Stocks rebounded nicely. Tech stocks (FANGs – Facebook, Amazon, Netflix, Google) after leading the way down in last year’s fourth quarter (off 22%) led stocks back up (up 23%). A global stock portfolio earned about 12% this quarter and domestic stocks continued in the forefront.
Looking past this quarter, non-domestic markets have fallen short of domestic market returns. There is no reason to think this pattern will continue. Stock markets seemed to have calmed a bit, and some of the uncertainties that have plagued stocks in the recent past seem to be coming into sharper focus. Trade negotiations with China are moving along in a more positive vein and stocks continue to respond nicely to positive news about any possible resolution.
Concerns of looming deficits due to tax cuts appear to have moved to the back burner as inflation and interest rates remain at historically low levels. Markets continue to shrug off any dysfunction in Washington. Yet, concerns remain. How Brexit (Britain leaving the European Union) eventually plays out remains a mystery.
Bonds, especially longer-term bonds, are up this month, which is consistent with declining yields, at longer maturities. Look below to see how bond yields beyond a year are below last quarter and a year ago. The ten-year yields are below one-month yields – the lowest is at the 5-year mark. This pattern is unusual. Perhaps the best explanation is as simple as this: in a world of low and negative interest rates, U.S. Treasuries are the “best deal in town” for safe assets.
Interest rates are historically low and have confounded many observers – more than a few predictions have gone awry, and crafting a compelling story to explain why there is little difference between short-term and long-term rates remains elusive. Additionally, by historical standards the Fed has massive levels of Treasuries and Mortgage-backed securities on its balance sheet, which it must deal with, creating even more uncertainty.
Interest rates are important to the economic landscape. They are the price of capital – interest is what must be paid to use someone else’s money. The Fed only controls short-term rates. Longer-term rates are where supply and demand for capital intersect. Demand depends on the expected payoff for putting capital to work; supply depends on what you expect to earn for giving up the use of your money. The horizon for suppliers and users of capital is distant – slight changes in interest rate’s can have a significant effect.
Stock prices are the present value of all future cash flows, which theoretically go on forever. Falling interest rates translates into rising values of these cash flows. The historically low levels and generally downward trend in interest rates help to explain the long-running bull market.
Bond returns are affected by both absolute levels and changes in interest rates – rising rates produce lower bond prices and returns; falling interest rates work in the opposite direction. The longer the maturity, the greater the impact of changing rates. Declining yields at the long end mean better returns for longer-maturing bonds.
Where interest rates go from here is anybody’s guess. However, right now there doesn’t seem to be much pushing rates up, especially with an expected slowdown in worldwide growth. All indications are for rates to remain low with little difference between short and long rates for a while.
Jack Bogle, the godfather of index funds and founder of Vanguard, passed away in January at age 89. His influence on the investment world over the past forty years is immense; his accolades are well-deserved. Jack Bogle’s unwavering commitment in his ideas alone set him apart. While the underlying concepts behind index funds are now the mainstream, they surely weren’t when he first championed them. Jack Bogle clearly did more than anyone for small investors. The notion behind Index Funds (achieving market results at the lowest cost to have the best chance for long-term success) is equally applicable to all investors – both large and small.
Other articles filed under Investing
April 24, 2019
Stock Markets Stocks rebounded nicely. Tech stocks (FANGs – Facebook, Amazon, Netflix, Google) after leading the way down in last year’s fourth quarter (off 22%) led stocks back up (up 23%). A global stock portfolio earned about 12% this quarter...
April 22, 2019
Many of us are familiar with insurance for your home, auto and life, but the reality is - we don't often know our specific coverages until we need to make a claim. Insurance has become so specific it’s worthwhile to...
April 19, 2019
It’s no secret that since the Financial Crisis value stocks have underperformed growth stocks. Many theories exist as to why this has happened, none of which can be confirmed as truth. This begs the question “what does this last decade...
April 17, 2019
If you’re like most people, you know that planning to achieve your financial goals involves more than just budgeting and saving for retirement. You’ve undoubtedly received financial advice, solicited or otherwise, from some combination of family, friends, coworkers, or even...
February 8, 2019
Over the summer, we had a client ask if there was a place to look for existing accounts or funds they or family members may have accumulated and forgotten about over the years. That sparked Julie’s memory of the New...