traveler1116
I recently referred to our markets as “Flummoxed.” A friend of mine has suggested the word “Quagmire.” Choose what word that you like, but the confusion is all around us. After the worst start in over 50 years for the equity markets, we now find ourselves in a very thick fog of uncertainty.
What to do? What to do?
The consensus view is that the Fed will announce a 75-basis point hike this afternoon. One would rationally think that this would cause a rise in Treasury yields and other interest rates. However, that is not what is occurring.
As I write my commentary, yields are down this morning, with the 10-year Treasury yielding just 2.79%. This is the lowest yield for the Treasury notes and bonds benchmarks. Then, the 2-year Treasury is now yielding more than the 30-year Treasury.
Alice has fallen down the rabbit hole and “Wonderland” is upon us.
Earnings are another area of concern. Much of this is to be blamed on the dollar. It is but a penny away from parity with the euro, and this is causing a major amount of consternation. The dollar, in fact, is up about 15% against the euro this year, and being this close to parity has not occurred since 2002, some twenty years ago.
Credit Suisse estimates that for every 8-10% that the dollar appreciates, American corporate profits will decrease by 1.00%. Translated, this means a potential $100 billion hit to the S&P 500’s annual earnings. This is not an insignificant number.
Recently, a number of companies have blamed the rising dollar for a decline in their earnings. These included Netflix (NFLX), Johnson & Johnson (JNJ), Salesforce (CRM), and IBM. Recently, IBM’s CFO stated, “The velocity of the strengthening is the sharpest that we’ve seen in over a decade. All the currencies we hedge, over half of them are down double digits against the U.S. dollar this year. So it’s kind of, I would say, unprecedented.”
Much of the strength in the dollar has been caused by the Fed, in my opinion. The Fed’s rush to raise interest rates, to battle inflation, has all kinds of collateral consequences, if not damages. Along with the rise of the dollar and the consequences of that, we are also seeing a sharp rise in borrowing costs, which will be another negative for American corporate revenues and profits.
Between inflation, the Fed, bond yields, and equity returns, investors are in the land of “make-believe.” You can make what you want of it. You can believe anything you like. However, the turn of all of these events, and the resulting complications from them, make it very difficult to proceed ahead with any kind of assurance. Any kind of assurance at all.
“Alice laughed. ‘There’s no use trying,’ she said, ‘one can’t believe impossible things.’
‘I daresay you haven’t had much practice,’ said the Queen. ‘When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”
I will tell you this. Grant’s Rules 1-10 are “Preservation of Capital.” I suggest you follow this course.
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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