Freaky Friday!

— Why freaky? We continue to plow the same ground and saw the same sawdust we have for the past 13 years.

— The media provides zero perspective as the “good news is bad news” narrative continues to rule.

— Money continues to pour into bulletproof  tech as a safe haven from an illusive, rate driven, yet to be seen recession–not an optimal strategy.

— The 4.763% yield on the 10-year note is normal in our current inflation environment … not a harbinger of bad things to come.

Why Freaky!

I’ll tell you why. I started publishing kortsessions.com in January 2013. Interest-rate-going-higher obsession has been a target of many of my posts–the continual sawing of sawdust. It is freaky. We just cannot seem to get passed it despite a ton of evidence that we should. I am attaching an excerpt from a post published March 18, 2013, “FBFH–Fed Bolt From Hell–The next big thing.”

The acronym FBFH was created by a media maven who felt the removal of Quantitative Easing (QE), the Fed’s bond-buying program to pressure rates lower and provide liquidity, would be a body blow to the S&P 500 which had just recovered all it had lost in the secular bear market beginning in 2000. For your reference the S&P 500 closed at 1560.70 March 18, 2013.

I responded in the following way:

Consider this.  Even though it may be spun to sound like the end of the world, FBFH (Fed Bolt From Hell) may really be a good thing that could propel the market forward after the initial emotional reaction. First and foremost, Q.E. was put in place to stimulate the economy and grow employment.  It was one of the final Fed measures taken in response to the 2008 financial collapse.  Sub 2% ten-year treasuries were not a long-term goal.  Ergo, if this policy is reversed, it is a strong sign that the Fed believes that the economy can stand on its own… something all would agree to be positive!

Obviously, the Fed continues to operate under this narrative and the Friday employment numbers would indicate that they are on the right track.

The Media and Perspective

These are really two words that should not be used in the same sentence. Instead of focusing on the fact that the economy seems to be performing well (not only in the category of lower inflation but also in job creation) they continue to focus on the Fed not lowering rate more quickly (possibly raising them because the economy may be strong/inflationary). Again, this has been an on-again/off-again narrative all the way to the current level of the S&P 500, 5827.04. If the financial media had been your guide in this spectacular bull market, it would be my guess that at best you would have been under-invested. Remember, the media goal is not to inform or educate. It is to keep your attention. Fear and bad news sell.

Is tech really bulletproof ?

Based on my experience (the “Nifty 50” of the 1970s and Y2K tech bubble–the past 54 years), NO.  We’ve seen this movie before, just when investors think they are most invincible, they are not. Valuation appears to be the Achilles heel this time around. Unlike the tech bubble these are real companies. Regardless, they can still be repriced downward. The perceived invincibility of tech is bolstered by legions of smaller/ inexperienced investors who might place their money in ETFs featuring tech stocks. Many of these are renters, not long-term holders. They can be very skittish and if they all try to leave the partyy at once, it can be quite ugly (reference Cathy Wood’s Ark Innovation fund portfolio–ARKK–$159.70 to $29.43, 2/21 to 12/22– minus 81.78%).

While the crowd has been parroting the mantra ‘in tech we trust’ they have been pouring out of economical sensitive stocks. Since the Russell 2000 hits its all-time high (11/25/24) it is down 11.23% whereas the S&P 500 has only shaved off 3.6% (1.54% on Friday) from its December high, all in the face of potentially ‘higher for longer’ rates.

What should the 10-year be yielding?

Based on the last 64 years the average yield spread between the 10-year US Treasury note and the rate of consumer price inflation (CPI) has been 200 basis points (2%). The rate of CPI inflation in the 12 months ending November 2024 was 2.7%. Add 2% and you have 4.7%. The 10-year closed out trading on “Freaky Friday” at 4.763%, right where it should be. Get used to it. We are seeing rates normalize.

Finally, we have been living with rates on the 10-year at or above 4% for nearly two. At the same time we have been living with an army of Cassandras forecasting doom on higher rates for much longer and in the face of a continuing good economy with growing employment.  Has this been helpful?

Parting thoughts

1) Energy came into focus with new Biden administration sanctions on Russian oil production. I’m not sure how durable these will be in the new administration. If Trump becomes a hardliner on Russia (anything can happen), prices could move substantially higher. If so, I believe these higher prices would act a a brake on the US economy. Even though inflationary, the Fed might be more inclined to cut rates if the higher prices appear to cause substantial economic weakness.

2) Tariffs and trade wars are not brilliant ideas. Hopefully the hedge fund guy he has nominated for Treasury can talk sense to Mr. Trump. If not his favorite report card on how he’s doing, stock prices, will set him straight.

2) The stock market is not a monolith. Even if tech gets beat up in here the economy seems fine and the vast majority of stocks are not overpriced.

What’s your take?

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.