Volatile price swings fuel speculation
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
The stock market rebounded strongly for a second day on Thursday, with the Dow Jones Industrial Average gaining 323.35 or 1.84 percent, and the Standard & Poor’s 500 higher by 36.24 points or 1.79 percent. With all the sharp declines and quick snap-back rallies we’ve seen the past few months, some are starting to speculate what’s behind these extreme price swings. Are the rapid daily swigs merely the result of excessive human emotion or are they the contrails left by high-frequency computer trading programs? At the moment, it would appear the answer is likely the latter.
Quality is king once again in the bond market, as bond buyers turned their noses up at the low-quality (junk) bonds they played fast and loose with during the first half of 2014. Today, investors are putting their money into only the highest-rated bonds. Of course, when you mix deflation fears, due to lower commodity prices like oil, with concerns over the past week that Greece may default on their debt, I guess making 2.02 percent in a 10 Year U.S. Treasury bond starts looking attractive.
The funny thing about bond prices is that I’m not convinced those buying 10 Year Treasury bonds today actually expect to hold onto them for 10 years. Instead, investors see them as a place to park money short-term, and then get back out when interest rates turn higher — if they turn higher — well, at some point interest rates will go up. Of course, there already plenty of figuratively cracked crystal balls laying around that haven’t quite called the bond market right so far. Now it appears more are coming around to the idea that the next interest rate increase may be pushed out to 2016.
On Wednesday, the FOMC minutes from the December meeting revealed there was considerable discussion of the timing of the first rate hike. Because of lower oil prices, the first interest rate increase could occur with inflation below the Fed’s 2 percent target. It was also noted that the labor market is weaker than indicated by the unemployment rate. Considering the downside risks versus the upside the risks of the economy the two appear “nearly balanced,” with the deterioration of foreign economy’s the larges downside risk.
This week, the top-performing bond index was the Barclays 20+ Year U.S. Treasury Bond index, gaining 2.96 percent over the past five trading days. In the No. 2 spot this week is the BofA Merrill Lynch Build America bond index, higher by 1.57 percent over the same period.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.