March 12, 2018
The yield on 10-year US Treasuries is up more than 20% (from 2.40% to 2.89%) in 2018, meanwhile the S&P 500 has been down almost 4.5% for the year and the fun is just getting started. I feel like market participants automatically ponder, “what happened last time this happened”, and then essentially go from there. It seems like a ridiculous starting point for any serious analysis. What is different this time? Everything… except the things that will precede and ultimately bring about the end of this bull market. Just like last time. A head scratcher, I know.
Since the lows in stock indices on February 7th, markets have roared back roughly 8%. Despite the rally, most investors will be opening their first statements showing a monthly loss in quite some time. I wouldn’t be surprised if this leads to some more selling pressure over the next couple of weeks.
Municipal bonds have had a rough go of it lately, with interest rates ticking higher and tax reform taking some of the shine off. We think this is a market ripe for buying. We have been slowly adding to Municipal Bonds through our favorite instruments and will look to ramp that up in March. Floating rate fixed income also seems attractive, provided we don’t have to go out too far on the risk spectrum.
We have our eye on Natural Gas (NG) at these levels. NG had a rough February, down 10.95% to finish the month at $2.66/mcf. We think the price could easily go to $6 or even higher in the not-all-that-distant future. We don’t think this will be a “flash-in-the-pan” price event, either, but rather a new longer-term average.
Energy was the worst performing sector in February with technology being the best, almost squeezing out a gain for the month. China was down 10% and none of the major countries we track were able to finish positive, or even close to it. Bonds were not a place to hide, as only Floating Rate, Short-Term Municipals were able to produce meager gains.
Perhaps this is the new theme for the market:
1. Stocks & Bonds are no longer negatively correlated.
2. A FED that is tightening from historically extreme levels of easy money in the face of low unemployment is setting the stage for volatility to move back toward its long-term average near 20.
3. Cash (and Cryptocurrency?) might be the only place(s) to hide.
As with all other times, we feel great about following our (tightened) trailing stop-losses. We thoroughly enjoy raising cash and then putting that cash back to work in the opportunities which are sure to develop along the way.
Shane Fleury, CIO
Elevate Capital Advisors