Investing Advice: Buckle Up for Turbulence

Posted On March 22, 2018 2:04 pm

We’ve discussed various times how interest rates are set to rise, possibly faster than fed funds futures are currently pricing, and how higher rates could be the undoing of the bull market. Today’s investing advice explores the possibility more deeply.

Our concerns are currently being borne out, as yesterday Jerome Powell, the new head of the Federal Reserve, held his first press conference following the expected 25 basis rise in Fed fund rate.

Powell struck a no-nonsense tone, displaying his determination to continue on a path of normalization. In other words, a higher interest rate environment. Stocks initially rose, but as the implications sunk into investors’ brains, shares began to suffer.

Michael Lebowitz of 720 Global provided a post-FOMC report in which he tells investors to Buckle Up for Turbulence Ahead.

U.S. Treasury securities across the maturity spectrum are reaching yield resistance levels that have proven for decades to be extremely valuable to investors engaged in technical analysis.

I believe it is possible that the reaction of interest rates to these resistance levels will hold important clues about future economic activity and the direction of the stock market.

While it is certainly possible that Treasury yields meander and prove these decade-old technical levels meaningless, strategic planning for what is certainly a heightened possibility of large asset moves is always wise.

Many investment pundits are scoffing at the recent increase in Treasury yields. Since record low yields were set in mid-2016, the ten-year U.S. Treasury note has risen by about 1.50%. When compared to increases of three to five percent that occurred on numerous occasions over the last 30 years, it’s hard to blame them for barely raising an eyebrow at a mere 1.50%. What these so-called experts fail to grasp, is that the amount of financial and economic leverage has grown rapidly over the last thirty years.

As such, it now takes a much smaller increase in interest rates to slow economic growth, raise credit concerns, reduce the ability to add further debt and generate financial market volatility.

The 1.50% increase in interest rates over the last two years is possibly equal to or even more significant than those larger increases of years past. In this article, I look back at how the economy and assets performed in those eras. I then summarize potential economic and market outcomes that are dependent on the resolution of current yields against their resistance levels.

 Related: 10 Ways to to Avoid Information Overload


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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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