Best Two Months since 2010 – The Superlatives Continue

The market has roared out of the starting gate this year with the S&P 500 gaining 11.1%, for its best two months since October 2010.  Yet, as Barron’s points out, despite the rally, the S&P 500 finished at virtually the same level at February’s end that it had at the end of November.  As I write this, a little over a week into March, the S&P is now marginally below the November 30 close.  Yet, I have gotten a kick out of pointing out in recent commentaries how superlative headlines have highlighted the “best since …” or the “worst since …”  These can certainly incite strong emotions with their often counterproductive reactions, e.g. investors get excited and want to buy after they read the “best since” headlines – I say counterproductive, of course, because we want to generally “buy low and sell high” so might do much better getting excited to buy after the “worst since”  headlines. 

I promise that I will stop commenting every month on this pattern of headlines highlighting one extreme or another.  But, please, remember that headline-watching is not your best friend.

What is Going On With Interest Rates?

As I’ve written in the past, I graduated from college just a few decades ago (like four!) at a time that seemed to be the mirror opposite of these past several years.  Inflation and interest rates were both at double digit levels, and we were experiencing a double dip recession.  What a difference a “few” years makes!

As we are about to head into uncharted territory with the longest economic expansion and the longest bull market since World War Two, the behavior of the bond markets around the world and the dormant inflation levels truly amaze me.  As I write this, the 10-year U.S. treasury notes are yielding just over 2.6%, or about double the lows set in 2016 and still at a level that I would not have believed possible in my lifetime.  This is really stunning at a time when we have the lowest unemployment rate in a half of a century.  (I guess I’m getting a bit caught up with my own superlatives.)

However the most stunning, remarkable, unfathomable statement of all to me is that worldwide over $11 trillion of bonds are yielding less than 0%, guaranteeing a loss if held to maturity!  That’s right, “investors” holding more than $11 trillion dollars are willing to pay (mostly governments) to hold their money.  In fact even Germany, the engine of European growth and one of the great economic success stories of the last decade, is able to borrow for 10 years essentially without having to pay any interest.  They have negative short-term rates out to their 10-year treasury note equivalent – the bund – which is yielding barely over “nothing” at 0.07%!  It sure would be nice if we could borrow at negative rates on our mortgages.

Finally, it is my understanding that prior to last fall’s sell-off in the markets, “only” $7 trillion of bonds were negative-yielding.  The growth in these negative interest rate bonds over the past few months seems to indicate the bond market is fearing that a global economic slowdown is in the offing or expected to continue.  While, on the other hand, the recovery in the U.S. stock market since Christmas Eve seems to point to expectations of economic growth resuming.  It will be interesting to see which market turns out to be correct (or if there is another explanation that I'm missing).