The Market Knows (What the Talkers Don’t)

by Richard Band | January 10, 2014 2:30 pm

Strange stuff going on.  A MarketWatch headline trumpets: U.S. SET FOR BIGGEST ANNUAL JOBS GAIN SINCE RECESSION.  True enough, as far as it goes.  But then, why did the benchmark 10-year Treasury yield fall three basis points Thursday (to 2.97%)?  Why did the price of the long (30-year) bond climb today to its highest close since December 23?

Most interesting of all, perhaps:  Why are bank preferreds skyrocketing?  As you can see from this chart[1], the Wells Fargo Index of Financial Preferreds (WHPSF[2]) surged to its highest level since last July.

I could go on.  There’s the curious case of the suddenly limp Dow, which finished down yesterday for the fourth session (out of six) in the New Year.

But let’s not harp.  The bottom line is that real-time market indicators are NOT confirming the Street talk about an economy running away on the upside.

Rather, it seems we may be heading into a fairly extended period of moderate growth with low inflation.  If so, there’s no need for interest rates to explode in 2014, as so many on Wall Street fear.

Stay with me a second.  Let’s imagine rates don’t go up significantly this year.  Maybe, when all is said and done, they don’t go up at all.

In that case, the financial markets have a few adjustments to make.  Since last May, some sectors of the stock market, for example, have zoomed while others have wilted as investors sought a haven from the perceived threat of rising rates.

If that “threat” turns out to have been a bogeyman, those trades will have to be at least partially unwound. Utilities and REITs and consumer staples will bounce back.  Industrial and consumer-discretionary stocks will retreat, for a while, anyway.

I expect the market to spend the next few months sorting these things out.  Stocks that climbed too far in 2013 will surrender some of their gains, and stocks that fell too far will recover some of their losses.  Prepare for a healthy dose of “reversion to the mean.”

Not a crash, mind you.  Just a correction of some excesses.

  1. chart:
  2. WHPSF:

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