The U.S. stock market is down around 6%, Treasuries are getting crushed, bond funds are down, and gold is down. Nearly every asset class has fallen on hard times after the Fed’s latest outline for the diminished path of QE going forward. Is now the time to panic? The likely answer is no and at this time there is no indication that the cyclical bull market has ended.
Did you know that the Dow Jones Industrial Average (INDEXDJX:.DJI) recently experienced 113 consecutive trading days without three straight down days? The streak ended on June 12. And did you know that this was the longest streak of all time? It was 20 days longer than the previous record that took place way back in 1935. The Dow Jones Industrial Average (INDEXDJX:.DJI) would advance 31% in the ensuing year after its then-record run. It might be worth noting that 1935 was six years after the official start of the Great Depression. And ironically, it is now exactly six years since the start (December 2007) of the worst recession since the Great Depression.
Investors should not fear the current market happenings and instead maintain an overweight allocation to the equity space. Despite this, there will likely be continued declines in correlation of stocks as we progress into a rising interest-rate environment. This means it won’t just be about risk-on or risk-off, but that certain stocks will see substantially different return profiles due to divergent fundamentals and valuations. Interest-rate sensitive stocks still face viable headwinds, but some companies with strong competitive positions offer good entry points for long-term investors.
The 10-year Treasury has exploded from 1.6% to more than 2.5% in less than two months. This is a massive move in a short period of time. The ramifications of this reach everywhere. Mortgage rates move higher, bond funds loss money, the U.S. dollar surges, foreign earnings are worth less, dividend yielding stocks are less compelling at the margin, and on and on. I highlighted potential landmines for a rising rate outcome recently and the thesis has played out.