By: Steve Smith
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.
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.