Brouwer & JanachowskiJanuary 29, 2016
A quieter week with stocks pretty much unchanged but still down around 2% since year-end. The action continues to be Treasuries with the Ten-Year note at 1.92% compared to 2.29%, when the Fed raised rates in December. Here’s the Treasury yield curve in mid-December and now.
Nearly every maturity is lower. So, if the Fed was trying to signal further rate increases and concern about the employment and inflation trade off, the market is ignoring them. Why?
- Growth: as we mentioned here, GDP growth was never going to hit the Fed’s target and today fourth quarter growth came in at 0.7%. One bright spot was consumption at 2.2%. Now these numbers are subject to very heavy revision but it seems, yet again, annual growth stalled at 2%.
- Fed meeting: in its first of the year, they acknowledged global market turmoil and threw in a “closely monitoring” clause. We bet they are.
- Bank of Japan: it’s not often that the BOJ makes headlines but today they announced negative rates of 0.1%. In the weird world of zero and negative rates, this should prime spending (why save if you're punished?). It may yet do so but we see this as a gamble to lower the yen against the Yuan. This chart shows the connection between stocks and the yen.
Yen down, stocks up. Which we think will remain for a while. Also, remember the BOJ does things differently with QQE. That extra “Q” is qualitative. This means they’re buying stocks, corporate bonds and real estate. That’s good for stocks.
Put all this together and we get slow growth, flat to modest earnings in stock and long-term bonds a good place to be. Just buying long dated Treasuries in the last month provided a 5% return.
Bottom Line: While there is no immediate catalyst for markets, patience will pay. The worst of the downside may be over but we're watching carefully.
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--Christian Thwaites, Brouwer & Janachowski, LLC
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