How Low Can We Go?

by Jason Norris, CFA Executive Vice President of Research

Stocks finished the week roughly flat while flirting with all-time highs intra-week followed by selling off on low volume late in the week. More importantly, interest rates continue to test new lows. The 10-year Treasury yield fell from 1.8 percent to 1.65 percent as investors continued to de-risk portfolios, driving the price of bonds to record highs. The poor jobs number last Friday continues to weigh on bond investors, increasing uncertainty for when the Federal Reserve will raise rates. We have also seen rates outside the U.S. fall to historic lows. The German 10-year Bund yield is two basis points in the black while Japanese JGBs are yielding a negative 0.16 percent. The chart below highlights where yields have dropped around the globe. As of the end of May, Fitch Ratings estimates that over $10 trillion of debt has a negative yield and this has increased in June.


We do not believe that the historically low rates reflect an imminent recession here in the U.S. On the contrary, we believe that a lot of the move is due to risk reduction. With the pending election and Brexit vote, global investors look to be reducing portfolio risk. Also, with negative rates around the globe, investors are looking for any yield, thus pushing U.S. rates lower, irrespective of the outlook for U.S. economic growth. Global investors are viewing the U.S. market as the best house in a bad neighborhood.

If you choose not to decide, you still have made a choice

Hillary Clinton virtually locked up the Democratic nomination this week and, while it was not a surprise, the amount of time it took surprised most pundits. The most common question we hear now is “How will you invest as we approach the election?” Since we are five months out, we believe it is too early to make any major changes in portfolios. We recently met with a Strategas policy analyst and his insight is that the Democrats hold the White House and take the Senate, while Republicans hold the House. They are only handicapping this at just better than a coin flip, however. In this instance there may be a lot of rhetoric on drug pricing and the Affordable Care Act. This scenario will also present a headwind for energy infrastructure in the U.S., thus pushing energy prices higher. We also believe that defense stocks should be OK in any scenario.

Our Takeaways for the Week

  • Election rhetoric will only increase but it is too early for major portfolio changes
  • Even with all this uncertainty, U.S. stocks are less than 2 percent from all-time highs