By: Kent Engelke | Capitol Securities
The “Wall of Worry” is rising. Goldman warns there is an 88% chance of a bear market in the intermediate future. Morgan Stanley stated today is an appropriate time to short the market. Vanguard and Fidelity have both issued bearish pronouncements. These are just the bearish comments of the last three days. The warnings issued the last 9 months are bordering on infinity.
The reasons are well known. Valuations. Lack of breadth. Historic change in monetary policy. Geopolitics. Socio-economic issues, etc.
The difference between today’s Wall of Worry and past “Walls” is that in era’s past equities were plunging.
Perhaps the only definitive comment to make is that if equities enter into a bear market as the largest firms are repetitively suggesting, this will be the most forecasted bear market in history.
Speaking of bear markets, the oil narrative is still extremely negative. Crude prices however are rising as inventories are declining at a pace greater than expected. The geopolitical risks are gargantuan, risks in years past that would create an incredibly bullish narrative.
Conversely to rising crude, oil equities are still languishing, internalizing this never ending bearish narrative, a narrative which in my view that is devoid from reality. It has been suggested oil stocks are priced for $35 oil not $52.
I am certain one can write a SAT question surrounding the negative equity narrative… rising equity prices and a negative crude narrative, but rising crude prices and languishing oil equity prices. But I do poorly on standardized tests.
In my view, the market that is entirely devoid from reality is the Treasury market. The FOMC is projecting an additional 100 basis points of tightening in the next 12-13 months boosting the overnight rate to around 2.25% or to the yield on today’s 10-year Treasury.
If the 14-year average of a 180 basis points spread between the overnight rate and the 10-year Treasury is maintained, the 10-year would rise to a 4.0% yield. If this relationship was to be maintained, the 10-year would decline in price by over 28% in the proceeding year according to Bloomberg.
Wow! All must remember the Committee missed its “central tendency” (which is different than a projection) from 2010-2015 when a comparable increase was suggested. Because of history, I think there is total complacency in the Treasury market.
Perhaps the only definitive statement to make is tomorrow will be interesting where fortunes can potentially be made and lost.
Last night the foreign markets were up. London was up 0.28%, Paris was up 0.23% and Frankfurt was up 0.29%. China was up 0.80%, Japan was up 0.04% and Hang Sang was up 1.17%.
The Dow should open nominally higher on tax cut optimism. The 10-year is off 11/32 to yield 2.36%.