Volatility roars back | Investor place
Soaring 10-Year Treasury Yields Scare Tech Investors … Beware Evergrande’s Default Volatility … Another Debt Ceiling Showdown
It’s like when you get on a plane, feel a few twitches of turbulence, then see the “seat belt” sign flashing.
Investors are experiencing turmoil in the markets – and buckling up is probably a good idea.
There are three things troubling the markets right now. Let’s look at them to get an idea of their importance.
As I write Tuesday morning, markets have plunged into the red thanks to the surge in 10-year Treasury yields.
After falling below 1.2% in early August, the 10-year Treasury yield has risen over the past two months.
That “push” turned into a real “leap” last week, with the return going from around 1.3% to over 1.5% as of this writing.
I’ve circled that one week peak of around 18% on the chart below.
This is important because the 10-year Treasury yield is a major barometer for what traders think about the market and inflation risk.
A rising yield is also a major hurdle for tech stocks. Given that, it’s no wonder our hypergrowth tech expert Luke Lango has been watching this increase.
From Luc Early stage investor update yesterday:
The 10-year Treasury yield rose above 1.5% today, continuing its strongest rise since February.
Yields have now risen about 20 basis points since the Fed met last week, as investors prepare for the Treasury market’s biggest buyer to turn short before the end of the year.
This decision makes sense and, more importantly, This is no reason to worry.
*** Why Luke asks for a weighted response
Luke points out that while yields could rise further, they are likely to return to lower levels for several reasons.
Back to Luke with these details:
The point is that the returns were too low, so now they are correcting higher, but they won’t go much higher from here because there are structural forces in place that will keep them lower for longer.
On the one hand, you have secular deflationary pressures through the expansion and improvement of technologies to increase productivity and reduce costs, such as automation, artificial intelligence and virtualization platforms. .
On the other hand, you have a persistent high demand for risk-free assets from risky funds like pension funds – in a market where “the money is zero” and where valuations are a little too tight for you. attract major allocations from these risky funds.
You also have the fact that the job market will face long term headwinds from automation technology that threatens to disrupt large swathes of the job market. This will put a floor on the level how far the unemployment rate can drop, which will keep the Fed on the sidelines.
Not to mention, the Fed serves the US government, and the US government has accumulated a lot of debt over the past few years (especially the past 24 months) … so in order to keep interest payments low for its “boss,” the The Fed has an incentive to keep rates low for longer. Same thing with all the other central banks in the world, for that matter.
In short, there are just too many age-old forces at play here for returns to rise much more. Don’t make mistakes. They will go higher. But at a very slow and gradual pace
The second reason Luke isn’t alarmed by soaring yields is because he’s focused on what matters: the story of long-term growth, as well as profits.
Back to Luc:
Short-term movements in the yield curve will dictate short-term price action.
But the long-term value of our stocks will depend on the long-term earnings growth trajectories of our companies.
As long as our companies generate a lot of profit over the next few years, our stocks will rise, regardless of where the returns go.
While the long term is what matters, right now the short term is volatile – and painful. But Luke points out that this is a temporary problem which is in fact an opportunity:
In all, things look good.
Let the volatility of returns subside in the coming weeks. Let tech stocks crash. Buy the dip when volatility sets in.
Let’s move on to the second source of volatility today.
*** The threat of wider fallout from Evergrande also worries investors
Let’s start with yesterday’s update of our Strategic trader team of John Jagerson and Wade Hansen:
The Evergrande situation in China continues to irritate traders.
Default seems very likely, and most of the world’s major financial institutions have significant direct or indirect exposure to this risk.
To make sure we’re all on the same page, Evergrande is a huge Chinese real estate company that is failing to pay off its debts.
Last Thursday, the ailing company missed an $ 84 million payment. He still owes $ 47.5 million tomorrow.
The larger fear is that this could be a “Lehman Brothers” collapse for China. Real estate accounts for around 30% of Chinese GDP, so a collapse would have a very real impact on their economy at large. It is reported that Evergrande alone helps maintain over 3.8 million jobs each year (directly employing around 200,000).
Yesterday, the legendary investor Louis Navellier also updated his Accelerated profits subscribers on this situation. Here he talks about this larger fear:
A real estate crisis would have a fairly significant impact on the Chinese economy.
Some economists are even predicting that if Evergrande fails, it could send China into a recession – and, of course, those fears are part of the reasons the stock market sold off strongly last Monday.
The good news is neither Louis nor our Strategic trader The team believes that significant economic contagion from a default will reach the United States. However, we might be faced with market volatility. Considering this, this has an impact on where John and Wade will look for trade setups..
Back to their update on this note:
We should be clear about the risks and the potential for volatility as the Q3 earnings season approaches in October.
We expect volatility to increase and we don’t plan to target energy or commodities trades, but we also don’t see much risk of a major downside at this time.
As I write Tuesday, the latest news is that Beijing is urging government-owned property developers to buy back some of Evergrande’s assets. So this is not a direct bailout, although it is a bailout.
Authorities hope, however, that the asset purchases will avoid or at least alleviate social unrest that could arise if Evergrande were to suffer a disorderly collapse, they said, declining to be identified due to the sensitivity of the matter.
We’ll keep you posted as events unfold here, but don’t be surprised if the markets get another mini panic if we get bad news from China.
*** Finally, partisan politics could disrupt the markets
The debt ceiling deadline is this Friday.
Last night, Senate Republicans voted against a House-backed bill that would have suspended the debt ceiling. They objected to how the bill tied to a broader spending bill pushed by Democrats.
Without a change in stance from either side, the decision to combine the temporary financing measure and the debt ceiling leaves the United States on track for a government stop and federal defaults as early as the month. next.
According to the Bipartisan Policy Center, without suspension or raising of the cap, there will be a risk of default between October 15 and November 4.
Moody’s Analytics suggests that a prolonged shutdown, if it did occur, would trigger another recession, destroying an estimated $ 15 trillion in household wealth and 6 million jobs.
Our politicians are aware of this and do not want to be responsible, so what we are seeing is partisanship on the brink of the abyss. However, the closer we get to Friday without this solution, the greater the risk of market volatility.
But remember, we saw it in 2011, when the debt ceiling showdown led to a downgrade in US AAA sovereign credit, and again in 2018 as trade tensions between the US and China were increasing. Both times brought a lot of anguish to the hand, but both times we got past it.
Ultimately, fasten your seat belt while these three issues resolve on their own. It might get worse before it gets better – but it will get better.
Have a good evening,