“The most incomprehensible thing about the universe is that it’s comprehensible.”
We can just as easily say that the most incomprehensible thing about the markets is that they are comprehensible. But right now the most important you need to understand is that interest rates and oil prices are rising – period full stop. You can crow about earnings until the cows come home but the raw material of markets – money – is getting more expensive. And the only way it won’t keep getting more expensive is if the economy slows down, in which case earnings will lag. Even without a slowdown, earnings are on a short-term sugar high from tax cuts and other non-organic factors that are coming to an end. We are about to pay for the devil’s bargain set by global central bankers that believe their job is to distort markets. Like the deal offered by the prophets in this New Yorker cartoon, this is a false choice.
Sadly, too many investors are falling victim to this false choice even though they should know better. Easy money is fake religion and low interest rates end up killing a lot of people (figuratively speaking, of course).
Markets are staring not only at a 3% yield on 10-year Treasuries but higher rates across the curve. This is long overdue as the Federal Reserve is reluctantly letting markets operate more freely (other central banks are still interfering in markets). It will raise the Federal Funds rate by either 75 or 100 basis points and reduce its balance sheet by $600 billion this year. The bond market believes this while the stock market is mostly in denial (February was a brief moment of clarity followed by investors working themselves through the five stages of grief). The Fed futures market is pricing in a 93% probability of a 25 basis point June hike, a 76% chance of a September hike, and...