A Pulse on Strategy for the Right Now
We have seen a bounce back in market averages after approaching year to date lows earlier in the month. Market’s higher moves have occurred even as interest rates continue to increase across the yield curve.
The US Treasury yield curve continues to be inverted indicating an economic slowdown ahead, but investor sentiment is off its lows indicating slightly more “bullish” optimism among individual investors. However, the increase in bullish sentiment is modest with the highest bearish individual investor sentiment being reached in the week of 9/21.
Another bond market indicator has turned negative regarding near term economic activity. The 3-month US Treasury yield exceeded the 10-year yield- which translates as a negative for the economy. This is because the normal trend should be that investors are rewarded (with a higher interest rate the longer the term is. A 10-year bond should be yielding a higher return than a 3-month treasury bond. It’s the opposite right now, hence the term “inverted yield curve.” This also means, for the time being, you are rewarded meaningfully even in vesting in short term bonds.
Some indications say that GDP growth for the 3rd quarter will be positive. The consumer continues to spend but there are indications of increased employment layoffs. Earnings season is in full swing with Microsoft and Google reporting disappointing earnings, revenues and downbeat forecasts. Earnings bets are lower than the average over the past 5 years indicating softness.
In the News:
Turmoil in the United Kingdom which was limited to the UK. With the appointment of a new Prime Minister, the Pound Sterling has stabilized, but talk about having the least wanted job in the world- that might be it. The UK has long term economic problems, part of which could be traced to the UK and all of Europe’s reaction to the financial meltdown in 2008-9. Our European brethren governments reacted with austerity, similar to Herbert Hoover in the 1920’s preceding the depression.
In 2008 the US government reacted not with austerity but with a stimulus package and Troubled Asset Relief Package or TARP. Remember that? It worked to lay the foundation for small but steady growth over the next 10 years for the US economy. We learned from that experience and reacted to the pandemic with very large stimulus. Was the stimulus too large? It certainly is a contributor to the current inflation challenge but what would have happened if the stimulus was less, or didn’t come at all? We have the European reaction to the pandemic to judge by comparison. Even with the US economic challenges our economy is currently achieving at the top of world economies with Europe lagging in terms of growth and employment. And guess what? Inflation is even higher in Europe with less stimulus. Eeek.
Incidentally, the treasurydirect.com website was not functioning today as the deadline for receiving the 9.6% interest rate approaches the 11/1 deadline. The rate is determined every 6 months and the next rate will be much lower, 6.5% which is still higher than you will receive with other fixed income investment choices. There is still some time left to lock in that high yield, but it might require treating I bonds as if you were trying to get high demand concert tickets-keep hitting that refresh button.
The decline in the stock market this year brings opportunity for investors who have RSUs (Restricted Stock Units - a form of equity compensation from employers). It is not uncommon for employees to hang onto their RSUs after they vest. Most often, investors hang on to their RSUs out of deferring the decision on deciding on a sell strategy. Clients who have RSUs that have increased in value can take advantage of this year's stock market decline. The strategy is to sell out of losses in your stock portfolio while selling out of gains from your RSUs as a way to trim your exposure to company (RSU) stock and diversify in a tax neutral way. Contact the SAS team for how this impacts your investment strategy.
Halloween this weekend!
Well, it’s on Monday this year, and rest assured those who take part will be goblin’ and ghoulin’ all weekend. Happy trick-or-treat-ing!
Weekly Catch-Up - News Articles That Caught Our Eye
- Harvard researcher says there are 8 types of ‘difficult’ people—and passive-aggressive is the ‘absolute worst’
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