Scott says it most Tuesday's during our Weekly Webinars but I will say it again, "Government bond markets lead all capital markets". So paying attention to the government bond market is a big part of our job in ascertaining the risk inherent in all the other asset classes we have investments in.
Someone asked me recently, "why is is that government bonds lead stocks"? The main reason is that the government bond market is massive, not all that transparent (BNN doesn't even show yields on the right side of their screen) and heavily traded by massive macro hedge funds (who one would think are reasonably bright). Regardless, the fact is, the bond market is almost always right and foreshadows most moves in other risk assets.
So here is what the 10yr US Treasury Bond has done (in yield) since the US election 11/09/16:
What you should notice is that the yield on the 10yr has now retraced about 38.2% from the entire move from 1.72% (bottom left) the day of the election to 2.64% (mid Dec). This is now the lowest yield since mid-Nov. And this in the face of the Fed having raised rates 2 times (Dec and Mar .25% each) and talk over the past few weeks about them reducing the size of their balance sheet. So we sit at 2.30%. Why?
Could be geopolitical risks like Russia/Syria and/or North Korea. Could be Trump is having a hard time with a Republican-controlled Congress on getting his health care plan in play and just today he said he needs to get the health care plan complete before he can push through his tax plan. Any and all of these issues are leading to rising risk for risk assets, like stocks. And when risk rises for risk assets, there is a natural flight to quality (FTQ) into safe havens like government bonds. Makes sense?
So given what is going on in the world and in the USA, one would expect that the S+P 500 might be under a similar amount of pressure as yields have been under for that FTQ...but not quite so fast. Have a look first at the same retracement timeline on the S+P:
Note that the S+P has come no where close to retracing to that 38.2% retracement level which is the top green line at 2305.
Strange? With all this geopolitical and risk associated with Trump's plan, one would think that stocks would be following lower.
And if we look at the VIX (the Chicago Board Options Exchange Volatility Index) which is simply a good measurement of what market participants think of risk, we see that it is now higher than it was at the election date:
We are pretty confident about are two things:
So what do we do with this view/observation? Nada, nothing, zero. Yes, we wait and protect our capital. We still have some strategic risk assets on but the risk we are taking has been muted by the increase in volatility in most asset classes...save for US stocks!