There is always a collective groan in the classroom when the teacher turns the lesson to a subject that no student likes. In that vein, sorry, but I need to talk about the bond market today. It has been absolutely awful this year. Let’s look at the 12-month Treasury for a bit, and the St Louis Fed’s excellent FRED database. The one-year chart is most telling.
A year ago the yield on the 12-month Treasury was 0.07%. Yesterday, as the FRED data is based on day-end closes, that yield was 3.92%. This morning the yield on the 1-year UST is quoted at 3.96%. Extraordinary stuff.
That’s the world we live in. Interest rates have gone from zero-to-sixty in the US faster than Joe Biden pretending to drive an electric car at the Detroit Auto Show, as he did yesterday. But it is Biden’s clueless cohorts at the Treasury and The Fed who have caused this spike in interest rates. “Inflation is transitory” was possibly the dumbest phrase ever uttered in Washington, a town known for dumb utterances.
The “floor” for interest rates has risen, and that makes any purchase that requires financing – cars, houses, etc. – more expensive at the margin. In the US economy we see fewer of them sold. full stop. According to TD Economics:
Through the first eight months of the year, (US light vehicle) sales have totaled 9.0 million units – down 15.3% from 2021’s year-to-date measure.
Ouch. That’s a recessionary contraction. That’s where the US economy is sitting these days. A recession with elevated rates of inflation. Stagflation. That is bad for stocks, especially those that are perceived as growth names, especially Big Tech.
It’s not too late to dump them. The joy I feel at seeing Meta Platforms (META) shares fall through $150 in today’s trading (although they have recovered somewhat) and seeing that stock fall to five-year lows is boundless. It couldn’t happen to a nicer guy than Zuckerberg. Also, having been forced to sit through a clueless commentator on financial TV huffing the stock while wearing a pair of Oculus VR goggles this summer makes it even nicer.
But, how to preserve your capital? Well, I did introduce one of my many model portfolios to attack stagflation. PREFS has failed 2.97% since inception, and that portfolio’s 6.63% annualized yield (before reovestment) easily covers that stagger. That spreadsheet is free-to-all as it doesn’t include the reinvestment trades, which I disclose behind the paywall at my site, www.excelsiorcapitalpartners.com, Honestly, the only excitement you will see from the 10 fixed-income names in PREFS is… a lack of excitement. that is exactly what you want when constructing a portfolio with the goal of capital preservation.
I will go to one more chart from the FRED database. As I always tell my clients, it is not the absolute level of rates, albeit they are incredibly contractionary now, to focus on, but it is the spreads. High-yield spreads, as measured by BoFA, have actually narrowed somewhat, and yesterday sat at 4.74%, after having jumped to 5.8% in June.
It’s not Katie-bar-the-door in the corporate fixed-income markets. There is still money to be made, cautiously, and via exposure to companies that are generating copious free cash flows, most of which are in the energy sector.
The teacher will end class now. It’s not 2008, but growth stocks are going to keep getting hammered every time there is fresh data (like Tuesday’s CPI print) showing that the inflation monster has not been tamed by the un-dynamic duo of Feckless Yellen and National Embarrassment Powell. So, bonds and preferreds are still attractive, relatively speaking, but keep an eye on the bond market for an “all-sell” signal. The stock market is always the last to know. It was in 2008… and no one wants to get a failing grade on their retirement nest egg.
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