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The Nasdaq Composite hit 11,000 this past week – and all anyone wants to talk about is negative real rates.
You see, it’s not good enough for the Nasdaq to win 2.5% for the week – and in the process break a big round number. It is also not good enough that the Dow Jones Industrial Average averaged 1005.16 points, if 3.8%, rose and the S&P 500 gained 2.5% to end the week just 1% of its full time. There must be a reason for stocks to rise, something that may explain why the market remains so strong given the bad economy.
And make no mistake – the economy remains terrible. Thursday’s unemployment claims were better than expected, as only 1.2 million Americans have filed for unemployment insurance, though more than a million people lost their jobs in just one week. Even the research on positive production and services that came out this past week showed a bit of a hierarchy. Against this background, it becomes harder to make the argument that the stock market predicts a stellar recovery.
And yet it continues to climb. The rise may not be due to better-than-expected revenue, even though 82% of companies have analyst forecasts above, well above the 71% average over the past four quarters, showing that corporate America has performed much better than anyone expected. That’s old news.
That the market found a new reason – negative real interest rates. Real rates are just what an investor earns after manufacturing in inflation, and usually they are positive. No more. They returned to positive territory at the end of January, shortly after mid-March, and have declined since then. In the past two months, the real rate of a 10-year Treasury note has dropped from minus 0.36% to minus 1.05%, the lowest in at least 17½ years.
Like Einstein’s evasive theory of everything, negative real rates appear to explain the madness of the world around us. Gold prices that are skyrocketing? That’s because the lack of gold on a payout almost doesn’t hurt as much as the alternative of cash in notes and vouchers losing you money every day. A weak dollar? Negative real rates make it look less attractive than ever in contrast to its counterparts in Europe and Japan. Choose an asset class, and it is likely that negative real rates can be made to explain its rise.
However, these trades have been going on for a while now. Gold closed above $ 2,000 an ounce for the first time ever this past week, but its movement really began in the fall of 2018 and began to accelerate when the Federal Reserve cut the interest rate by half a point in 2019. It is now adjusted for inflation-adjusted peaks hit in 1980 and 2011. That does not mean that gold should fall, but it does show how far the precious metal has come in a short period of time. The same could be said about the Nasdaq in general, and stocks like Apple (ticker: AAPL) specifically.
The only problem now is that everyone is playing the game – and that could be a sign that the trade is ready to shift. “If we’m used to a scenario, it’s normally time for the opposite,” says Quincy Krosby, chief market strategist at Prudential Financial.
That does not mean that what works can no longer continue to work. The markets have their own thoughts, but an impact could be in the works. Chris Harvey, US equity strategist at Wells Fargo Securities, claims that his 3388 target for the S&P 500 remains in sight, and he would not be surprised if it hit before September. “However, it is not difficult to imagine a ‘Day-shift’ from Labor Day to a shift in bonds and low volumes,” he writes. “So enjoy the run while it lasts.”
Others are even more concerned. Stiff strategist Barry Bannister currently sees the S&P 500 up 5% to 10%, but if the index continues to rally for the rest of the summer, it would be a sign that the Fed is “once again bubble blows with several parallels in history where a heavy dose of caveat-leecher is guaranteed, as that usually ends in tears for investors. ”
It does not have to be that big, maybe just an increase in real rates. “You get nasty drawdowns when we have real-rate shocks,” says Barry Knapp of Ironsides Macroeconomics.
If they are equal, we will not look for reasons why the market wins. We will try to explain why it falls.
Write to Ben Levisohn at [email protected]
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