It’s September, after a long Labor Day weekend, hope everybody had a nice time and was able relax and enjoy your family. August turned out to be an interesting month. We had a lot of things going on on the international stage, of course that’s no secret. We’ve got a lot of tensions coming around North Korea, with China and Russia in the mix as well.
We also have congress sitting on their hands with no tax plan for the year completed yet, healthcare is still up in the air, and we have no economic agenda or any plan that’s in place. It seems as though what’s happening in congress today is a lot of infighting.
It’s interesting because we started the year with a lot of hype and excitement around what could be the Trump economic plan and we’re now here in early September with, really, no clear direction. That’s got the markets on edge a little bit. We saw markets throughout this month, depending on where you looked, down maybe about 1% to up maybe about 1%.
I talked to you last month about how I thought the most interesting thing that has taken place so far this year was in the bond markets, specifically in the treasury market. All the talk of The Fed raising rates three times since December of last year, all the talk about inflation, none of that’s really occurring. The Fed has raised rates, but as you’ll see in the rest of this article, we haven’t seen that translate into increases on your savings accounts or your CDs, and mortgage rates are staying about where they were. I’ll make clear as to why that is below.
Suffice it to say, we’re now in the September and October timeframes, typically the toughest months in the markets. A lot of Wall Street so-called “experts” are calling for some sort of a pull-back.
I can tell you from an economic perspective, we think things look good. Unemployment is good, the housing market is good, wages are good, and corporate profits are good today. The markets are elevated as far as evaluations go today, but markets don’t just come down because they’re elevated. There needs to be an event. I think that’s why the markets are so sensitive right now to any of the international events, especially as they surround North Korea.
Let’s take a few minutes and explore what’s going on in the equity markets and in the fixed income markets.
Indices Performance – August 2017
Let’s start with the U.S. Equities Markets here. Over the course of the last month you can see that the NASDAQ 100 is really the sole winner, up 1% throughout August. Russell 1000 & 3000 eking out a fraction of a gain here. Looking at the S&P 500, it’s flat. The Dow Jones Industrial Average is down about 0.42%. The we have the S&P 600 SmallCap and the S&P 400 MidCap, down 0.70% and 0.71% respectively.
Sector Performance – August 2017
As we look at the sectors for the month of August, the clear winner is Health Care, followed by Utilities. Utilities is up mainly because of what’s happening with interest rates, which we will get to shortly. Materials, Technology, and Real Estate are all higher on the month.
The S&P 500, as we mentioned before, is flat. Industrials, Consumer Staples, Consumer Discretionary, and Financials are all down with Energy hit the hardest, down 2.39%.
The Treasury Yield Curve
Let’s take a look now at treasuries. What I want to point out to you here is the Treasury Yield Curve as of January 3rd of this year.
As you can see the 1 Month Treasury on January the 3rd of this year, which was the first trading day of 2017, was trading at 0.52%. Just about a half a percent.
Today, the yield on that 1 Month Treasury is 1.30%.
The yield on the 3 Month Treasury today, is 1.03%.
If we look at the 3 Month Treasury back on January 3rd, it’s just 0.53%.
What’s interesting to see now is that the 1 Month Treasury is actually yielding higher than 6 Month, 1 year, and even the 2 Year Treasury. So the 1 Month Treasury is now in first place, and actually tied with the 2 Year Treasury at 1.30%.
Interestingly enough at the beginning of the year the 10 Year Treasury, was yielding 2.45%.
Even after The Fed’s interest rate hikes, the 10 Year Treasury is now yielding 2.07%
The 30 Year Treasury as of January 3, 2017, was yielding 3.04%.
Today, it’s yielding 2.69%. So, what’s this telling us? Typically, when we see the longer end of the yield curve, that being the 10, 20, and 30 Year rates dropping in an environment where the short-term rates are going up it’s a clear signal for a slowing economy into the future. However, with that being said, there are too many other things on the global stage today to come to that conclusion too easily.
As an example, if you look at Japan and Germany, the yields on their 10 year equivalent of our treasury are less than one half of one percent. That’s a big deal coming off of negative, but still if you look at these major developed countries and their 10 Year Treasury equivalent being a half of one percent, they would rather be putting their money in our 10 Year Treasury even if it’s only at 2.07%.
So, there is a lot of buying pressure on the treasuries that’s allowing those rates to stay low. I do think there is some merit to the treasuries saying, “Hey, we’re not really worried about any major inflation in the future. We don’t see money velocity taking off too quickly.” I think what this is really telling us is that we’re in for more of what I would call slow economic growth. Nothing that I see is a big warning sign right now, but it is interesting to note that even though The Fed has raised rates we’ve really only seen it start to take hold at the shorter end of the yield curve. Which again, doesn’t necessarily translate into much good for anybody that’s counting on savings or CDs to start earning more money.
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