The Last Time Bonds Did This … Stocks Rallied

Keith Fitz-Gerald Aug 14, 2019

It’s panic stations for many investors this morning now that the yield curve has inverted – meaning short-term rates are higher than long term rates.

The problem is that much of what you’re hearing is flat-out wrong and, potentially very dangerous for your money.

Here’s the thing.

The relationship between short-term interest rates has changed over time and, for that matter, continues to change. Anybody caught looking in the rearview mirror will get caught flat-footed.


Since 1963 interest rate conditions like those we have in play right now have preceded above average returns for the S&P 500.

I am well aware that an inverted curve supposedly signals recessionary conditions but that’s an argument better suited to the halls of academia and people a whole lot smarter than me.

I’d rather concentrate on profits.

Interest rates are nothing more than a barometer that reflects constantly changing risk premiums associated with the cost of money. Stocks, on the other hand, are a reflection of future earnings potential. Simply put, one looks backwards; one looks forward.

Don’t get me wrong, the inversion is important.

Just not like most investors think.

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Rates are being artificially driven lower as bond traders price in the election-related uncertainty, associated with Democratic presidential candidates who are widely perceived to be downright hostile to the Trump Administration’s pro-business conditions and pro-growth policies.

At the same time, the markets are dealing with $15 trillion in negative yield assets in play around the world, which means an inflow of capital here in search of returns – and this is key – at any price.

It’s simple supply and demand.

Remember how bond prices and yield work. Unlike stock prices that go up when there’s strong demand, bond yields go down. So while falling yields can signal rising risk, what they really signal is rising demand.

Why – a recession, slowing economic conditions, etc – is really nothing more than the media searching for a story.

So now what?

Most investors are surprised to learn that low interest rate environments are great for large-cap stocks with strong balance sheets, consistent earnings and higher than average cash flow. Like Apple Inc. (NasdaqGS:AAPL), PayPal Holdings Inc. (NasdaqGS:PYPL), Cisco Systems Inc. (NasdaqGS:CSCO), and Orchid Island Capital Inc. (NYSE:ORC), for example.

They’re also great for certain bond holdings like Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG) or even Vanguard Short-Term Inflation-protected Securities Index Fund ETF (NasdaqGM:VTIP), two of my favorites.

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My number one choice, right now, though, is Raytheon Company (NYSE:RTN)

It’s a defense contractor with strong growth and a logical safe-haven against market shenanigans. I like the fact that earnings continue to expand and that it provides a wide range of products and services that include: air and missile defense; land-and sea-based radar solutions; cyber, and intelligence solutions; naval combat and ship electronic and sensing systems; airborne radars for surveillance and fire control applications; precision guidance systems; just to name a few – all of which are absolutely critical components to our national defense.

On a related note, I get asked about gold a lot lately and that’s a subject of intense debate at the moment. Like the yield curve, the relationships that once drove it have changed.

You shouldn’t buy gold because it might rise as an inflation hedge, but you should stock up because of the relationship it enjoys with interest rates.

At the end of the day, I realize that you may not “buy” any of the things I’ve just shared with you. That’s okay.

I am not here to foster agreement.

I am here to help you make money by sharing the information Washington can’t, Wall Street won’t, and the media isn’t prepared to tell you.

Especially when it goes against the “grain.”

Until next time,


One Response to The Last Time Bonds Did This … Stocks Rallied

  1. Stephen says:

    A great commentary Keith.
    Love your insight and explanations that are logical, informative and well ahead (timeline) of the usual perspectives.

    Well done.

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