It’s time for a little perspective.
I don’t see a runaway spike in rates (at least not now). So, here’s why you should stop worrying about U.S. monetary policy.
The (roughly) 2.4% yield on the US 10-year note is higher than most developed countries’ yield and for the time being will continue to attract global funds.
Look at some bond yields around the world: Germany 1%, Japan 0.5%, France 1.3%, and the United Kingdom 2.4%.
Which would you rather buy, a U.S. 10-year note yielding 2.5% or an Italian note at 2.3%?
In addition, the U.S. economy remains on a slow but steady growth trajectory, although recent data has been a bit more mixed. Other global economies are struggling, and inflation is below the Fed’s stated 2% target.
Given these factors, I just don’t see the reasoning behind an accelerated rise in rates.
I’ve said repeatedly that a 5%-10% correction would be normal and healthy. However, every time the market drops 2% to 3% buyers come in and the market subsequently rallies to a new high.
While the late September/early October sell-off was real, the latest jobs report for September supports the “steady U.S. economy” theory.
Ebola, ISIS, Ukraine, and other global headlines do not drive long-term investment success, but they do make for attention-grabbing headlines. I’m much more interested in the interplay of valuation, liquidity and sentiment.
Small cap rebound
And with the exception of sentiment (which had gotten too frothy) these “legs of the stool” continue to suggest a favorable environment for equities.
Three times in 2014 (in February, May, and now September) the Russell 2000 small cap index has dropped to the 1090 level, and each time it has subsequently bounced back.
In addition, according to this week’s Barron’s, in the 17 midterm election years since 1946, the S&P 500 has delivered a positive return, averaging 17.5% for the twelve months measured from October 31 of the midterm year to the following October 31st.
While neither of these factoids guarantees the same results again, I like the odds.
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