Basically picking up where we left off at the end of 2017, the first full trading week of 2018 has been nothing short of stellar. The S&P 500’s six straight closing days in the green is the longest such streak to begin a new year since before the Beatles performed on the Ed Sullivan Show (1964). Futures are down in today’s pre-market, but it would appear quite elementary that this may be nothing more than near-term profit taking.
But is there more to it than this?
The reason I bring this up is because, over the past several days, we’ve seen 10-year Treasury bill yields spring to life: from wallowing in the 2.3%’s for most of 2017 — when the equities market was busy zooming to all-time record highs after all-time record highs — to nearly 2.6% this morning. At first blush, more attractive bond rates might look to draw investments out of the riskier equities market and dampen the bullish, long-term stock market rally.
But rising U.S. yields also represent the market’s expectation that we’ll be seeing rising inflation as the domestic job market tightens further amid robust economic growth momentum. This will effectively sop up a measure of the gains going forward, leading to the Fed cranking up interest rates over time. So gains are looking to continue increasing, but so are costs…
Consider for a moment that this is not only the case in the U.S. — part of the reason the stock market rally has been so full-throttle for as long as it has; there have been effectively no global economic headwinds for now an extended period of time — but around the world as well. The European Central Bank is also reducing its bond purchases, and this morning we’re seeing more of the same from China and the Bank of Japan.
So, yeah — profit-taking is definitely part of this, which would indicate a short-term pause in this long-term rally — but realities of a growing global marketplace are beginning to be realized in today’s investment activity, as well. Probably a good thing — dealing with reality — in a general sense.