Stocks closed lower yesterday as nervous investors sidelined their buying aspirations ahead of today’s Fed decision. Bond yields hit 2007 levels today, because a) why not, and b) the economy is chugging along.
Fairy “tail”. It was November or so of 2007 when 10-year Treasury Note yields were at yesterday's level. Back in 2007, a 4.35% yield to maturity on a 10-year note would not have been considered a big deal. In fact, it would have been considered to be low, given that yields started the year around 4.6% and got as high as around 5.3%. Incidentally, those highs were not seen since 2002. Turning the clock forward a bit brings us to 2008… yeah, 2008, and you know what happened in 2008. Actually, it was technically in December of 2007 when The Great Recession began. Fed Funds went to near 0% with the Fed’s wading into the ZIRP (zero interest rate policy). The US was not only dealing with a recession, but with it came the Global Financial Crisis, and both events teamed up on the rates markets to make it a bit of a wacky place for a while. Throughout The Great Recession, 10-year yields were volatile falling to as low as 2.05% by the end of 2008 only to skyrocket up to around 3.95% by the end of June of that year. You don’t have to do the math… it is a big move up in yields… and big move down in prices.
Volatility stayed with 10-year yields which, ultimately settled into a range between 1.5% and 3% FOR ALMOST 10 years. At that point, very little attention was paid to treasuries, because non-institutional bond investors were all focused on the stock market with its potential to earn FAR MORE than 2% annually. Longer maturity treasuries were held captive by the constant threat of recession and historically low Fed Funds rates. The Fed started hiking rates in late 2015 but was forced to pivot by late 2018 as stocks and bonds were declining along with corporate earnings growth… and that coming recession appeared closer than ever. By the summer of 2019, the Fed was actively lowering rates as recession fears increased. This caused 10-year yields to fall to their range lows. AND THEN IT HAPPENED, the pandemic… AND the long-awaited recession. That brush with apocalyptic economic conditions and the Fed’s flooding the financial system with stimulus started the death knell of 10-year bond yields. The Great Recession brought unprecedented stimulus with ZIRP, but the COVID crisis brought Unprecedented (with a capital “U”) stimulus. The 10-year note’s yields were slammed to historic lows. How low? Try 0.5%... low. At that point, even more steadfast bond investors seemed to give up on the asset class. The yield on the risky S&P500 was far greater than those offered by treasuries, also risky at those heights. How about 3-month Treasury bills trading between 0% and 0.1%! Even some so-called bond traders began to refer to T-bills as cash equivalents !
OK, ok, I am dragging this out a bit. Those once-shunned-as-cash-equivalent treasury bills are now yielding almost 5.5%! And those left-for-dead 10-year notes are now yielding around 4.3%. If you asked many folks about the chances of that happening back in 2021, most, would have responded with, simply, “very low.” That said, today’s yields, in statistical terms, would exist in the “tails” of possibility, meaning they were highly improbable… far left of the mean, even beyond -3 standard deviations away (which is far )… AND YET THEY OCCURRED. The financial markets are said to have significant tail risk, meaning, even though significant swings are not probable, they are still POSSIBLE.
That said, it is Fed day, and the central bankers will deliver their policy decision this afternoon. The markets put the likelihood of a hike at 0.8%, which can be interpreted as highly improbable. In fact, at this point, there is only a 42% chance of another hike before the end of the year, which declines rapidly once 2024 starts. Now that is more probable but considered not likely. If you have been paying attention at all to this note, you should be saying to yourself, “all that means nothing, because in the markets ANYTHING is possible.” Maybe we should just wait and hear what Chairman Powell says this afternoon. He is, after all, the Boss in charge of rates. He will speak at 2:30 PM Wall Street time. If you don’t want to listen, you can just play the probabilities. Just remember that even a coin toss has the possibility of landing on neither heads nor tails but landing on its edge… though it is highly improbable.
WHAT’S WAGGING IN THE PREMARKET
Western Digital Corp (WDC) shares are higher by +2.71% in the premarket after the BNP Paribas upgraded the stock to OUTPERFORM from NEUTRAL and raised its price target to $58. Analysts warming up to storage market is a sign that they may be improving their outlooks for the broader hardware market. Potential average analyst target upside: +12.8%.
Kimco Realty Trust (KIM) shares are higher by +2.0% after Wells Fargo raised its rating to EQUALWEIGHT from UNDERPERFORM and raised its price target. Analysts have raised their FFO per share targets by +0.2% on average in the past month. Dividend yield: 4.97%. Potential average analyst target upside: +23.0%.
Dollar General Corp (DG) shares are lower by -1.83% in the premarket after JPMorgan cut its rating to UNDERWEIGHT from NEUTRAL lowering its price target. The cut came after an interview with the companies CFO revealed that the company may not be expected to return to normal profitability until beyond 2024 as its customers are “acting recessionary” with depleting pandemic-era savings. If true, this may have implications for broader retail stocks. Dividend yield: 2.05%. Potential average analyst target upside: +29.7%.
YESTERDAY’S MARKETS
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