Bonds are not used to losing money

It was rough going for stocks on Friday, ending the session in the red, as triple witching expiration combined with general angst to weigh on markets. Economic numbers showed a surge in new manufacturing orders in NY, a rise in industrial production, a decline in sentiment, but lower expectations about inflation.

And the living is… was easy. And before you know it… summer is over, and the Fed is back in business. Yes, the central bankers will meet this week and decide on rate policy. You remember rates, right? Sure, you do. Those nasty things that trounced your portfolios last year, leaving it, still, in an awkward way. The Fed’s rate hiking bonanza caused your bond portfolios to lose value, a rare occurrence, AND your equity positions to fall. All that translates into, no matter what you owned in 2022, it was under pressure. But this is 2023 and the Fed, though still angry, appears less angry and it has slowed its brake-mashing. An Artificial Intelligence investing boom shook equity markets out of their funk earlier this year, injecting enthusiasm back into the stock markets. However, soon after, organic intelligence about the reality of earnings growth, continued inflation, and bloated stock valuations kicked in, stalling the rally. Now, faced with lots of conflicting information from companies, the Fed, and the economy, investors are looking to the bond markets for answers, and it is telling a painful story.

Remember that longer maturities are not largely impacted by Federal Reserve policy, which is more targeted on shorter maturities. Longer term rates are dictated by the markets. When bond traders are expecting long term economic growth and inflation, yields increase, which means prices come down. So, if you own longer maturity bonds and the economy is expected to boom, your bond portfolio may lose money. However, if you own stocks in a booming economy, they are likely to do well. Notice how I used the words “may” and “likely” in place of a firmer word like “will.” That is because, it doesn’t always work out that way.

Let’s get back to bonds. The total bond market index lost some -13% last year. Many investors who were in, what would be considered, a safe, bond-heavy portfolio were shocked to lose money. In 2021, the same index lost -1.54%, which was not too bad given that the S&P500 gained almost +27%. But, looking farther back in bonds, we would find only 3 losing years going back to 1980. To further underscore my point, I am going to let you in on a little secret. The bond market was in a secular rally for 40 years from 1980 through 2020! It is, therefore, no wonder that bond investors have grown quite lax in recent years. If you can’t quite appreciate what I am writing here, take a look at the chart that follows this section to appreciate the magnitude of the bond rally. It was quite a rally that ended in a pronounced decline last year. And though this year started with hopes that the declines in bonds would end, it has been rough going. Year to date, the index is just barely positive, up by +0.26%. That is precisely why so many investors are hoping that the Fed will provide some direction later this week. I won’t write about that just yet as there is likely to be plenty of ink to spill on the matter as the week unfolds. For now, just maybe, appreciate how much ground we gained in the bond market over the last 40 years. The pain last year may have been acute, but from a longer-term perspective, it was just a small bump in a very long… and mostly smooth, road.

STOCKS ON THE MOVE

Micron Technology Inc (MU) shares are higher by +1.67% in the premarket after the memory chip maker got a rating hike to BUY from Deutsche Bank, which cited DRAM prices rising quicker than expected due to increased demand. The company is expected to deliver earnings next week on the 27th. Dividend yield: 0.65%. Potential average analyst target upside: +9.7%.

Apple Inc (AAPL) shares are on the move this morning, up one minute and down the next. Preorders for the company’s new iPhone 15 are beating analyst estimates, gaining nods of approval. The early morning volatility may carry into today’s regular session. Dividend yield: 0.54%. Potential average analyst target upside: +15.8%.

FRIDAY’S MARKETS

NEXT UP

  • NAHB Housing Market Index (Sept) may have slipped to 49 from 50.
  • Later this week: we will get more housing data, Leading Economic Index, and flash PMIs. The main attraction however will be the FOMC meeting which will conclude with its announcement on Wednesday. Download the attached economic calendar for times and details.

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