Interest Rates Stay Low Despite Hikes by The Fed

By Dean Barber

August 4, 2017


July was an interesting month. The old theory of “Sell in May and go away” would not have worked so well this summer.

Summer’s coming to a close this year, we’ve got school starting up. I know I have kids headed back to college. Fall is just around the corner and before you know it we’re going to be into the fourth quarter of this year.

July actually turned out to be a pretty exciting month for the equity markets. One of the best July’s that we have seen in several years. All of that is due to some really good earnings reports coming out of corporate America. We believe that the earnings are what’s driving the markets today.

Obviously, we’ve still got some political pressures going on. The Trump Administration can’t seem to gain any traction whether it’s on healthcare, tax reform, or economic policies. Things are really up in the air politically, but corporate America is doing extremely well. Home sales are great and believe it or not interest rates, even though The Fed has raised rates three times, have stayed fairly low. We saw a little bit of tick up early on in the month of July. Those interest rates, especially on the 10 Year Treasury, did come back down. We have seen a real flattening of the yield curve so far this year, which we will go over here shortly.

First, let’s explore what happened in the equity markets and the equity sectors in the month of July.

Sector Performance – July 2017

Chaikin Analytics –

Let’s start with a quick look at the month of July. As you can see, not all sectors are positive. We did have the Technology sector coming out as the main winner up 4.68%. Followed by Utilities up 3.98%, Energy finally getting a bit of a boost up 2.75%, Health Care still struggling down 0.18%, and Industrials down 0.90%.

Chaikin Analytics –

As we extrapolate these different indices out over the current year we see quite a different story. Look at Energy, negative 11.56% on the year. Oil production here at home continues to remain high, that’s putting pricing pressure on Energy, and it looks as though we could see oil prices staying in that $50 a barrel or below range for the balance of this year.

Technology and Health Care are the two big winners year-to-date, 18.8% and 15.62% up respectively.

Indices Performance – July 2017

Chaikin Analytics –

As we take a look at the major indices in July, the NASDAQ 100 is the clear winner here, up 4.38%. Dow Jones Industrial Average really surged towards the end of the month, up by 2.23%. The S&P 500 is up 1.87%. Russell 2000 is lagging behind, up just 0.13%.

Chaikin Analytics –

As we look at the indices over the year we can see some really big discrepancies in the total returns. Look at the NASDAQ higher by 21.17%, Dow Jones Industrial Average up 11.07%, followed by the S&P500 up by 10.64%.

Making our way down into the mid and small cap stocks, and we’re seeing 6.49% up on the S&P 400 MidCap, and just 3.31% up on the S&P 600 SmallCap.

So this rally has not necessarily been a broad-based rally where it’s been catching everything. Clearly, the winners are the large and mega cap stocks and the technology stocks with the small and medium sized companies lagging behind.

Typically, what you would see over a long market cycle is the small and mid cap stock outperform. So the question we really have to ask ourselves today is, “Are the large caps overextended or is it time for the small and mid caps to make a run?” We’ll keep a close eye on things when it comes to the equity markets for the balance of this year. And we’re kind of excited to see what the month of August brings.

Interest Rates – July 2017

U.S Treasury –

Let’s turn our attention to interest rates. I especially want to look at the yield on the 10 Year Treasury. As we ended the month of June, we were at 2.31% was the yield on the 10 Year Treasury. That peaked up to a high of 2.39% on July 7th. Since then interest rates have really been trending back the other direction. As we ended the month of July we were at 2.30%. At the beginning of this month we are at 2.26%.

U.S Treasury –

So, the 10 Year Treasury, if we look back at the beginning of the year, has really not moved a whole lot throughout the entire course of the year. Even though we have had interest rate increases by the Federal Reserve. The 10 Year Treasury started the beginning of the year at 2.45%, so really we’ve see about a two tenths of one percent decline in the 10 Year Treasury.

Turning our attention to the 1 Month Treasury which was 0.52% on January 3rd, and looking at today things get pretty interesting, we now have that 1 Month Treasury at 1%. What we’ve seen here is a flattening of the yield curve. The short end of the yield curve, the 1 Month Treasury, that is what The Fed is manipulating.

The 10 Year Treasury is telling us a different story, it’s telling us that there is no money velocity and no threat of inflation. We anticipate that this 10 Year Treasury will vacillate, and I’ve said this before, between 2-2.5% for the balance of this decade. The only way we really see that turn around is seeing money velocity increase, and I will plan to address money velocity with you during next month’s segment.

Thank you for joining me for this July Monthly Economic Update. I hope you all have a wonderful and prosperous August and I look forward to talking to you towards the first part of September. If I raised any questions, concerns, or anything you want to talk to an advisor about please give us a call here at the office at 913-393-1000 or schedule a complimentary consultation below.

Dean Barber

Founder & CEO

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