Stock Market: Rally or Folly?
The recent equities market rally has brought good cheer to this budding Spring. In the bond market, however, the prices for treasuries are falling in concert with its partner, the U.S. dollar. The spike in Treasuries is especially noticeable in the longer maturities as the chart below indicates. This is not necessarily good for the future of the stock market rally.
As you can see below, via earlier monetary policy the Federal Reserve has driven short term interest rates to nearly zero, inflation-adjusted. In addition, on the long side of the yield curve they have begun to engage in so-called quantitative easing (QE), whereby the Fed purchases Treasuries with money it creates, and thus puts money into the system (although most of it is still locked up in banks still unwilling to lend). QE also backs up the sale of Treasury securities that are coming to market in historically enormous amounts in order to fund both the Bush era deficits and the necessity of huge Obama deficits to revive the economy in a way that leads to long-term economic growth and, for example, stabilization (or retreat) of healthcare costs.
The CNBC crowd of stock market cheerleaders views the latest crop of economic data as quite favorable for a long and sustained stock market rally. And, let’s face it, any of us who have recently put some money into the market, or, more likely, have money to recoup from losses incurred in our pension plans over the past 18 months want to b.e.l.i.e.v.e . . . In fact, some of the latest data do appear to point towards a recovery. Frankly, the yield curve itself, in normal times, would point toward an investor class willing to invest for longer time periods; note the so-called “steepening” of the yield between the two year note and the 10 year bond, for example. Additionally,
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