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Bond yields up, stock values down

By:  Carter E. Anthony, CFA


At the end of the third quarter, the 10-year Treasury bond yielded 4.60%, its hjghest yield since 2007.

The 2-year yielded even more at 5.07%, emphasizing the inverted yield curve. For the quarter, the conservative Dow Jones Industrial Average fell 2.6%, the broader S & P 500 fell 3.6% and the tech-heavy Nasdaq fell 4.1%.

Responding to the Fed’s rate increases in 2022, the S & P 500 was down 19% and the Nasdaq was down 33%.

Investors expected more of the same in 2023, but news surrounding Artificial Intelligence (AI) led to an “artificial” rally in the AI stocks driving the indices to first-half highs, carrying the NASDAQ to its best first half of a year since the 1980s during the advent of desktops.

With the Fed continuing to raise rates, stock valuations have not made sense. The tech sector has been trading at 28 times earnings, is now trading at 24 times earnings, but has a 10-year average P/E of 18.5 times.

In terms of equity weighting, I have always been under-weight the S & P 500 in technology stocks because I don’t like their volatility.

For example, Nvidia, a specialty chip-maker fell 50% in 2022 only to rise 80% in 2023 due to speculation in the importance of Artificial Intelligence.

My portfolios will not earn all the upside of tech stocks but they will also not feel the brunt of the downside.

Energy stocks, one of the few third quarter winners, rode the rally in crude oil prices during the quarter.

The sector was up 11% with Exxon closing at its all-time high. Like it or not, the world runs on fossil fuels and there is no substitute of such a magnitude.

I have always been over-weight energy. Investing in energy stocks is much like investing in gold except with energy stocks, an investor can analyze financial statements, review the work of management, understand the supply and demand for the product and receive a quarterly dividend.

With gold, you get William Shatner (Denny Crane) telling you gold will double in the next 12 months or maybe it is 12 years or with him, it might be “whenever”.

Gold is a speculation that responds to crises.  Energy stocks work well for you when there is no crisis.

Earlier in the year, I invested in several “deep value” stocks with 5% dividend yields in anticipation of the recession that has been forecast for three years now.

We often call deep value stocks, “cheap stocks”.  As sometimes happens, cheap stocks get cheaper. As a “total return” manager (managing for income and appreciation) I cannot stand to see cheap stocks get cheaper.

A couple of those cheap stocks are now in someone else’s bargain basement portfolio and we own better companies with 3%+ dividend yields.

Using the last two years as a guide, the conservative Dow is down 2.4% and the broader S & P 500 is down 3.8%. Over that same period, our portfolios are in positive territory.

The Fed still controls the markets. As the Fed goes, so go bond yields and stock values.

Chairman Powell has said there might be another ¼ point increase this year and he anticipates a few more increases next year.

According to recent releases on consumer spending and credit card debt, the public is oblivious to higher rates and a possible slowing economy leading to layoffs.

Strikes at UAW and Kaiser Permanente indicate total ignorance of layoffs. However, home purchase applications have tumbled as mortgage rates approach 8%.

In a similar situation in the 1979-1981 period, when the Fed was raising rates to squelch inflation, mortgage rates approached 20%. Let’s hope we don’t get there.

This week, in another bow to unproven climate change the Leader of the Free World declared war on swimming pool heaters.

Almost all swimming pools are heated by the least expensive fossil fuel, natural gas.

How many swimming pools are there in the U.S.?  How many swimming pools in the U.S. have heaters?  How many hours are swimming pool heaters used in a year?

This is the president of a country with a population of 330 million people, a GDP of approximately $25 trillion and who is the Commander of the strongest military in the world valued at $2.0 trillion+.

We’re bleeding TAXPAYER money in support of Ukraine and he has declared war on swimming pools.

1 Comment

  1. Pete Taylor on October 16, 2023 at 4:58 pm

    I always enjoy your thoughts and memories, Thanks “Tiny”⚾️

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