Stocks Up On Strong Economy, Trade Optimism, And Rate Cut Expectations  Stocks closed higher yesterday, erasing Tuesday's pullback and adding to their weekly gains. So far for the week, the Nasdaq is up 1.36%, the S&P is up 1.43%, and the Dow is up 1.59%.
The two main topics for the market remain the U.S.-China trade talks, and what the Fed does next on interest rates.
The next round of trade talks are expected to take place sometime in September. But traders are also wondering if, and how much, of the new tariffs scheduled to hit on September 1st will go into effect, or if those will get postponed like they were ahead of the June talks. Already, tariffs on more than half of the additional $300 billion were postponed until December 15th. Could the rest be put on hold as well as a show of good faith? We shall see.
As for interest rates, the Fed is widely expected to cut rates at their next meeting on September 18th, with odds at more than 90% that they do. With a rate cut all but certain, the real question seems to be if they'll cut by 25 basis points or 50 basis points.
Either way, that's bullish for the economy and the market.
I heard more people, once again, wringing their hands yesterday over the yield curve inversion of the 10-year vs. the 2-year.
Give it a rest.
Even former Fed Chair Janet Yellen dismissed the yield curve inversion hysteria by explaining that there were a number of factors other than market expectations causing the yield curve to invert. And that there's no threat of a recession at this time.
And she's right.
The biggest reason why the yield curve inverted is because there's an enormous demand for our Treasuries. And it's easy to see why. With slower growth rates around the globe, and the pervasiveness of near zero yields and negative yields in bonds of other countries, where else are bond investors going to put their money?
Think about it -- if you have hundreds of millions of dollars or billions of dollars, capital preservation is priority number one (and the virtual risk-free guarantee of the U.S. Treasury satisfies that), and then a positive yield is priority number two. And that makes U.S. Treasuries the best game in town.
This is a demand driven inversion because there's nowhere else for bond investors to go, and the yields on short-term bonds are too high.
But if/when the Fed cuts rates again, that will push short-term yields down, where they belong, and correct the inversion.
Then, hopefully, folks can stop this nonsensical talk of an inverted yield curve and recession.
Our full year GDP is on pace for 2.6%, which is stronger than the average annual GDP of this entire 10½ year expansion. Unemployment is near record lows. Consumer confidence is near record highs. And corporate earnings continue to impress.
None of that says recession.
But let me just play along for a moment and pretend that the inverted yield curve actually meant something this time around – the fact of the matter is that the economy often expands after an inversion, and the stock market goes up on average of double-digits afterwards.
If anything, the inverted yield curve is one of the best buy signals of all time.
So you'd be well served to tune out the yield curve inversion doomsayers.
These are historic times for our economy. And historic times for the market.
So make sure you're talking full advantage of it.
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Best, 
Kevin Matras Executive Vice President, Zacks Investment Research |
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