(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
Here is the main headline on CNBC Today telling investors why the market ended the day in the red:
We saw this coming from a mile away. In fact, we have 2 direct trades that benefit from rising rates (tickers reserved for Reitmeister Total Return members). And we also know that this stock market bubble will likely end when bond yields and the earnings yield for the stock market get back to parity (discussed in detail in my latest online presentation: Is This ANOTHER Stock Market Bubble?).
Yet all that did not stop us from carving out a tidy profit today (+0.67%) while the overall market was bathed in the red. Let’s discuss all that and more in this week’s commentary.
Yes, bond rates are surging. That is because the Fed artificially compacted the 10 year rate to an unprecedented 0.5% earlier in 2020 to fight back against the implosion in the economy.
However, when the historical norm for rates is closer to 4%, then reversion to the mean had to kick in sooner or later. That is ESPECIALLY true as the historic size of stimulus coupled with massive Fed accommodation is starting to show some modest signs of inflation. So investors interested in NOT losing money have to demand higher rates of return on these bonds.
This has led to a doubling of Treasury rates over the last 6 months with much of the gains coming in the last month.
What is missing from the chart above is that a 1.3% yield on the Treasury rate is still VERY low. And it makes the stock market MUCH more attractive by comparison in that it offers an earnings yield closer to 4.4% as displayed in the chart below.
The key thing to note in this chart is that the yield for stocks and bonds have spent most of history in lock step. So with bond yields so freakin’ low it creates an environment where stocks are really the ONLY choice for logical investors. That is why we call this a TINA market:
Alternative…to owning stocks
So is the surge in rates truly scary and leading to a decline today?
That is downright silly because rates would have to be closer to 4% to make them equally attractive to stocks. So we have a LONG way to go to make this happen.
(Above is a very short hand version of a very important relationship between the stock market and bond rates. To get the full story on how this has created a stock market bubble…and a strategy to ride it up and then parachute out before its too late…then click here to check out this vital presentation: Is This ANOTHER Stock Market Bubble?)
More likely some investors are just getting a touch nervous as we get closer to 4,000 as that is probably a level that will lead to an extended consolidation period or pull back. (That concept was at the heart of our commentary last week.)
The rest of the economic news this week is in line with the positive readings found the majority of the past 6 months. Of note is that as the number of Coronavirus cases declines, so too does the number of people filing first time Jobless claims. There we see 4 straight weeks of declines which is a welcome sight.
Also of note is that with earnings season coming down the home stretch, it turned out to be MUCH better than expected. In fact at one time analysts expected a -12% year over decline in earnings. That has been whittled down to a modest -1% decline. Better yet, future earnings expectations are on the rise putting more wind behind the sails of the stock market.
Lastly, the manufacturing sector is looking up after a better than expected Empire State Manufacturing Index report today coming in at 12.1. That is nicely ahead of the 3.5 reading from January. Also the New Orders and Employment components are up month over month. Hopefully other regional manufacturing reports sing this same tune leading to a strong ISM Manufacturing report for the month.
Low rates are still the main game in town leading to TINA leading to an overt bullishness for stocks. That will be in place for at least another 12-24 months given the spread between the yield for stocks and bonds.
So we will lean into that concept with occasional pauses as we reach milestones like 4,000 where there likely will be a well deserved spot of resistance. I suspect we might be there by the next time we talk. Stay tuned!
What To Do Next?
Right now my Reitmeister Total Return portfolio is well positioned for where the market appears to be headed in 2021. Gladly we have been reading the tea leaves well of late which is why are solidly ahead of the market to start the new year:
+4.70% for the S&P 500
+14.99% for the Reitmeister Total Return portfolio
If you would like to see the current portfolio of 14 stocks and ETFs, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were trading at $392.04 per share on Wednesday afternoon, down $0.26 (-0.07%). Year-to-date, SPY has gained 4.86%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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