In an era when playing fast and loose with the facts seems de rigueur, not only for the newsmakers but the media covering them, you are bound to get some carryover to the mundane world of economic and financial news. But in financial media what you get is opinion and speculation about assumed facts. The reporting on Friday’s market was based on this process, with zero real analysis or perspective.
Assumed Fact: When the Fed moves to raise rates, this market is toast!
On December 18, 2013 the S&P 500 stood at 1810.65 and the US Treasury 10-year note was in the process of spiking to a 3.0% yield. This is a fact! Why is this important? It marked the official beginning of the tapering of Quantitative Easing (QE), which would take eleven months to complete. This was the Dreadful End of Quantitative Easing (QE). We wrote about it at length. At the time the media had it pegged as the beginning of the end of the bull market that had commenced in March 2009.
What actually happened? QE ended October 29, 2014. Fear of economic weakness brought in a ton of “safety trade / risk-off” buyers to the 10-year Treasury. The yield dropped to 2.39%. During the same period the S&P 500 rose to 1983 (almost 10%). (another verifiable fact)
December 15, 2015, almost 14 month after the end of QE, after many fits and starts, the Fed finally took action raising the Fed funds target rate by 1/4 point to 0.5%. The 10-year was trading around 2.25%, again lower than the rate at the end of QE. (FACT)
With oil on its way to $26.00 per barrel, as a result of a ‘supply glut’ and not slowing demand, and with other commodities collapsing, the punditry was at DEFCON1. The flight-to-safety trade was in full force as we moved into February with the 10-year trading below 1.7%. On the Brexit vote in late June, at the height of the panic, the safety trade took the 10-year yield to 1.37%. (Another Fact).
As of the market’s close, Friday September 9, the 10-year yield stood at 1.66% with the S&P 500 close at 2128. The 10-year yield is about half of what it was when QE ended. The market is up roughly 10% during that same period (FACT).
So, what have we learned? It would appear that fear in the market is so powerful that it trumps greed. When the Fed raises rates, or threatens to raise rates, market participants, fearing a move in rates might bring on an economic slowdown, race to the safety of long-date treasury securities and gold, thus negating the effect the move in short-term interest rates might have had on the long end. Also, because these moves on theFed funds rate are so minuscule and far-between, it would appear that they hold little or no negative implications for the economy.
The only other thing that I can fathom for these sharp spikes down on Fed pronoucements is that trading in today’s market is so dominated by computer-algorithmic forces it fails to recognize the nuances in these small moves. In other words, please don’t confuse my computer with the facts.
In the case of the media the formula is the same. Please don’t confuse my writers, bloggers, on-air personnel or pundits with the facts. We know what markets do when rates go up! They continue to ‘saw the same old sawdust.’
What’s your take?
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