier. Consumer Staples climbed out of the basement and increased its relative ranking position by two slots. Telecom and Consumer Discretionary managed to increase their momentum scores over the past week, but that did not prevent them from sliding lower in the rankings. Consumer Discretionary is now in last place.
Mid-Cap Value’s 13-week reign over the style rankings has now ended. Even though it managed to boost its momentum score over the past week, the four smallest capitalization categories all zoomed past it. Small-Cap Growth sits at the top today, followed by Small-Cap Blend, Small-Cap Value, and Micro-Cap. Although not in perfect alignment, the style rankings are now clearly arranged in an inverse capitalization relationship. Large-Cap Value, Large-Cap Blend, and Mega-Cap moved lower and all now reside in the lower half. Large-Cap Growth already sits on the bottom and could not move any lower. Despite their fall in the rankings, the Large-Cap categories did not weaken on an absolute basis and remain in solid uptrends. It is just that their smaller brethren are displaying stronger intermediate-term strength.
Canada is on top again, and Latin America is still on the bottom. Other than those two, you might not recognize the rankings of the other global categories compared to a week ago. Emerging Markets made a miraculous jump from 10th to second place, and its strength appears to be coming from multiple sources. Russia, Peru, Nigeria, and the Philippines are among the countries displaying strong momentum. Although Emerging Markets appears to be in a three-way tie for second place, this does not diminish the impressiveness of its recent rise. Other global categories moving higher included World Equity, Pacific ex-Japan, China, and the Eurozone. The U.K. was the only global category to post a momentum decline, and while its score was only reduced by a point, its ranking plunged from third to ninth. The U.S., EAFE, and Japan all slipped lower on a relative strength basis. Latin America posted a great week and flipped from red back to green. However, it was not able to move out of last place.
“It is one thing to be data dependent. It is another to be data point dependent.”
— Drew Matus, UBS economist
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