Mr. Ten Year Please Stand Up Redux
CAMS Weekly View from the Corner – Week ending 12/72018
December 10, 2018
Just eight short weeks ago we shared a View on the Ten Year Treasury bond where it asked “Mr. Ten Year to Please Stand Up” in order to highlight the underlying cause of the breakout volatility for the stock market at that time.
Since then we have experienced unrelenting volatility in the stock market and in fact, volatility for several markets – the bond market included. In particular, within the bond market, Mr. Ten Year has put on some notable volatility trend wise which has played a key role in volatility across all markets.
The Ten Year bond cannot make up its mind as to which overall direction to trend. Adding insult to injury, when it attempts direction is has been very sharp to the upside and then very sharp to the downside which has bled over to the stock market.
On an inter-market basis the bond market is viewed as the wise old owl when it comes to the economic landscape if you will. At times the stock market will pay particular attention to what the “owl” sees from its higher vantage point (or thinks it sees) out there in the near-future economic landscape.
The above picture depicts the Ten Year Treasury bond with the arrows visually highlighting the spike higher and the follow-on cliff dive lower.
In eight weeks time collective market participants have gone from an overwhelming concern that the economy is so strong it will spike interest rates to the point of killing the economy to a seemingly collective belief that the economy is weakening by the day and recession is imminent. Eight weeks.
Putting some narrative to the economic landscape as simply and straightforward as possible it seems markets generally continued to be amped up in the summer and early fall with the view of how strong the economy was via a host of economic data points. Simultaneously, they seemed to fall asleep at the wheel in terms of the slowing of housing activity in the same timeframe.
Add in some additional housing weakness as the fall season unfolded and the collective seemed to awaken to the fact that housing activity in the prime spring and summer seasons had not been that impressive. Additional weak reports on this front followed and the tide seemed to turn wholeheartedly that the economy was weakening rapidly even though a wealth of economic data points remain strong.
In light of the historically high valuations the stock market is carrying it is simply hyper-vigilant on the economic growth front. With this, seeing the old owl displaying such ferocity in direction to only turn and display the same ferocity in the other direction has the stock market uncertain.
Expect more volatility with an uncertain outcome near-term for the stock market. As shared in previous Views, if the economy does turn south across the board the highly valued stock market will be adjusting downward in price. Right now, an across the board economic downturn is anything but certain – hence the volatility as market participants work through just where this storyline may be heading economically.
I wish you well…
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
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