It’s weird when the biggest news on an April 14th is not the panicked realization that tax day is tomorrow. This year, that’s not even top five.
Crazy stock market turbulence is probably first, although maybe bond markets should be. And even though you’re probably thinking that last week was horrendous in the stock markets, you would be happily wrong. Last week, the Standard & Poor’s 500 rose 5.7%, the Dow Jones Industrials rose 5%, and the Nasdaq Composite Index ended 7.3% higher. Wow! That’s an amazing week! Sadly, though, it came right on the heels of a week in which the S&P lost 9%, the Dow dropped 7.8%, and the Nasdaq fell 10%, right into bear market territory. And THAT week was preceded by a first quarter that also showed losses in stocks.
The most important fact to notice in all these gyrations is that after a terrible week, the market recovered to an extent. And if you had sold when everything looked bleak, you would have missed those big up days. They weren’t enough to overcome all of the losses from earlier in the month and year, but they were a good start.
The bond market is swinging wildly. Bond prices are set in the marketplace. Who will pay what I’m asking? And if no one, what is the most I can get? And bond prices set yields. In the last couple of weeks, while stock market uncertainty was riveting us, investors sold bonds, especially Treasury bonds, and forced prices down and yields up. Stocks and bonds falling at the same time is unusual. What is more typical is money moving out of stocks and into bonds (or vice versa), so that prices move in opposite directions.
What we’re seeing now is many investors (not all) selling Treasurys because the bonds no longer seem like a safe-haven asset. Investors, especially foreign investors who own a lot of Treasurys, are selling them – not to get a better yield elsewhere, but to get out of U.S. markets.
If you can think of the recent past as a really bad week followed by a crazy much-less-bad week, then in the middle of the really bad week, when the president suddenly reversed course on tariffs and called for a 90-day pause, that was because the bond market was suddenly weak. And it worried economists so much that the president was moved to act. What happened on Tuesday night was that Japan started dumping Treasurys, pushing prices down and yields MUCH higher. That would normally attract new Treasury buyers into the market, but it didn’t.
What happens if the U.S. is no longer the gold standard for international investing? It hasn’t happened yet, but there are cracks in the foundation. One of the biggest things to remember is that the U.S. is a debtor nation. We depend on Americans, and the government, and foreign countries, to buy our bonds to finance our debt. According to the Council on Foreign Relations, this year our government will pay more in interest on its debt than it does on defense. And international trade is critical to keeping the system afloat.
We buy foreign products and send dollars abroad. Foreigners use those dollars to buy Treasury notes and bonds. It works! The proposed tariffs are upsetting the system, and causing uncertainty in businesses who now don’t know how to plan for the future, and, of course, creating an enormous tax on American consumers. No wonder economists are widely deriding the across-the-board tariffs as a bad idea. We got a little relief at the end of last week when the president exempted electronic goods from the tariffs, but it was short-lived, as members of the administration said the tariffs would return in the near future.
Stock and bond market machinations recently have caused losses and gains for investors (depending on which side of the market you were on), but maybe more importantly, they have caused a loss of faith in the U.S. government as the financial leader of the world. Can we regain that trust? Yes, but we had better start before our usual investors find somewhere else to put their money. (For instance, Germany’s bonds are looking attractive.)
As always, but especially in turbulent times, we recommend that most clients hold onto their conservative asset allocations, rebalance infrequently, and don’t sell when things are bad. Every investor is different, though, and if you want personalized suggestions, please call us at 203.458.5220.
Inflation is a big deal these days, too, with the Federal Reserve and its Chairman Jerome Powell watching carefully for inflation to fall to near 2% so they can begin cutting the Fed funds rate again. And we actually got some good news on that front last week, when the Consumer Price Index (CPI) showed an annual increase in prices of just 2.4%. Getting closer!
But consumer-sentiment, as polled by the University of Michigan, measured its second-lowest level in history, at the same time that expected future levels of inflation rose to their highest level in 44 years. (Egg prices are up 60% compared to one year earlier.) When tariffs take full effect, we expect inflation to rise again.
For the week ending on April 11th, the S&P Index closed at 5,363, the Dow at 41,212, and the Nasdaq at 16,724. The yield on the ten-year Treasury finished at 4.493 – much higher than it yielded in August (3.95%), but just about the same as 11 months ago in May. U.S. crude oil cost $62.42 per barrel, N.Y. gold cost $3,229.30 per ounce, and one Euro was worth $1.14. That shows how much buying power the U.S. dollar has lost. On January 1st of this year, you could buy one Euro for $1.04.
Elizabeth E. Cook
Partner, Diastole Wealth Management
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) Axios, Bloomberg, Barron’s, Business Insider, The Economist, CNN, CNBC, The Wall Street Journal, The New York Times, The Washington Post, USA Today, Morning Brew, Yahoo Finance, MarketWatch, NBC, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220, or reply to this email to reach me, Liz Cook.
We’re watching many different markets reacting to the news in many different ways. But it’s helpful to remember that Warren Buffett once said it’s wise for investors “to be fearful when others are greedy and to be greedy only when others are fearful.” And if you’re looking for another positive note, remember that bull markets, “climb a wall of worry.”