In case it’s not on your calendar, today marks the twentieth anniversary of Alan Greenspan’s famous “irrational exuberance” speech. Legend holds that the Fed chairman, who was thought to be around 120 years old at the time, came up with the term one morning while writing a speech in his bathtub. Good luck getting that one out your head.
Ten-year U.S. Treasury yields just hit a 17-month high of 2.38%
The wrinkled Fed chief’s watery reflections, which have come to claim a place among the most iconic in financial markets history, swirled around the idea that asset prices were reaching unsustainable levels. According to Mr. Greenspan, who’s now around 150, his nifty turn of phrase was intended to spook the markets. Like the image of the Fed chief in the bathtub.
November 2016 was the worst month for Treasuries since December 2009
Unsurprisingly enough, the senior banker’s efforts to that end were a spectacular failure. Stocks slumped briefly and slightly, but rebounded quickly and sharply. All in, equities rallied post-irrational-exuberance-speech for more than three years before the dot-com bubble finally popped in 2000, when Mr. Greenspan turned 180.
The 10-year Treasury note is up 100 basis points from its all-time low in July
We hear that the really-former Fed chief isn’t so worried about stocks today, even as key equity benchmarks set higher and higher records. No, our old banker buddy is far more concerned about the bond market and the recent sharp rise in interest rates. “Once a bubble emerges,” says our centuries’ old friend, “it is difficult to do anything to stop it that won’t have a major negative impact on the economy.” We’re only hoping he wasn’t in the bath.
What the markets have been doing…
While the post-election rally took a bit of a break, traders, doubtlessly animated by visions of fiscal stimulus and faster economic growth in their heads, never stopped working. Indeed, what appeared to be stability in the broad benchmarks masked significant volatility among the underlying sectors, with investors trading out of defensive stocks and those sensitive to higher interest rates and moving into sectors that would benefit the most from a cyclical upturn in the global economy. The narrowly focused Dow benefited the most, boosted by strong performance from bank and energy,stocks. Conversely, the tech-heavy NASDAQ underperformed considerably.
Outside the cyclical rotation, the biggest story of the period was likely OPEC’s agreement to cut production in an effort to boost prices. The surprising agreement immediately sent the commodity itself and stocks of oil exploration and production firms up nearly 10%.
|Index||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
Amid the political hoopla, the bond market was responding to real economic data, and solid data at that. Good numbers on personal income gains, manufacturing activity, and construction spending helped push the yield on the 10-year Treasury note to its highest level since mid-2015 as bond prices sank. In the otherwise quiet high yield space, energy sector bonds reacted favorably to news of the OPEC agreement. Municipal bonds underperformed Treasuries, as investors continued to face a rising yield environment and a sizable new issuance calendar.
|Fixed Income||Yield||Two-Week Yield Change|
|30-Year Municipal Bonds||3.27%||+0.27%|
Look out below!!!…
With plenty of money and a scarcity of deals, private equity firms’ cash levels are the highest they’ve been since the depths of the financial crisis
Quotes of the Week…
“The average retail investor will be slow to change direction in their (bond) mutual fund portfolios.”
Tom Roseen, head of research services at Lipper
Number of the Week…
The number of temporary workers Amazon is adding at its U.S. warehouses for the peak sales season
What Fund Architects has been doing…
Between the U.S. elections, Federal Reserve activity, and OPEC meetings, not to mention the normal flow of economic data, November promised to be an interesting month. It did not disappoint. Across the 30-day stretch, all the big U.S. equity benchmarks touched new highs, Treasuries were routed, oil rallied, and emerging market bonds were decimated. Underneath it all, sectors were repositioning themselves in dramatic ways. The month was, in other words, an excellent environment for the Fund Architect’s systematic investment process.
The Global Financials position we took at the beginning of November worked out quite favorably. Election results sent U.S. Treasury rates higher, with the hopes of increased growth and fiscal stimulus. Bank stocks received a boost from these higher interest rates, along with the promise of decreased regulation.
Based on our December rankings, we sold the portfolio’s Global Financials position as well as Global Technology, which we’ve held for several months. Based on our sector rankings, we repositioned the assets into U.S. Mid Cap equities (MDY) and Global Industrials (EXI). U.S. equities continue to outperform their international counterparts.
Fixed Income Changes
Rising interest rates in November hammered most fixed income sectors, not least of which U.S. Treasuries. Happily, we reduced our exposure to Treasuries in November in favor of Bank Loans, which have very little interest rate exposure. For December, we are selling our Convertible Bonds and increasing cash. From where we sit, it’s better to be cautious in this dangerous interest rate environment.
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